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| MCK > SEC Filings for MCK > Form 10-Q on 27-Jan-2009 | All Recent SEC Filings |
27-Jan-2009
Quarterly Report
of Operations
Financial Overview
Quarter Ended Nine Months Ended
December 31, December 31,
(In millions, except per share data) 2008 2007 Change 2008 2007 Change
Revenues $ 27,130 $ 26,494 2 % $ 80,408 $ 75,472 7 %
Litigation Charge (Credit), Net $ 493 - NM $ 493 $ (5 ) NM
Income (Loss) from Continuing
Operations Before Income Taxes $ (70 ) $ 277 NM $ 667 $ 993 (33 )
Income Tax Benefit (Expense) 50 (76 ) NM (125 ) (309 ) (60 )
Discontinued Operations, Net - - - - (1 ) NM
Net Income (Loss) $ (20 ) $ 201 NM $ 542 $ 683 (21 )
Diluted Earnings (Loss) Per Share
(1) $ (0.07 ) $ 0.68 NM $ 1.94 $ 2.28 (15 )%
Weighted Average Diluted Shares 274 297 (8 ) 279 300 (7 )
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NM - not meaningful
(1) For the quarter ended December 31, 2008, potentially dilutive securities
have been excluded from the per share computations due to their antidilutive
effect.
Revenues for the quarter ended December 31, 2008 increased by 2% to
$27.1 billion compared to the same period a year ago. We recorded a net loss of
$20 million in the quarter ended December 31, 2008 compared to net income of
$201 million in the comparable prior year period. Diluted loss per basic share
was $0.07 in the third quarter of 2009 compared to diluted earnings per share of
$0.68 in the same period a year ago. The net loss and diluted loss per basic
share for the quarter ended December 31, 2008 included a pre-tax charge of
$493 million ($311 million after-tax) for the Average Wholesale Price ("AWP")
litigation as discussed in further detail under the caption "Operating Expenses
and Other Income, Net" in this financial review. In the third quarter of 2008,
net income and diluted earnings per share reflected $41 million of pre-tax
charges ($32 million after-tax) relating to increases in our legal reserves,
settlement of a legal matter, severance expenses associated with a reduction in
workforce, asset impairments and restructuring activities. These charges are
discussed in further detail under the caption "Operating Expenses and Other
Income, Net."
For the nine months ended December 31, 2008, revenues increased 7% to
$80.4 billion, net income decreased 21% to $542 million and diluted earnings per
share decreased 15% to $1.94 compared to the same period a year ago. Decreases
in net income and diluted earnings per share primarily reflect the pre-tax
charge of $493 million for the AWP litigation in our Distribution Solutions
segment. This charge was partially offset by the recognition of $76 million of
previously unrecognized tax benefits and related interest expense during the
second quarter of 2009 as a result of the effective settlement of uncertain tax
positions and improvement in our Distribution Solutions segment's results,
partially due to a $24 million pre-tax gain on the sale of our 42% equity
interest in Verispan, L.L.C. ("Verispan"). Diluted earnings per share also
benefited from the impact of share repurchases made in 2008 and the first nine
months of 2009.
McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Results of Operations
Revenues:
Quarter Ended Nine Months Ended
December 31, December 31,
(In millions) 2008 2007 Change 2008 2007 Change
Distribution Solutions
U.S. pharmaceutical
direct distribution &
services $ 17,037 $ 15,703 8 % $ 50,076 $ 44,273 13 %
U.S. pharmaceutical
sales to customers'
warehouses 6,695 7,183 (7 ) 19,678 21,251 (7 )
Subtotal 23,732 22,886 4 69,754 65,524 6
Canada pharmaceutical
distribution &
services 1,967 2,224 (12 ) 6,390 5,886 9
Medical-Surgical
distribution &
services 680 648 5 2,007 1,884 7
Total Distribution
Solutions 26,379 25,758 2 78,151 73,294 7
Technology Solutions
Services 576 553 4 1,722 1,644 5
Software & software
systems 141 150 (6 ) 419 427 (2 )
Hardware 34 33 3 116 107 8
Total Technology
Solutions 751 736 2 2,257 2,178 4
Total Revenues $ 27,130 $ 26,494 2 $ 80,408 $ 75,472 7
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Revenues increased by 2% to $27.1 billion and increased by 7% to
$80.4 billion during the quarter and nine months ended December 31, 2008
compared to the same periods a year ago. The increase for the quarter and nine
months ended December 31, 2008 primarily reflects growth in our Distribution
Solutions segment, which accounted for 97% of consolidated revenues.
U.S. pharmaceutical direct distribution and services revenues increased
during the quarter and nine months ended December 31, 2008 primarily reflecting
market growth rates (which include growing drug utilization and price increases,
offset in part by the increased use of lower priced generics), expanded business
with existing customers and our acquisitions of Oncology Therapeutics Network
("OTN") in October 2007 and McQueary Brothers Drug Company ("McQueary Brothers")
in May 2008. For the first nine months of 2009, revenues also benefited from a
shift of revenues from sales to customers' warehouses to direct store delivery.
U.S. pharmaceutical sales to customers' warehouses decreased primarily
reflecting a decrease in volume from a large customer, the loss of a large
customer and reduced revenues associated with the consolidation of certain
customers. For the first nine months of 2009, revenues were also impacted by a
shift of revenues to direct store delivery. These decreases were partially
offset by expanded business with existing customers. In addition, these revenues
benefited from one additional day of sales in the first nine months of 2009
compared to the same period a year ago.
Canadian pharmaceutical distribution and services revenues for the quarter
ended December 31, 2008 decreased primarily due to an unfavorable exchange rate,
partially offset by new and expanded business and market growth rates. For the
first nine months of 2009, revenues increased primarily reflecting new and
expanded business, partially offset by an unfavorable exchange rate. Canadian
revenues were impacted in the quarter and the nine months ended December 31,
2008 by a 21% and a 5% unfavorable foreign exchange rate change compared to the
same periods a year ago. In addition, these revenues benefited from three more
days of sales during the first nine months of 2009 compared to the same period a
year ago.
Gross Profit:
Quarter Ended Nine Months Ended
December 31, December 31,
(Dollars in millions) 2008 2007 Change 2008 2007 Change
Gross Profit
Distribution Solutions $ 988 $ 859 15 % $ 2,873 $ 2,529 14 %
Technology Solutions 355 345 3 1,040 1,033 1
Total $ 1,343 $ 1,204 12 $ 3,913 $ 3,562 10
Gross Profit Margin
Distribution Solutions 3.75 % 3.33 % 42 bp 3.68 % 3.45 % 23 bp
Technology Solutions 47.27 46.88 39 46.08 47.43 (135 )
Total 4.95 4.54 41 4.87 4.72 15
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Gross profit increased 12% and 10% in the third quarter and first nine months
of 2009 compared to the same periods a year ago. As a percentage of revenues,
gross profit margin for the third quarter of 2009 increased reflecting an
increase in both of our segments' gross profit margins. For the first nine
months of 2009, gross profit margin benefited from improvements in our
Distribution Solutions segment, partially offset by a decline in our Technology
Solutions segment reflecting a change in product mix and the recognition of
$21 million of disease management deferred revenues in 2008 for which expenses
associated with these revenues were previously recognized as incurred.
Distribution Solutions segment's gross profit margin increased by 42 basis
points to 3.75% in the third quarter of 2009 and by 23 basis points to 3.68% in
the first nine months of 2009 compared to the same periods a year ago. In the
third quarter and the first nine months of 2009, gross profit margin was
impacted by the benefit of increased sales of generic drugs with higher margins,
a benefit associated with a lower proportion of revenues within the segment
attributed to sales to customers' warehouses, which have lower gross profit
margins relative to other revenues within the segment and higher buy side margin
primarily reflecting the volume and timing of compensation from branded
pharmaceuticals. For the third quarter of 2008, gross profit margin was
increased by $10 million of last-in, first-out ("LIFO") inventory credits. LIFO
inventory credits reflected a number of generic product launches partially
offset by a higher level of branded pharmaceutical price increases. For the
first nine months of 2009, the increase in gross profit margin was partially
offset by $14 million in antitrust settlements received during the first nine
months of 2008 not recurring in 2009.
Quarter Ended Nine Months Ended
December 31, December 31,
(Dollars in millions) 2008 2007 Change 2008 2007 Change
Operating Expenses
Distribution Solutions
(1) $ 1,048 $ 554 89 % $ 2,180 $ 1,541 41 %
Technology Solutions 265 300 (12 ) 817 827 (1 )
Corporate 84 68 24 218 202 8
Securities Litigation
credit, net - - - - (5 ) NM
Total $ 1,397 $ 922 52 $ 3,215 $ 2,565 25
Operating Expenses as
a Percentage of
Revenues
Distribution Solutions 3.97 % 2.15 % 182 bp 2.79 % 2.10 % 69 bp
Technology Solutions 35.29 40.76 (547 ) 36.20 37.97 (177 )
Total 5.15 3.48 167 4.00 3.40 60
Other Income, Net
Distribution Solutions $ 6 $ 7 (14 )% $ 43 $ 30 43 %
Technology Solutions 1 4 (75 ) 5 9 (44 )
Corporate 10 20 (50 ) 23 65 (65 )
Total $ 17 $ 31 (45 ) $ 71 $ 104 (32 )
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(1) Operating expenses for the third quarter and first nine months of 2009 include the AWP litigation charge of $493 million in our Distribution Solutions segment.
Operating expenses for the third quarter and first nine months of 2009
increased 52% to $1.4 billion and 25% to $3.2 billion. As a percentage of
revenues, operating expenses for the third quarter and first nine months of 2009
increased 167 and 60 basis points to 5.15% and 4.00%. Operating expense dollars
increased primarily due to the AWP litigation charge, business acquisitions and
additional costs incurred to support our sales volume growth, partially offset
by a decrease due to $38 million of pre-tax charges recorded during the third
quarter of 2008. Both the AWP litigation charge and the prior year's pre-tax
charges are further described below.
Distribution Solutions segment's operating expenses for the third quarter and
first nine months of 2009 increased primarily due to the AWP litigation charge,
business acquisitions and additional costs incurred to support our sales volume
growth. Operating expenses as a percentage of revenues increased primarily due
to the AWP litigation charge and business acquisitions, partially offset by the
recognition of $16 million of pre-tax charges during the third quarter of 2008.
During the third quarter of 2008, we incurred $41 million of pre-tax charges as follows:
- $13 million of legal reserves due to the settlement of claims arising out of an inquiry from a governmental agency. This reserve was not tax deductible;
- $3 million of severance costs associated with the closure of two facilities within our Distribution Solutions segment;
- $4 million of legal reserves;
- $4 million of severance and exit-related costs and a $4 million asset impairment charge for the write-off of capitalized software costs associated with the termination of a software project, of which $3 million was charged to cost of sales in our condensed consolidated statements of operations;
- $9 million of severance expense associated with the realignment of our workforce. Although such actions do not constitute a restructuring plan, they represent independent actions taken from time to time, as deemed appropriate by management; and
- a $4 million asset impairment charge associated with the write-down to fair value for a property as assessed by market prices.
Corporate expenses increased by $16 million to $84 million for the third
quarter of 2009 primarily due to the increase of the accounts receivable sales
facility fees. For the nine months ended December 31, 2008, Corporate expenses
remained relatively unchanged compared to the prior year period.
Other income, net decreased during the third quarter and first nine months of
2009 primarily reflecting a decrease in interest income due to lower cash
balances and lower interest rates and a net decrease in earnings from our equity
investments. These decreases for the first nine months of 2009 were partially
offset by a $24 million pre-tax gain from the sale of our 42% equity interest in
Verispan. Interest income is primarily recorded at Corporate and financial
results for Verispan are recorded within our Distribution Solutions segment.
McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Segment Operating Profit and Corporate Expenses:
Quarter Ended Nine Months Ended
December 31, December 31,
(Dollars in millions) 2008 2007 Change 2008 2007 Change
Segment Operating
Profit (Loss) (1)
Distribution Solutions
(2) $ (54 ) $ 312 NM $ 736 $ 1,018 (28 )%
Technology Solutions 91 49 86 % 228 215 6
Subtotal 37 361 (90 ) 964 1,233 (22 )
Corporate Expenses,
net (74 ) (48 ) 54 (195 ) (137 ) 42
Securities Litigation
credit, net - - - - 5 NM
Interest Expense (33 ) (36 ) (8 ) (102 ) (108 ) (6 )
Income (Loss) from
Continuing Operations,
Before Income Taxes $ (70 ) $ 277 NM $ 667 $ 993 (33 )
Segment Operating
Profit (Loss) Margin
Distribution Solutions (0.20 )% 1.21 % (141 )bp 0.94 % 1.39 % (45 )bp
Technology Solutions 12.12 6.66 546 10.10 9.87 23
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(1) Segment operating profit includes gross profit, net of operating expenses, plus other income for our two operating segments.
(2) Operating expenses for the third quarter and first nine months of 2009 include the AWP litigation charge of $493 million in our Distribution Solutions segment.
During the third quarter and first nine months of 2009, operating profit as a
percentage of revenues in our Distribution Solutions segment decreased primarily
due to the AWP litigation charge, partially offset by higher gross profit
margin. For the first nine months of 2009, the decrease in operating profit as a
percentage of revenues was also partially offset by the benefit from the gain on
the sale of our equity interest in Verispan.
Operating profit as a percentage of revenues in our Technology Solutions
segment increased during the third quarter of 2009 compared to the same period a
year ago reflecting favorable operating expenses as a percentage of revenues and
an increase in gross profit margin. Operating profit as a percentage of revenues
increased during the first nine months of 2009 reflecting a decrease in
operating expenses as a percentage of revenues partially offset by a lower gross
profit margin primarily reflecting the recognition of $21 million of deferred
revenue during the first nine months of 2008 for which expenses had been
recognized in prior periods.
Corporate expenses, net of other income increased primarily due to lower
interest income.
Securities Litigation: During the nine months ended December 31, 2008, we
recorded a net credit of $5 million relating to various settlements for our
Securities Litigation.
Interest Expense: Interest expense decreased primarily reflecting the
repayment of $150 million of term debt during the fourth quarter of 2008.
Income Taxes: The Company's reported income tax rates for the quarters ended
December 31, 2008 and 2007 were 71.4% and 27.4%, and 18.7% and 31.1% for the
first nine months of 2009 and 2008. In addition to the items noted below,
fluctuations in our reported tax rate are primarily due to changes within state
and foreign tax rates resulting from our business mix, including varying
proportions of income attributable to foreign countries that have lower income
tax rates.
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