McKesson Corp.’s (MCK) second quarter fiscal 2012 earnings of $1.63 per share (excluding special items) outperformed the Zacks Consensus Estimate of $1.38 and the year-ago earnings of $1.10. Higher revenues and lower share count helped boost earnings.
Revenues for the quarter climbed 10% to $30.2 billion, inching ahead of the Zacks Consensus Estimate of $29.5 billion. Strong performance of McKesson’s two segments, aided by the acquisition of US Oncology, led to the upside.
Including one-time items, McKesson reported second quarter earnings of $1.18 per share, down from $1.25 reported in the year-ago period. Earnings were impacted by a pre-tax, non-cash charge of $118 million related to the average wholesaler’s price (AWP) litigation.
Quarter in Detail
McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment went up 10% to $29.4 billion in the reported quarter. Strong growth in US pharmaceutical direct distribution and services revenues led to the upside. Market growth, the company’s business mix and the acquisition of US Oncology contributed to the strong performance.
Revenues from the US pharmaceutical distribution business came in at $26 billion, 10% higher than the year-ago figure. The company reported steady demand across all its pharmaceutical and Medical-Surgical distribution businesses.
Canadian revenue increased 8% to $2.5 billion, due to market growth which was partially offset by the impact of government imposed price restrictions on generic drugs. Medical-Surgical distribution revenue climbed 13% to $873 million. Medical-Surgical distribution revenue benefited from five extra days of sales in the quarter. The segment also benefited from sales of flu vaccines.
Revenues at the Technology Solutions segment scaled up 7% to $825 million, with all business segments contributing to growth.
Within the Technology Solutions segment, service revenue increased 6% to $643 million. While software revenue climbed 11% to $153 million, hardware revenue increased 4% to $29 million.
Gross profit for the quarter went up 21% to $1.7 billion. McKesson reported an 11% increase in operating expenses, which came in at $999 million. Higher operating expenses were related to the acquisition of US Oncology.
2012 Outlook Raised Again
McKesson raised its outlook for fiscal 2012 again and now expects earnings (excluding special items) in the range of $6.19 – $6.39 share. The company was previously guiding towards earnings in the range of $6.09 and $6.29 per share. The Zacks Consensus Estimate for fiscal 2012 is currently $6.22 per share. We expect an upward revision in estimates.
The earnings guidance excludes acquisition-related expenses of 7 cents, 46 cents related to the amortization of acquisition-related intangible assets and 31 cents related to litigation reserve adjustments.
McKesson expects fourth quarter 2012 earnings to be exceptionally strong. With blockbuster drugs like Pfizer Inc.’s (PFE) Lipitor losing patent protection in calendar year 2011, the company expects to record robust generic revenues in fiscal 2012.
For fiscal 2012, McKesson expects to generate at least $2 billion of cash flow from operating activities. Capital spending is anticipated to lie in the range of $450 – $500 million.
We currently have a Neutral recommendation on McKesson, which carries a Zacks #3 Rank (short-term Hold rating). Investor focus will remain on the outcome of the Veteran’s Administration (VA) contract renewal process.
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