) third quarter of fiscal 2014 (ended Dec 31, 2013) earnings of
$1.45 per share was up only 0.7% from the year-ago quarter.
Excluding $0.52 per share of charges related to the dispute
with the Canada Revenue Agency and $0.18 per share of
restructuring charges in the Technology segment along with other
extraordinary items, earnings came in at $2.15 per share. The
Zacks Consensus Estimate was $1.83 per share.
On a reported basis, including one-time charges, earnings were
Revenues grew 10.3% to $34.3 billion in the third quarter of
fiscal 2014, surpassing the Zacks Consensus Estimate of $33.6
Quarter in Detail
McKesson operates through two segments: Distribution Solutions
and Technology Solutions.
Revenues at the Distribution Solutions segment increased 10.4%
year over year to $33.5 billion in the reported quarter due to
strong market growth across pharmaceutical direct distribution
and services. Revenues from the U.S. pharmaceutical distribution
business came in at $29.3 billion, up 9.0% year over year.
Revenues from Canada were up 5.8% to $2.8 billion driven by
market growth and new customer wins.
Revenues from Medical-Surgical distribution and services
surged 67.3% to $1.5 billion due to the addition of PSS World
Medical. We note that McKesson closed the acquisition of PSS
World Medical Inc. in Feb 2013.
Revenues at the Technology Solutions segment were up 6.2% year
over year to $784 million driven by growth in services (+10.0%),
partially offset by a decline in software revenues (-11.0%). We
remind investors that the company streamlined operations in this
segment and sold its international technology and hospital
automation businesses during the fiscal first quarter.
Operating expenses (on an adjusted basis) climbed 13.0% in the
reported quarter to $1.2 billion.
Fiscal 2014 Outlook Lowered
McKesson now expects earnings (excluding special items) from
continuing operations in the range of $8.05-$8.20 in 2014, down
from the earlier estimate of $8.40-$8.70 per share. Even
though the Distribution Solutions is expected to perform well in
the fourth quarter, the decline in guidance came on the back of
charges related to Canadian dispute and restructuring charges in
the Technology segment (related to Horizon Clinicals software
Moreover, McKesson had expected a recovery in demand in its
Medical Imaging business which did not materialize. The guidance
excludes the impact of Celesio acquisition.
Update on Celesio Acquisition
After a failed bid, McKesson finally managed to secure the
acquisition of Celesio through the agreements signed last week.
McKesson reached an agreement with Franz Haniel & Cie. GmbH,
the leading shareholder of Celesio.
As per the agreement, McKesson will acquire the entire stake
of Franz Haniel & Cie. GmbH in Celesio for €23.50 per share.
McKesson also announced the acquisition of convertible bonds of
Celesio from Elliott, a stakeholder in Celesio. The agreements
with Haniel and Elliott will enable McKesson to obtain the
minimum requisite of a 75% stake in Celesio for the acquisition
to go through. McKesson expects to close the transactions by Feb
The combined group is expected to have annual revenues in
excess of $150 billion. McKesson expects to realize annual
synergies between $275 million and $325 million by the fourth
year of obtaining operational control of Celesio.
McKesson expects to launch a tender for the remaining
outstanding common shares of Celesio in the fiscal fourth
quarter. The company anticipates gaining operational control of
Celesio in the first half of fiscal 2015.
Third quarter results did not surprise us. We are impressed
with McKesson's relentless efforts to acquire Celesio. McKesson
has a history of successful acquisitions. We believe the Celesio
acquisition is a step in the right direction and will allow
McKesson to gain a foothold in Europe, thereby geographically
expanding its core operations further.
We note that rival
) entered into a strategic ten-year pharmaceutical distribution
) and Alliance Boots GmbH in 2013.
McKesson currently carries a Zacks Rank #3 (Hold). Right now,
) looks attractive with a Zacks Rank #2 (Buy).
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