McKesson third quarter revenues increase 9% to $30.8 billion

McKesson Corporation (NYSE: MCK) today reported that revenues for the third quarter ended December 31, 2011 were up 9% to $30.8 billion compared to $28.2 billion a year ago. On the basis of U.S. generally accepted accounting principles ("GAAP"), third-quarter earnings per diluted share was $1.20 compared to $0.60 a year ago.

Third-quarter GAAP results included a pre-tax charge of $27 million ($15 million after-tax or six cents per diluted share), recorded in the Distribution Solutions segment, to increase an existing litigation reserve for claims against McKesson relating to First DataBank's published drug reimbursement benchmarks, commonly referred to as Average Wholesale Prices ("AWP"). Last year's third-quarter GAAP results also included a pre-tax AWP litigation charge of $189 million ($133 million after-tax or 52 cents per diluted share).

McKesson separately reports financial results on the basis of Adjusted Earnings in addition to GAAP. Adjusted Earnings is a non-GAAP financial measure defined as GAAP earnings from continuing operations, excluding acquisition-related expenses, amortization of acquisition-related intangible assets, and certain litigation reserve adjustments. A reconciliation of McKesson's financial results determined in accordance with GAAP to Adjusted Earnings is provided in Schedules 2, 3 and 4 of the financial statement tables included with this release. Third-quarter Adjusted Earnings per diluted share was $1.40 compared to $1.28 a year ago.

For the first nine months of the fiscal year, McKesson generated cash from operations of $1.7 billion and ended the quarter with cash and cash equivalents of $4.2 billion. During the first nine months of the fiscal year, the company deployed $204 million for acquisitions, repurchased $650 million of common stock, and paid $146 million in dividends.

The Board of Directors authorized the repurchase of up to an additional $650 million of common stock, bringing the total authorization to approximately $1.5 billion.

"McKesson delivered another quarter of solid operating results, and I am pleased with our accomplishments during the first nine months of our fiscal year," said John H. Hammergren, chairman and chief executive officer. "Our strong balance sheet and cash flow also provide us with significant opportunities to create shareholder value. Today, we announced a definitive agreement to purchase for approximately CAD $920 million the independent banner and franchise businesses of Katz Group Canada Inc., a privately-owned company that operates an integrated retail pharmacy network in Canada. We are excited about this acquisition which, combined with our increased share repurchase authorization, demonstrates our commitment to using a portfolio approach to deploy our significant cash balances. Based on our year-to-date progress, we continue to expect Adjusted Earnings between $6.19 and $6.39 per diluted share for the fiscal year ending March 31, 2012."

Distribution Solutions revenues were up 9% in the third quarter, driven mainly by strong growth in U.S. pharmaceutical direct distribution and services revenues, reflecting market growth and our mix of business, as well as the acquisition of US Oncology.

Canadian revenues, on a constant currency basis, were down 3% for the quarter due in part to the impact of government imposed price reductions on generic drugs. Including an unfavorable currency impact of 1%, Canadian revenues were down 4% for the quarter. Medical-Surgical distribution revenues increased 2% for the quarter.

In the third quarter, Distribution Solutions gross profit improved due to the positive impact of the US Oncology acquisition.

Distribution Solutions GAAP operating profit was $510 million for the quarter and the GAAP operating margin was 1.70%. Adjusted operating profit was $572 million for the quarter and the adjusted operating margin was 1.91%.

Technology Solutions revenues were up 4% in the third quarter. GAAP operating profit was $69 million and the GAAP operating margin was 8.38%. Adjusted operating profit in the third quarter was $89 million and the adjusted operating margin was 10.81%. In the third quarter, we recorded a pre-tax product alignment charge of $42 million. This charge related to Technology Solutions' strategy to converge core clinical and revenue cycle information technology solutions for the Horizon and Paragon^® product lines onto Paragon's Microsoft^® platform over time.

Fiscal Year 2012 Outlook

McKesson expects Adjusted Earnings between $6.19 and $6.39 per diluted share for the fiscal year ending March 31, 2012, which excludes the following GAAP items:

• Amortization of acquisition-related intangible assets of approximately 48 cents per diluted share in Fiscal 2012.
• Acquisition-related expenses of approximately seven cents per diluted share in Fiscal 2012.
• Litigation reserve adjustments of 37 cents per diluted share.