McKesson Reports Fiscal 2009 Fourth-Quarter and Full-Year Results

McKesson Corporation (NYSE:MCK) today reported that revenues for the fourth quarter ended March 31, 2009 were $26.2 billion compared to $26.2 billion a year ago. Fourth-quarter earnings per diluted share was $1.01 compared to $1.05 per diluted share a year ago. Last year’s earnings included one cent per diluted share from discontinued operations.

Fourth-quarter earnings were impacted by a non-cash, pre-tax impairment charge of $63 million ($60 million after-tax), or approximately 22 cents per diluted share. The charge, which is recorded within the Distribution Solutions segment, is primarily related to our 39% equity investment in Parata Systems, LLC.

For the fiscal year, McKesson had revenues of $106.6 billion versus $101.7 billion a year ago, and earnings per diluted share of $2.95. Earnings per diluted share was impacted by a pre-tax charge in the third fiscal quarter of $493 million ($311 million after-tax) for the AWP litigation. Excluding the AWP litigation charge, and the prior year Securities Litigation credit, McKesson’s earnings per diluted share from continuing operations for the full year was $4.07 compared to $3.31 a year ago.

"Our results in the fourth quarter capped off another solid full-year financial performance. Throughout the year, we demonstrated strong execution in the face of the challenging economy,” said John H. Hammergren, chairman and chief executive officer.

"This quarter, we implemented additional cost control actions across the company in response to the economic environment. With these actions, operating expenses were flat for the quarter, and we are pleased with the resulting earnings growth for the quarter and for the year,” said Hammergren.

In Fiscal 2009, McKesson continued to execute a balanced capital deployment strategy to create additional shareholder value. For the year, the company generated cash from operations of $1.4 billion, completed $358 million of acquisitions, repurchased $484 million of its common stock, paid $116 million in dividends, and made $392 million in internal investments and capitalized software. The company ended the year with a cash balance of $2.1 billion and a gross debt-to-capital ratio of 28.9%, up from 22.7% in the prior year as a result of issuing $700 million of long-term debt in February 2009.

"In the fourth quarter, we resumed share repurchases, although we did so in a measured way that reflects the more challenging economic and financial market climate. Nonetheless, the continued strength of our balance sheet gives us the flexibility to maintain our portfolio approach to capital deployment,” Hammergren commented.

The fourth quarter results included eight cents per diluted share from a tax reserve release of $22 million.

Segment Results

Distribution Solutions revenues were flat for the fourth quarter and up 5% for the year. U.S. pharmaceutical direct distribution and services revenues grew 4% for the quarter, primarily reflecting customer growth. U.S. pharmaceutical direct distribution and services revenues grew 11% for the year, primarily reflecting customer growth and the Oncology Therapeutics Network acquisition. Warehouse revenues were down 4% for the quarter and 7% for the year due to decreased purchases by several customers.

On a constant currency basis, Canadian revenues grew 3% for the quarter due to market growth rates and new and expanded distribution agreements. Including the unfavorable currency impact of 20%, Canadian revenues decreased 17% for the quarter. For the full year, Canadian revenues grew 10% on a constant currency basis. Including the unfavorable currency impact of 9%, Canadian revenues grew 1% for the full year.

Medical-Surgical distribution and services revenues were up 4% in the fourth quarter and 6% for the full year. During the fourth quarter, the rate of growth in sales to physician offices slowed as a result of the current economic environment.

In the fourth quarter, Distribution Solutions gross profit of $1.1 billion was up 2% compared to the fourth quarter a year ago. Full-year gross profit of $4.0 billion was up 10% from a year ago. The increases in gross profit for the quarter and year primarily resulted from an increased mix of higher-margin products and services, including sales of OneStop Generics, which were up 26% in the quarter, and stronger branded price inflation.

In the fourth quarter, operating profit was $422 million and the operating profit margin was 1.66%. For the full year, operating profit of $1.2 billion was negatively impacted by the AWP litigation charge. Excluding the AWP litigation charge, operating profit of $1.7 billion was up 11% for the year and the operating margin was 1.59% compared to 1.50% a year ago.

"Distribution Solutions executed extremely well throughout Fiscal 2009, particularly the U.S. pharmaceutical distribution business where margin improvements were attributable to several factors, including above-market growth for our OneStop Generics program and solid levels of compensation from our agreements with branded pharmaceutical manufacturers,” said Hammergren.

In Technology Solutions, revenues were flat for the quarter and up 3% for the full year. Services revenues grew 3% in the fourth quarter and 4% for the full year, reflecting the steady nature of our offering. Software and software systems revenues decreased 7% for the quarter and 3% for the full year, reflecting delays in software purchasing by hospital and physician office customers due to the current economic climate.

Operating expenses were down 3% for the quarter and 2% for the year due to aggressive cost containment actions.

Technology Solutions operating profit in the fourth quarter was $106 million, up 2% compared to the fourth quarter a year ago, and for the full year was $334 million, up 5%.

"Technology Solutions’ solid base of stable and recurring revenues helped mitigate the effects of the slowing economy. Additionally, we implemented cost containment measures in mid-Fiscal 2009 and, as a result, operating margin was stable for the year,” said Hammergren.

Fiscal Year 2010 Outlook

"As we look ahead to Fiscal 2010, we expect many of the trends that have driven our success over the past few years to continue,” said Hammergren. "In Distribution Solutions, generics will be a strong driver for our business, and we have excellent relationships with branded pharmaceutical manufacturers. We also have a diverse product offering in Technology Solutions, much of which does not require large capital investments by customers.”

"However, as we progressed through Fiscal 2009, we began to see other trends in our business, including continued delays in technology purchasing and a modest impact on revenues in portions of our distribution business as a result of the slowing economy. We have also experienced pressure on sell side margins in our U.S. pharmaceutical business. Additionally, the financial market and economic environment have caused us to deploy capital at a slower pace than we have over the past few years, and to adopt a more conservative approach to our capital structure,” Hammergren said.

"Based on these trends, for the fiscal year ending March 31, 2010, McKesson expects to earn between $3.90 and $4.05 per diluted share,” Hammergren concluded.

Key Assumptions for Fiscal Year 2010 Outlook

The Fiscal 2010 outlook is based on the following key assumptions and is also subject to the Risk Factors outlined below.

• Distribution Solutions revenue growth is expected to be up modestly.
• Branded price inflation in Fiscal 2010 is expected to be similar to Fiscal 2009 levels.
• Technology Solutions revenue growth will remain at similar levels to Fiscal 2009.
• The guidance range assumes a tax rate of 32%, which may vary from quarter to quarter.
• Capital expenditures should be between $350 million and $400 million.
• Cash flow from operations is expected to be approximately $1.5 billion, before considering an anticipated payment totaling approximately $295 million in connection with the AWP litigation settlement for private party claims.
• Weighted average diluted shares used in the calculation of earnings are expected to be approximately 272 million for the year.
• The Fiscal 2010 guidance range does not include any potential litigation reserve adjustments, or the impact of any potential acquisitions, divestitures, impairments, and material restructuring or integration-related actions.

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; 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; 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; 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; 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 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 15th 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. McKesson has been in continuous operation for more than 175 years, making it the longest-operating company in healthcare today. Over the course of its 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 www.mckesson.com.