10-QPeriod: Q3 FY2014

MCKESSON CORP Quarterly Report for Q3 Ended Dec 31, 2013

Filed January 30, 2014For Securities:MCK

Summary

McKesson Corporation reported its third quarter fiscal year 2014 results, showing a significant increase in revenues driven by market growth and the acquisition of PSS World Medical. However, net income and diluted earnings per share experienced a substantial decline year-over-year, primarily impacted by increased litigation charges, technology solutions charges, and expenses related to the proposed acquisition of Celesio AG. The company is actively pursuing the acquisition of Celesio AG, which, if successful, is expected to be a transformative event, significantly expanding its international presence. Despite the near-term earnings pressure, McKesson's core business demonstrates continued revenue growth, and the company remains focused on strategic initiatives, including its pending European expansion.

Financial Highlights

51 data points
Beta

Revenue

$34.34B

5.4% Gross Margin

Net Income

$65.00M

0.2% Net Margin

EPS (Diluted)

$0.28

Total Assets

$36.48B

Cash & Equivalents

$2.43B

Free Cash Flow

-$399.00M

Financial Statements
Beta
Revenue$34.34B
Cost of Revenue$32.49B
Gross Profit$1.85B
Operating Expenses$1.36B
Operating Income$493.00M
Net Income$65.00M
EPS (Basic)$0.28
EPS (Diluted)$0.28
Shares Outstanding (Basic)230.00M
Shares Outstanding (Diluted)234.00M

Key Highlights

  • 1Total revenues increased by 10% to $34.3 billion for the quarter ended December 31, 2013, compared to the prior year period, driven by market growth and the PSS World Medical acquisition.
  • 2Net income for the quarter decreased significantly by 79% to $64 million, or $0.28 per diluted share, compared to $298 million, or $1.24 per diluted share, in the prior year.
  • 3The company is actively pursuing the acquisition of Celesio AG, a European pharmaceutical wholesale and retail company, with a revised transaction value of approximately €6.4 billion ($8.7 billion).
  • 4A significant charge of $122 million related to an unfavorable Canadian tax court decision impacted the quarter's income tax expense.
  • 5The company recorded an $80 million impairment charge for its International Technology business, classified under discontinued operations.
  • 6Operating expenses increased by 18% due to the PSS World Medical acquisition and higher AWP litigation charges.
  • 7McKesson continues to return capital to shareholders through dividends and share repurchases, with a quarterly dividend increase to $0.24 per share.

Frequently Asked Questions

The substantial decrease in net income was primarily driven by a combination of factors, including increased litigation charges (specifically related to AWP litigation and a Canadian tax dispute), charges within the Technology Solutions segment for product alignment and restructuring, and significant expenses incurred in pursuit of the Celesio AG acquisition. These factors outweighed the revenue growth from the Distribution Solutions segment and the PSS World Medical acquisition.

McKesson entered into new agreements to acquire approximately 75.99% of Celesio AG's shares for €23.50 per share, with the total transaction valued at approximately €6.4 billion ($8.7 billion). This acquisition is expected to close in the fourth quarter of fiscal year 2014 and will significantly expand McKesson's international presence. While the acquisition presents a strategic growth opportunity, it also carries integration risks and the potential for significant management attention and resources to be diverted.

McKesson has classified its International Technology and Hospital Automation businesses as discontinued operations. During this quarter, an $80 million impairment charge was recorded for the International Technology business. The revenues and losses from these businesses are presented separately, reducing reported net income.

McKesson expects its operating cash flow, combined with existing liquidity sources like its accounts receivable sales facility and revolving credit facility, to be sufficient for its capital needs. The company also secured a $5.5 billion bridge loan to facilitate the Celesio acquisition and anticipates refinancing this with longer-term debt. The company remains compliant with its debt covenants.