McKesson Reports Fiscal 2010 First-Quarter Results

McKesson Corporation (NYSE: MCK) today reported that revenues for the first quarter ended June 30, 2009 were $26.7 billion compared to $26.7 billion a year ago. First-quarter earnings per diluted share was $1.06 compared to 83 cents per diluted share a year ago.

"McKesson had excellent first quarter results, driven by strong performance across the entire company. Every business in both our Distribution and Technology segments met or exceeded our earnings expectations, giving us positive momentum for the remainder of our fiscal year,” said John H. Hammergren, chairman and chief executive officer.

In the first quarter, McKesson revenues were flat, primarily impacted by the Fiscal 2009 loss of certain customers in the U.S. pharmaceutical distribution business. Earnings per diluted share was up 28% versus the prior year, aided by strong cost controls across the company. This led to significant operating margin expansion in both segments, resulting in 12% growth in Distribution Solutions operating profit and 56% growth in Technology Solutions operating profit.

The company continues to execute a balanced capital deployment strategy designed to create additional shareholder value. During the first quarter, McKesson repurchased $275 million of common stock, leaving $555 million remaining on its current share repurchase authorization. For the quarter, McKesson had cash flow from operations of $907 million and ended the quarter with cash of $2.6 billion.

In the first quarter, the company’s 401(k) plan, the Profit Sharing Investment Plan (PSIP), resolved an outstanding legal matter. The PSIP will use a portion of the settlement proceeds from this matter in place of the company’s Fiscal 2010 plan contribution. Compared to Fiscal 2009, this resulted in a reduction in the company’s expense of four cents per diluted share in the first quarter, and is expected to result in an expense reduction of approximately 15 cents per diluted share for the full year.

"I am very pleased with the company’s first quarter earnings, which are the result of focused execution and aggressive cost management in both segments of our business. In addition, strong cash flow generation in the first quarter allowed us to get an early start on our share repurchase program. Based on our positive momentum, we are raising our previous outlook and now expect that McKesson should earn between $4.15 and $4.30 per diluted share for the fiscal year ending March 31, 2010,” Hammergren said.

Distribution Solutions revenues were flat in the first quarter. U.S. pharmaceutical distribution revenues were also flat for the quarter, reflecting market growth rates and the loss of certain customers in Fiscal 2009. In addition, there was a shift of revenues to direct store delivery from sales to customers’ warehouses.

Canadian revenues, on a constant currency basis, grew 10% for the quarter due to market growth rates and expanded distribution agreements. Including an unfavorable currency impact of 15%, Canadian revenues decreased 5% for the quarter. Medical-Surgical distribution revenues were up 9% for the quarter, aided by acquisitions made in late Fiscal 2009 and an increase in demand from the H1N1 virus.

In the first quarter, Distribution Solutions gross profit of $954 million improved 2% compared to the first quarter a year ago. The increase in gross profit for the quarter was due primarily to the impact of our agreements with branded pharmaceutical manufacturers and an improved mix of higher-margin products and services, including sales of OneStop Generics, which were up 19% in the quarter, partially offset by lower sell margin in our U.S. pharmaceutical business.

Distribution Solutions operating profit of $430 million was up 12% for the quarter and operating margin was 1.66% compared to 1.48% a year ago.

"Distribution Solutions had a very strong performance in the first quarter. Margin improvements were attributable to several factors, including solid levels of compensation from our agreements with branded pharmaceutical manufacturers, above-market growth for our OneStop Generics program, increased demand related to the H1N1 virus and, most importantly, a more disciplined approach to expense management across all of the businesses in this segment,” said Hammergren.

In Technology Solutions, revenues were flat for the quarter. Services revenues grew 4%, reflecting the steady nature of our offering. Software revenues were down 6% and hardware revenues were down 43% reflecting the impact of lower bookings in the latter part of Fiscal 2009.

Technology Solutions operating expenses were down 9% in the quarter due to continued rigorous expense management. Operating profit was $103 million, and the operating margin was 13.86% compared to 8.87% for the first quarter a year ago.

"Technology Solutions has a diverse portfolio of solutions and a solid base of stable and recurring revenues. Coupled with ongoing expense management initiatives, this resulted in higher quarterly operating profit,” said Hammergren. "With the products and services we offer in Technology Solutions, we are well-positioned to extend our leadership in healthcare information technology while driving customer and company success,” Hammergren added.

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, as amended, 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 or furnished 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; continued volatility and disruption to the global capital and credit markets; and changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies. 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.