McKesson Beats, Ups Guidance

McKesson Corp. (MCK - Snapshot Report) reported its fiscal second-quarter earnings of $1.07 per share, beating the Zacks Consensus Estimate of $1.01. However, earnings declined from the year-ago profit of $1.17. Meanwhile, revenues increased 1.9% to $27.1 billion.
 
The Distribution Solutions segment grew 2% with the U.S. pharmaceutical distribution business recording a 2% increase in revenues. The loss of two customer buying groups in the U.S. continued to impact the performance of this segment. We believe the performance of the Distribution Solutions segment will continue to be impacted by the lost business through the remainder of the year.
 
Canadian revenues grew 9% as the Canadian pharmaceutical market remained slightly stronger than the U.S. market. Medical-Surgical distribution revenues also increased (up 5%), benefiting from small acquisitions made by the company in late fiscal 2009. The Specialty Care Solutions business performed well, benefiting from the launch of generic versions of Oxaliplatin.
 
The company’s business should benefit in the next couple of quarters from the increased demand related to the flu season. McKesson has a contract with the Centers for Disease Control and Prevention (CDC) for the distribution of the H1N1 flu vaccine and ancillary medical surgical supplies to 150,000 sites across the country. Besides this, the business should also benefit from higher demand for flu test kits and Roche’s Tamiflu and GlaxoSmithKline’s (GSK - Analyst Report) Relenza.
 
The Technology Solutions segment recorded a 4% increase in revenues. While services revenues grew 5% reflecting the steady nature of the company’s products and the recognition of previously deferred revenues, software revenues were up 1%, with bookings increasing modestly during the reported quarter. However, hardware revenues declined 13%.
 
Gross profit for the quarter increased 3% to $1.3 billion with both segments contributing to growth. The company reported a 4% decline in operating expenses, which came in at $888 million. The lower expenses were driven primarily by the company’s cost containment efforts which were implemented due to the difficult economic environment.
 
Based on the company’s results and expectations for a strong flu season, the company increased its guidance for fiscal 2010. McKesson now expects earnings in the range of $4.45 - $4.60, up from the earlier guidance of $4.15 - $4.30.