SAN FRANCISCO--(BUSINESS WIRE)--Nov. 8, 2005--McKesson Corporation (NYSE:MCK)
-- Revenues of $21.6 billion, up 8%.
-- Second quarter net income of $167 million, up 94%, and diluted EPS of 53 cents, up 83%.
-- Net income from continuing operations of $154 million, up 79%, and diluted EPS from continuing operations of 49 cents, up 69%.
-- Year-to-date cash flow from operations of $2 billion compared to $365 million for the first six months a year ago.
McKesson Corporation (NYSE:MCK) today reported that revenues for the company's second quarter ended September 30, 2005, were $21.6 billion, an increase of 8% over the prior year. Second quarter net income was $167 million or 53 cents per fully diluted share, compared to $86 million or 29 cents per fully diluted share in the second quarter a year ago. Second quarter net income includes an after-tax gain of $13 million or four cents per share for the sale of the McKesson BioServices business unit, which is reported as a discontinued operation. Second quarter net income from continuing operations was $154 million or 49 cents per fully diluted share.
"Our significant improvement in operating profit and earnings per share from a year ago was due to an outstanding performance in Pharmaceutical Solutions," said John H. Hammergren, chairman and chief executive officer. "Pharmaceutical Solutions operating profit increased 69%, reflecting our continued focus on expanding our operating margin, the progress we have made evolving our relationships with pharmaceutical manufacturers and continued growth in our generics programs. We also had another excellent quarter in Provider Technologies."
"Our evolving relationships with manufacturers combined with more efficient inventory management in our U.S. pharmaceutical distribution business continue to be the primary factors producing record operating cash flow. In addition, at the end of our second quarter, we benefited from some favorable timing in our working capital accounts. Year-to-date, operating cash flow was $2 billion, compared to $365 million for the first six months a year ago."
"This record cash flow has enabled us to continue to apply a portfolio approach to shareholder value creation - a mix of strategic acquisitions, share repurchases and dividends. Year-to-date, we have spent $575 million on acquisitions, including D&K Healthcare Resources (D&K) and Medcon, $290 million to repurchase shares and $36 million to pay dividends."
"McKesson was fortunate to have experienced little impact to our operations or facilities from the devastation of Hurricanes Katrina and Rita. We were proud to have played a role in providing pharmaceuticals, medical supplies and nurse triage services to the affected areas. We are continuing to support the recovery of our affected customers and employees."
Segment Results
"For the quarter, Pharmaceutical Solutions revenues were up 8%, reflecting growth from our customers who are winning in the marketplace, new and expanded distribution agreements, revenue growth in our Canadian operations and revenues from D&K. This revenue increase was offset in part by slowing market growth and slower growth of customer warehouse sales than we achieved a year ago."
"Pharmaceutical Solutions operating margin expanded 44 basis points to 1.23%, reflecting our progress with manufacturers and an increased mix of generics. Margin expansion was partially offset by increases in operating expenses, including those of D&K. We are now moving aggressively to integrate the D&K operations and deliver operating efficiencies as we retain the customer base. While execution work remains, we are making great progress, and once we have completed our integration plan, this business should be accretive to segment results next fiscal year."
"Medical-Surgical Solutions revenue was up 8%, with growth across all sectors of the business. Revenue growth among alternate site customers was strong as we began seasonal shipments of flu vaccine. Operating profit was $23 million compared to $18 million in the second quarter a year ago, which included a litigation settlement charge."
"In Provider Technologies, revenues were up 18%, with software and software systems revenues up 32%. We continue to see strong demand for our clinical and imaging software solutions and automation systems, and are focused on accelerating the pace of our implementations. Bookings were also strong in the quarter, including several large agreements that include software, pharmacy automation, supply chain automation, cabinets and bedside scanning technology in unique solutions designed to reduce medication errors and improve efficiencies."
"Operating profit was up 37%, from $19 million to $26 million. We have begun integrating the Medcon cardiology solution into our overall clinical and imaging offering. This acquisition had a $3 million negative impact on segment operating profit in the quarter and will continue to be negative throughout this fiscal year, but it should be accretive to Fiscal 2007 results. With the increasingly positive trends toward more I.T. purchases by hospitals, we have also increased investments in development and sales to expand our market position over the next several years."
Outlook
"Turning to the balance sheet, we ended the quarter with almost $3 billion in cash. Using our strong balance sheet and significant operating cash flow, combined with our improving financial performance, we plan to continue our portfolio approach to create shareholder value."
"During the quarter, we repurchased $224 million of shares, completing the previous $250 million authorization and beginning a new $250 million share repurchase program approved in August. Over time, we have a goal of repurchasing shares to offset the dilution resulting from the exercise of stock options."
"We are clearly pleased with the momentum we have across McKesson. Based on our positive year-to-date results and the continued progress in our business, for the fiscal year ending March 31, 2006, McKesson expects to earn $2.25 to $2.40 per fully diluted share from continuing operations, excluding any adjustments to the securities litigation reserve," Hammergren concluded.
The guidance range is based on a tax rate for continuing operations for Fiscal 2006 of approximately 35%, up from original guidance of 32.5%. Partially offsetting the impact of the increased tax rate is a $37 million pre-tax gain from an anti-trust settlement which will be recorded in this year's third quarter. The EPS range also assumes approximately 315 million shares in the dilution calculation.
As previously announced, by order entered September 28, 2005, the Honorable Ronald M. Whyte granted preliminary approval of the proposed settlement of the consolidated class action pending in the U.S. District Court for the Northern District of California and established a schedule for further proceedings, including a hearing date of January 27, 2006 on final approval of the settlement. McKesson now expects to be able to fund the pending $960 million consolidated class action settlement from cash.
Corporate Highlights
The second quarter included the following news at the company:
In advance of Hurricane Katrina, McKesson established a back-up network of regional distribution centers to deliver pharmaceutical products to the Gulf Coast. Following the onset of the storm, these facilities remained open over Labor Day weekend for emergency deliveries. McKesson chartered a helicopter and a plane to make deliveries to areas isolated by flooding. In addition, McKesson employees and the McKesson Foundation have contributed more than $1 million to hurricane relief efforts, including $300,000 to the McKesson Employees Relief Fund to help displaced colleagues.
Following McKesson's acquisition of D&K Healthcare Resources, Inc., the company signed an amended supply agreement with D&K's largest customer group, American Pharmacy Cooperative, Inc., (APCI), a member-owned group purchasing organization representing more than 1,400 independent pharmacies. Over the past 12 months, APCI members purchased $1.3 billion of pharmaceuticals from D&K.
Revenues from generic sales were up 18% in the quarter, 22% year-to-date. McKesson's strong market position was a major factor in the decision by Teva Pharmaceuticals to select McKesson as the lead distributor for its recent launch of generic Allegra. The company's proven rapid generic distribution capabilities facilitated the product's successful delivery to customers.
McKesson's Valu-Rite(R) network of independently owned pharmacies was the highest rated pharmacy chain nationwide in a survey of 20,000 pharmacy customers conducted by Wilson Health Information, a leading consumer research firm. Valu-Rite(R) pharmacists earned the highest satisfaction ratings for personal service, convenience, and access to important health information and also scored very high on providing medication safety information, coordination of care, help with managed care, advice on non-prescription products and customer service.
McKesson signed an agreement with the Centers for Medicare & Medicaid Services (CMS) to offer a Medicare Health Support pilot program to pre-selected Medicare beneficiaries in Mississippi. McKesson will provide health education and support to approximately 20,000 pre-identified, fee-for-service Medicare beneficiaries with heart failure and/or diabetes. Beneficiaries will also have access to a free, 24X7 nurse advice line. Enrollments began in August.
McKesson Medical-Surgical strengthened its position in the long-term care sector of the market by re-signing its largest customer, HCR-Manor Care, to a new three-year agreement.
McKesson signed several large contracts to supply Horizon Clinical solutions and automation products to a range of customers, including Medical University of South Carolina, a large academic medical center with more than 600 physicians; Clinton Memorial Hospital, a 100-bed community hospital in Wilmington, Ohio; and Doctor's Medical Center, a major public hospital in San Pablo, California, near San Francisco.
Risk Factors
Except for historical information contained in this press release, matters discussed may constitute "forward-looking statements", within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking terminology such as "believes", "expects", "anticipates", "may", "should", "seeks", "approximates", "intends", "plans", "estimates" or the negative of these words or other comparable terminology. The most significant of these risks and uncertainties are described in the company's Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: the resolution or outcome of pending shareholder litigation regarding the 1999 restatement of our historical financial statements; the changing U.S. healthcare environment, including the impact of potential future mandated benefits; changes in private and governmental reimbursement or in the delivery systems for healthcare products and services; governmental efforts to regulate the pharmaceutical supply chain; changes in pharmaceutical and medical-surgical manufacturers' pricing, selling, inventory, distribution or supply policies or practices; changes in customer mix; substantial defaults in payment or a material reduction in purchases by large customers; challenges in integrating and implementing the company's software and software system products, or the slowing or deferral of demand for these products; the company's ability to successfully identify, consummate and integrate strategic acquisitions; changes in generally accepted accounting principles (GAAP); foreign currency fluctuations; and general economic conditions. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The company assumes no obligation to update or revise any such statements, whether as a result of new information or otherwise.
A Webcast of the company's regular conference call to review financial results with the financial community is available through McKesson's website, www.mckesson.com, live at 5 PM ET today and on replay afterwards. Shareholders are encouraged to review SEC filings and more information about McKesson, which are located on the company's website.
About McKesson
McKesson Corporation (NYSE:MCK) is a Fortune 15 healthcare services and information technology company dedicated to helping its customers deliver high-quality healthcare by reducing costs, streamlining processes and improving the quality and safety of patient care. Over the course of its 172-year history, McKesson has grown by providing pharmaceutical and medical-surgical supply management across the spectrum of care; healthcare information technology for hospitals, physicians, homecare and payors; hospital and retail pharmacy automation; and services for manufacturers and payors designed to improve outcomes for patients. For more information, visit us at www.mckesson.com.
Schedule I
----------
McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions except per share amounts)
Quarter Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
FY06 FY05 Chg. FY06 FY05 Chg.
-------- -------- ---- -------- -------- ----
Revenues $21,605 $19,922 8% $42,663 $39,097 9%
Cost of sales 20,711 19,191 8 40,844 37,517 9
-------- -------- -------- --------
Gross profit 894 731 22 1,819 1,580 15
Operating expenses 665 603 10 1,277 1,192 7
Securities Litigation
charge - - - 52 - -
-------- -------- -------- --------
Total operating
expenses 665 603 10 1,329 1,192 11
-------- -------- -------- --------
Operating income 229 128 79 490 388 26
Interest expense (22) (30) (27) (47) (60) (22)
Other income, net 35 15 133 63 30 110
-------- -------- -------- --------
Income from continuing
operations before
income taxes 242 113 114 506 358 41
Income taxes (88) (27) 226 (182) (109) 67
-------- ------- -------- --------
Income from continuing
operations 154 86 79 324 249 30
Discontinued operation,
net 13 - - 14 1 -
-------- -------- -------- --------
Net income $ 167 $ 86 94 $ 338 $ 250 35
======== ======== ======== ========
Earnings per common
share (1)
Diluted (2) (3)
Continuing
operations $ 0.49 $ 0.29 69% $ 1.03 $ 0.84 23%
Discontinued
operation 0.04 - - 0.05 - -
-------- -------- -------- --------
Total $ 0.53 $ 0.29 83 $ 1.08 $ 0.84 29
======== ======= ======== ========
Basic
Continuing
operations $ 0.50 $ 0.29 72% $ 1.06 $ 0.85 25%
Discontinued
operation 0.04 - - 0.05 - -
-------- -------- -------- --------
Total $ 0.54 $ 0.29 86 $ 1.11 $ 0.85 31
======== ======== ======== ========
Shares on which earnings
per common share were
based
Diluted 316 300 5% 315 300 5%
Basic 308 293 5% 305 292 4%
(1) Certain computations may reflect rounding adjustments.
(2) For the quarter ended September 30, 2004 and six months ended
September 30, 2005 and 2004, interest expense, net of related
income taxes, of $1 million, $1 million and $3 million has been
added to net income for purposes of calculating diluted earnings
per share. This adjustment reflects the impact of the Company's
potentially dilutive obligations.
(3) Diluted earnings per share, excluding the Securities Litigation
charge, is as follows:
Six Months Ended
September 30,
----------------------
FY06 FY05 Chg.
-------- -------- ----
Net income - as reported $ 338 $ 250 35%
-------- --------
Exclude: Securities Litigation charge 52 - -
Estimated income tax benefit (17) - -
-------- --------
35 - -
-------- --------
Net income, excluding Securities Litigation
charge $ 373 $ 250 49%
======== ========
Diluted earnings per common share,
excluding Securities Litigation charge $ 1.19 $ 0.84 42%
Schedule II
-----------
McKESSON CORPORATION
CONDENSED CONSOLIDATED INCOME INFORMATION BY BUSINESS SEGMENT
(unaudited)
(in millions)
Quarter Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
FY06 FY05 Chg. FY06 FY05 Chg.
-------- -------- ------- -------- -------- -------
REVENUES
Pharmaceutical
Solutions
U.S. Healthcare
direct
distribution &
services $12,762 $11,625 10% $25,113 $22,625 11%
U.S. Healthcare
sales to
customers'
warehouses 6,247 6,021 4 12,373 11,937 4
-------- -------- -------- --------
Subtotal 19,009 17,646 8 37,486 34,562 8
Canada
distribution &
services 1,467 1,258 17 2,954 2,510 18
-------- -------- -------- --------
Total
Pharmaceutical
Solutions 20,476 18,904 8 40,440 37,072 9
-------- -------- -------- --------
Medical-Surgical
Solutions 769 714 8 1,513 1,421 6
-------- -------- -------- --------
Provider
Technologies
Software &
software systems 66 50 32 128 101 27
Services 259 229 13 513 451 14
Hardware 35 25 40 69 52 33
-------- -------- -------- --------
Total Provider
Technologies 360 304 18 710 604 18
-------- -------- -------- --------
Revenues $21,605 $19,922 8 $42,663 $39,097 9
======== ======== ======== ========
GROSS PROFIT
Pharmaceutical
Solutions $ 566 $ 428 32 $ 1,160 $ 985 18
Medical-Surgical
Solutions 167 162 3 336 321 5
Provider
Technologies 161 141 14 323 274 18
-------- -------- -------- --------
Gross profit $ 894 $ 731 22 $ 1,819 $ 1,580 15
======== ======== ======== ========
OPERATING EXPENSES
Pharmaceutical
Solutions $ 322 $ 284 13 $ 622 $ 557 12
Medical-Surgical
Solutions 145 145 - 286 276 4
Provider
Technologies 140 125 12 273 245 11
Corporate 58 49 18 96 114 (16)
-------- -------- -------- --------
Subtotal 665 603 10 1,277 1,192 7
Securities
Litigation charge - - - 52 - -
-------- -------- -------- --------
Operating
expenses $ 665 $ 603 10 $ 1,329 $ 1,192 11
======== ======== ======== ========
OTHER INCOME, NET
Pharmaceutical
Solutions $ 8 $ 5 60 $ 16 $ 11 45
Medical-Surgical
Solutions 1 1 - 2 2 -
Provider
Technologies 5 3 67 7 4 75
Corporate 21 6 250 38 13 192
-------- -------- -------- --------
Other income,
net $ 35 $ 15 133 $ 63 $ 30 110
======== ======== ======== ========
OPERATING PROFIT
Pharmaceutical
Solutions $ 252 $ 149 69 $ 554 $ 439 26
Medical-Surgical
Solutions 23 18 28 52 47 11
Provider
Technologies 26 19 37 57 33 73
-------- -------- -------- --------
Operating
profit 301 186 62 663 519 28
Corporate (37) (43) (14) (58) (101) (43)
Securities
Litigation charge - - - (52) - -
-------- -------- -------- --------
Income from
continuing
operations
before
interest
expense and
income taxes $ 264 $ 143 85 $ 553 $ 418 32
======== ======== ======== ========
STATISTICS
Operating profit as
a % of revenues
Pharmaceutical
Solutions 1.23% 0.79% 44bp 1.37% 1.18% 19bp
Medical-Surgical
Solutions 2.99% 2.52% 47 3.44% 3.31% 13
Provider
Technologies 7.22% 6.25% 97 8.03% 5.46% 257
Return on
Stockholders'
Equity (1) (1.3%) 11.3% -
(1) Ratio is computed as the sum of net income (loss) for the last
four quarters, divided by the average of stockholders' equity for
the last five quarters. Ratio includes the $810 million and $35
million after-tax Securities Litigation charges recorded in the
third quarter of 2005 and the first quarter of 2006.
Schedule III
------------
McKESSON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions)
September 30, March 31,
2005 2005
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,996 $ 1,800
Receivables, net 5,855 5,721
Inventories 7,588 7,495
Prepaid expenses and other 246 346
------------- -------------
Total 16,685 15,362
Property, Plant and Equipment, net 649 616
Capitalized Software Held for Sale 130 130
Notes Receivable 119 163
Goodwill and Other Intangibles 1,826 1,529
Other Assets 1,047 975
------------- -------------
Total Assets $ 20,456 $ 18,775
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts and accounts payable $ 10,055 $ 8,733
Deferred revenue 539 593
Current portion of long-term debt 6 9
Securities Litigation 1,183 1,200
Other 1,227 1,257
------------- -------------
Total 13,010 11,792
Postretirement Obligations and Other
Noncurrent Liabilities 605 506
Long-Term Debt 988 1,202
Stockholders' Equity 5,853 5,275
------------- -------------
Total Liabilities and Stockholders'
Equity $ 20,456 $ 18,775
============= =============
Schedule IV
-----------
McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
Six Months Ended
September 30,
-------------------
FY06 FY05
--------- ---------
OPERATING ACTIVITIES
Income from continuing operations $ 324 $ 249
Adjustments to reconcile to net cash provided by
(used in) operating activities:
Depreciation and amortization 127 122
Securities Litigation charge, net of tax 35 -
Securities Litigation settlement payments (69) -
Deferred taxes 111 123
Other non-cash items 2 7
--------- ---------
Total 530 501
--------- ---------
Effects of Changes In:
Receivables 62 (192)
Inventories 253 (1,172)
Drafts and accounts payable 1,108 1,317
Deferred revenue 101 (75)
Taxes 29 (54)
Proceeds from sale of notes receivable 28 39
Other (102) 1
--------- ---------
Total 1,479 (136)
--------- ---------
Net cash provided by operating activities 2,009 365
--------- ---------
INVESTING ACTIVITIES
Property acquisitions (83) (53)
Capitalized software expenditures (66) (66)
Acquisitions of businesses, less cash and cash
equivalents acquired (575) (48)
Proceeds from sale of business 63 12
Other 3 19
--------- ---------
Net cash used in investing activities (658) (136)
--------- ---------
FINANCING ACTIVITIES
Repayment of debt (20) (14)
Capital stock transactions:
Issuances 282 89
Share repurchases (290) -
ESOP notes and guarantees 9 13
Dividends paid (36) (35)
Other (100) 6
--------- ---------
Net cash provided by (used in) financing
activities (155) 59
--------- ---------
Net increase in cash and cash equivalents 1,196 288
Cash and cash equivalents at beginning of period 1,800 708
--------- ---------
Cash and cash equivalents at end of period $ 2,996 $ 996
========= =========
PR Contact
McKesson Corporate Media Relations
415-983-8988
CorporateMediaRelations@McKesson.com