McKesson Reports Fiscal 2011 Second-Quarter Results

Revenues of $27.5 billion for the second quarter, up 1%.

McKesson Corporation (NYSE: MCK) today reported that revenues for the second quarter ended September 30, 2010 were $27.5 billion compared to $27.1 billion a year ago. Second-quarter earnings per diluted share was $1.25 compared to $1.11 per diluted share a year ago.

Second-quarter earnings included an after-tax gain of 28 cents per diluted share from the sale of McKesson Asia Pacific Pty Limited (“MAP”), which was recorded as a discontinued operation in our condensed statement of operations.

On October 19, 2010, McKesson announced an agreement to settle an action filed by the State of Connecticut relating to First DataBank’s published drug reimbursement benchmarks, commonly referred to as Average Wholesale Prices (“AWPs”) for $26 million. As a result, second-quarter earnings per diluted share included a pre-tax litigation charge of $24 million ($16 million after-tax or six cents per diluted share). Last year’s second quarter results included a pre-tax credit to the Securities litigation reserves of $20 million ($12 million after-tax or four cents per diluted share).

Second-quarter results also included a non-cash, pre-tax asset impairment charge of $72 million in Technology Solutions, related to our revenue cycle management solution, Horizon Enterprise Revenue Management ^TM .

For the first half of the fiscal year, McKesson had cash flow from operations of $798 million and ended the quarter with cash of $3.1 billion. During the first half of the fiscal year, McKesson repurchased $1.5 billion of common stock, including $531 million in the second quarter, fully using the share repurchase authorization. Today, the Board of Directors approved a new $1 billion share repurchase authorization. The company also paid $80 million in dividends during the first half of the fiscal year.

“We are very pleased with the momentum in Distribution Solutions and the results of our share repurchase activity. Based on this quarter’s result of $1.03, for the full fiscal year ending March 31, 2011, we continue to expect that McKesson should earn between $4.72 and $4.92 per diluted share from continuing operations, excluding adjustments to the litigation reserves,” said John H. Hammergren, chairman and chief executive officer.

Distribution Solutions revenues were up 2% in the second quarter. U.S. pharmaceutical distribution revenues were up 1% for the quarter. Canadian revenues, on a constant currency basis, were down 1% for the quarter. Including a favorable currency impact of 5%, Canadian revenues grew 4% for the quarter. Medical-Surgical distribution revenues were up 5% for the quarter.

Distribution Solutions gross profit was $1,090 million compared to $960 million in the second quarter a year ago. Distribution Solutions gross profit margin in the second quarter was higher compared to the second quarter a year ago primarily due to an improved mix of higher-margin products and services, including sales of OneStop Generics.

Distribution Solutions operating profit of $491 million was up 18% for the quarter, and the operating margin was 1.83% compared to 1.58% a year ago. Excluding the AWP litigation charge, operating profit of $515 million was up 24% for the second quarter and the operating margin was 1.92%.

“I’m pleased with the outstanding performance in our Distribution Solutions segment and the ability of our team to consistently provide higher-value products and services to our customers,” Hammergren said. “In particular, the market-leading generics programs that we have across all of our distribution businesses continue to play a significant role in our margin expansion.”

In Technology Solutions, revenues were down 3% for the second quarter primarily reflecting the sale of MAP, which accounted for quarterly revenues of approximately $17 million in last year’s second quarter. Also, in the second quarter of the prior year, results included the recognition of $22 million of previously deferred revenues, resulting in $16 million of related gross profit.

Technology Solutions operating profit in the second quarter was $14 million. Excluding the asset impairment charge of $72 million, operating profit was $86 million and the operating margin was 11.17%. Operating margin in this year’s second quarter was impacted by continued investment in our clinical and enterprise revenue management solutions.

“Our hospital customers remain focused on installing the clinical solutions that will allow them to improve quality of care for their patients and qualify for stimulus money. As their strategic partner, we are committed to achieving certification of our systems, deploying the solutions, and helping our customers achieve broad adoption,” said Hammergren.

“While we are disappointed in the asset impairment charge associated with Horizon Enterprise Revenue Management, we believe very strongly that over time hospitals will need the enhanced functionality of this product in a post-healthcare reform environment,” Hammergren concluded.

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, as amended, 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”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, 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: material adverse resolution of pending legal proceedings; changes in the U.S. healthcare industry and regulatory environment; public health issues in the U.S. or abroad; changes in the Canadian healthcare industry and regulatory environment; competition; the frequency or rate of branded drug price inflation and generic drug price deflation; substantial defaults in payment or a material reduction in purchases by, or loss of, a large customer or group purchasing organization; implementation delay, malfunction or failure of internal information systems; the adequacy of insurance to cover property loss or liability claims; the company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances; loss of third party licenses for technology incorporated into the company’s products and solutions; the company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others; system errors or failure of our technology products and solutions to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; increased costs or product delays required to comply with existing and changing regulations applicable to our businesses and products; failure to comply with and changes in government regulations relating to sensitive personal information and to format and data content standards; the delay or extension of our sales or implementation cycles for external software products; changes in circumstances that could impair our goodwill or intangible assets; foreign currency fluctuations or disruptions to our foreign operations; new or revised tax legislation or challenges to our tax positions; the company’s ability to successfully identify, consummate and integrate strategic acquisitions; changes in accounting principles generally accepted in the United States of America; and general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the company, its customers or suppliers. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are first made. Except to the extent required by law, the company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

A web cast 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 5:00 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, currently ranked 14th on the FORTUNE 500, is a 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 177-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 http://www.mckesson.com .

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