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McKesson Corp.’s (MCK - Analyst Report) fourth quarter fiscal 2012 (ended March 31, 2012) earnings (excluding special items) of $2.09 per share surpassed both the Zacks Consensus Estimate of $2.06 per share and the year-ago earnings of $1.78 per share. Similarly, full year adjusted earnings of $6.38 per share outperformed the Zacks Consensus Estimate of $6.35 per share and the year-ago earnings of $5.31 per share. Higher revenues and lower share count boosted earnings.

Revenues for both the reported quarter and the year climbed 10% to $31.7 billion and $122.7 billion, respectively, ahead of the Zacks Consensus Estimate of $30.3 billion and $121.4 billion, respectively. Strong performance of McKesson’s Distribution Solutions segment led to the upside.

Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment went up 10% to $30.8 billion in the reported quarter. Strong growth in US pharmaceutical distribution revenues led to the upside.

Revenues from the US pharmaceutical distribution business came in at $27.5 billion, 10% higher than the year-ago figure, driven by new business with existing customers, market growth and the acquisition of US Oncology.

Canadian revenue climbed 12% to $2.6 billion, as a result of five additional sales days and market expansion. Medical-Surgical distribution revenue went up 8% to $781 million, reflecting steady market growth and customer addition.

Revenues at the Technology Solutions segment slipped 2% to $860 million, primarily due to lower revenues recorded from the software and hardware segments.

Within the Technology Solutions segment, while service revenue increased 3% to $678 million, software revenue declined 19% to $147 million and hardware revenue decreased 10% to $35 million.

Gross profit for the quarter went up 5% from prior-year quarter to $1.8 billion. McKesson reported a 1% year-on-year increase in operating expenses, which came in at $1.2 billion. Higher operating expenses were related to the acquisition of US Oncology.

During fiscal 2012, McKesson repurchased common stock worth $1.9 billion. Moreover, the company authorized additional share repurchase of up to $700 million during the year, bringing the total authorization to about $1 billion.

Outlook for 2013

Apart from releasing financial results, McKesson also provided its outlook for fiscal 2013. The company expects earnings (excluding special items) in the range of $7.05 - $7.35 share. McKesson expects the Katz Group acquisition to contribute about 15 cents to fiscal 2013 earnings.

The Zacks Consensus Estimate for fiscal 2013 lies towards the lower end of the guidance range at $7.16 per share.

The company expects Distribution Solutions revenue to grow at market rates and Technology Solutions revenues to experience the same level of growth as in fiscal 2012.

For fiscal 2013, McKesson expects to generate cash flow from operating activities in the range of $2.0 - $2.5 billion.

Our View

We currently have a Neutral recommendation on McKesson, which carries a Zacks #2 Rank (short-term Buy rating). We are impressed by the company’s performance and believe that factors like aging population, increased use of generics, growing demand for specialty pharmaceutical products, along with the extension of the Veterans Affairs deal will help drive growth.

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