McKesson Corporation (MCK) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the McKesson Corporation Fourth Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Erin Lampert. Please go ahead.

Thank you, Elizabeth. Good afternoon, and welcome to the McKesson's Fiscal 2012 Fourth Quarter Earnings Call. With me today are John Hammergren, McKesson's Chairman and CEO; and Jeff Campbell, our CFO. John will first provide a business update and will then introduce Jeff, who will review the financial results for the quarter. After Jeff's comments, we will open the call for your questions. We plan to end the call promptly after one hour at 6:00 p.m. Eastern Time. Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the company's periodic, current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures, in which we exclude from our GAAP financial results acquisition-related expenses, amortization of acquisition-related intangible assets and certain litigation reserve adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing fourth quarter fiscal 2012 results available on our website for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thanks, and here is John Hammergren.

Think, Erin, and thanks, everyone, for joining us on our call. I'm really pleased to report the results from our last quarter of fiscal 2012, which wrapped up another strong full year of financial performance. Our full year adjusted earnings per diluted share was $6.38, up 20% from the prior year. Fourth quarter revenues were up 10% to $31.7 billion and fourth quarter adjusted earnings per diluted share was up 17% to $2.09. We also had great performance in cash flow from operations, which came in at $2.9 billion for the year. This outstanding result is a tribute to our ability to efficiently manage working capital in a growing business. As a result of our cash flow performance and the overall strength of our balance sheet, in the fourth quarter we executed a $1.2 billion accelerated share repurchase program, bringing our total share repurchases for the year to $1.9 billion. Also in the fourth quarter, we completed our acquisition of the independent banner and franchise business of Katz Group Canada for $919 million. After completing the Katz acquisition and executing the accelerated share repurchase program, we still ended fiscal 2012 with over $3 billion in cash on our balance sheet, leaving strong flexibility to deploy capital using our portfolio approach going forward. Turning to the broader industry environment. Health care topics remain a focus in this election year. We continue to believe the issues of quality, access and cost will remain at the center of all health care discussions. McKesson remains actively engaged in public policy conversations at the Federal and state level, addressing a number of issues that are important to our customers and, certainly, to our industry. The issues our customers face remain the same regardless of the outcome of the ongoing political and legal discussions on health reform. Health care providers, manufacturers and payers are looking for broad solutions to drive improved financial, clinical and operational performance. With the most comprehensive set of tools, services and resources in our industry, McKesson is well-positioned to support our customers as the industry continues to transform. Before I turn to the fourth quarter and full year results for Distribution Solutions, let me take a moment to walk you through a legal matter, which in the past has impacted our GAAP results in the Distribution Solutions segment. In our fiscal third quarter earnings call, Jeff indicated that we had reached an agreement in principle with the Department of Justice to resolve federal Medicaid claims related to AWP. I'm pleased to tell you that in April, we finalized this settlement, in line with our existing reserves. As you know, McKesson had previously settled all private payer AWP claims during the third quarter of fiscal 2009. While there are still outstanding cases by public entities, which we plan to vigorously defend, this settlement with the Department of Justice represents another important step in bringing resolution to the claims related to AWP. Now moving on to some business results for our fourth quarter and full year. Strong execution in Distribution Solutions drove overall operating results for the company. We continue to grow and expand our value to our customers through our core capabilities of operational excellence, unmatched service levels, the global scale of our sourcing and the use of technology to help our customers succeed. U.S. Pharmaceutical continues to turn in outstanding results. Customers in all channels, from the small independent pharmacy to the large retail customer, recognize the value McKesson brings. As a result, we have succeeded along with our customers. We've also performed well for our branded pharmaceutical manufacturing partners and maintained steady levels of compensation in return. A significant accomplishment for the U.S. Pharmaceutical business was being selected as a sole distributor for the Department of Veterans Affairs. I'm extremely pleased the VA has again trusted McKesson with serving our nation's veterans. Finally, we had another significant quarter in generics, aided by 2 important product launches. Overall, generics continue to make a substantial contribution to our results. In summary, I believe U.S. Pharmaceutical is extremely well-positioned for continued industry leadership. Turning to our other businesses in Distribution Solutions segment. Our Canadian Distribution business had a solid year despite planned government-imposed price reductions for generic pharmaceuticals in certain provinces. Our team in Canada continues to find innovative ways to expand the breadth of their offering to our customers. And I'm pleased they were able to successfully mitigate much of the impact of ongoing regulatory challenges. We completed our acquisition of the independent banner and franchise business of the Katz Group Canada late in the fourth quarter. As a reminder, Katz has been a valued customer of McKesson for over 20 years so these banner and franchise members, who primarily operate under the brands of I.D.A., Guardian and Medicine Shoppe Canada, have long-standing relationships with McKesson. The response from the pharmacists has been positive, demonstrating McKesson's support to independent pharmacy and our capability to develop innovative and value-enhancing programs. In our fourth quarter we recognized the one-year anniversary of our acquisition of US Oncology and our integration efforts are largely complete. US Oncology, part of McKesson's Specialty Health, provides one of the most comprehensive service offerings available to a large and fast growing segment in the health care industry. We have demonstrated the value of our expanded technology platform and broad sourcing capabilities that we bring to US Oncology physicians and hospitals. We remain focused on helping our customers succeed in an environment where they face increased reimbursement and competitive pressure. During the fourth quarter, I named Marc Owen as the new President of McKesson Specialty Health. Many of you know Marc and he's led our strategy and business development efforts since 2001. Marc has a deep understanding of the health care industry, including the dynamics of the specialty market. I believe his leadership, along with our physician customers, will continue to shape a successful strategy for this important business. Our Medical-Surgical business continues to contribute to the overall success of Distribution Solutions, with 8% growth in revenues in fiscal 2012. The fiscal 2012 results of our Medical-Surgical business extend a multi-year trend of strong execution and improved operating results. We continue our leadership in the ambulatory market by delivering value to our customers through our competitive offering, our strong focus on customer success and our private label products. Overall, I'm extremely pleased with our full year performance in Distribution Solutions. As we look ahead to fiscal 2013, we expect that revenue in Distribution Solutions will grow at the market rate adjusted for our mix of business. We also expect continued growth in Distribution Solutions operating margins. Jeff will discuss our operating margin assumptions in more detail, but I'd like to highlight the key drivers of our expected margin expansion. We expect continued strong relationships with our branded pharmaceutical manufacturing partners where we deliver a broad range of value-added services, resulting in steady compensation. In fiscal 2013, we expect brand price inflation will be at levels similar to fiscal 2012. We also expect good progress with our proprietary generics programs in our global sourcing initiatives. As you know, we approach generics as a single company across all of our customer segments in U.S. Pharmaceutical, Canadian Distribution, and our specialty businesses. We are headed into a year with a robust oral generics launch calendar, and we expect generic price trends to be similar to those we experienced in fiscal 2012. I have tremendous confidence in the success of the Distribution Solutions segment. We have an excellent team throughout this business, and they have constantly and consistently demonstrated over many, many years, a commitment to delivering a significant value to our customers and strong financial results. Turning now to Technology Solutions. For the year, Technology Solutions revenues were up 4% to $3.3 billion. Adjusted operating profit was up 21% to $440 million, including a product alignment charge, which I'll come back to in a moment. So overall, I'm pleased with the continued progress we are making in the Technology Solutions segment. As a reminder, in the third quarter, we announced a strategy in our hospital-facing business to converge core clinical and revenue cycle information technology solutions for the Horizon and Paragon product lines onto Paragon's Microsoft platform over time. Since then, we've met with all Horizon Clinical customers to discuss what our product strategy means for them. Keep in mind, we're not forcing migrations. We expect to have customers on the Horizon Clinicals platform for many years to come. And to successfully partner with those customers as certification requirements evolve. We have a long history of product innovation, including enabling our technology products to address regulatory requirements faced by our customers. Many of our Horizon Clinical customers are live on the currently certified release or in the process of upgrading. Horizon Clinical customers have previewed the Paragon product, many of them have, and the development roadmap vision we put in place, and they're pleased with what we have seen. Several Horizon Clinical customers have elected to convert to the Paragon product, and we started some of those conversions today. And we also have won new customers for Paragon. Our customers are pleased with the product as being contemporary, fully functional and easy to use and integrated. In my own conversations with hospital customers, they agree our strategy is the right one going forward, despite the competitive noise in the marketplace. We believe our strategy puts customers in a better position to reach the clinical and financial end points they will need as reform and payment models evolve. The electronic medical record is an important building block of a provider's overall technology strategy. But it is other components, like performance management, analytics, care coordination and payor capabilities that will create the difference in our customers' ultimate success. McKesson is the only company that delivers the breadth and depth of solutions to help our customers maximize the value of their core systems and improve quality and financial performance. Beyond our hospital-facing business, McKesson also continues to invest in solutions for our payer, pharmacy and physician customers. Our RelayHealth business sits at the center of addressing customers' needs to better connect and coordinate care. RelayHealth customers can send electronic prescriptions, clinical reminder messages, electronic lab results and care summaries to patients. The proposed rules for Stage II Meaningful Use place an increasing emphasis on connectivity. RelayHealth's tools are already well-positioned to help providers and payers across the spectrum achieve these requirements, regardless of their underlying technology platform. RelayHealth also helps facilitate the connectivity necessary for providers who are implementing new quality base care models. For example, the United States Department of Defense has implemented Relay Clinical secure messaging throughout its medical treatment facilities in all 3 branches of the military. This system allows health care providers to communicate with patients and other providers. McKesson Health Solutions is a leader in enabling players to use evidence-based clinical information technology to achieve better health care outcomes at lower cost. I'll take a moment to highlight 2 products that directly support the payer, and their provider partnerships, that are so important in today's market. McKesson Health Solutions has paired InterQual, the leader in clinical decision-support criteria with Clear Coverage, a next-generation point of care decision-support tool. InterQual is used by over 70% of the top 25 health plans and over 2/3 of the hospitals in the United States. Together, these products are helping to promote consistent clinical decision-making that improves the efficient delivery of quality patient care. Overall, I'm pleased to see the level of collaboration among our technology businesses to help our customers as they achieve better financial and clinical outcomes. Looking forward to fiscal 2013, we expect Technology Solutions revenue growth should be at the approximate level of growth experienced in fiscal 2012. And in summary, we are committed to helping our customers use information technology strategically to enable better business, better care and better connectivity. Before I end, I will spend a moment talking about capital deployment. Over time, we used our portfolio approach to capital -- for capital deployment for acquisitions, share repurchases, dividends and internal investments, creating significant value for our shareholders. We are in businesses that continue to generate strong cash flow from operations. We plan to continue our portfolio approach as we head into fiscal 2013. Our board recently authorized the repurchase of up to additional $700 million of our common stock, which brings the total remaining authorization to $1 billion. This action demonstrates our confidence in the business, and the stability of our future cash flows. To wrap up my comments, I'm pleased with our financial results in fiscal 2012. I'm confident in our team's ability to deliver strong performance in fiscal 2013. We have a steady track record of delivering double-digit earnings growth, and I'm pleased to provide fiscal 2013 guidance where we expect to continue that trend. We expect fiscal 2013 adjusted earnings per diluted share of $7.05 to $7.35. With that, I'll turn the call over to Jeff for a detailed review of our financial results. Jeff?

Well, thanks, John, and good afternoon, everyone. As you just heard, McKesson delivered another year of outstanding financial results. We had good growth in both segments, and our tremendous cash flows allowed us to continue our portfolio approach to capital deployment. This sets us up nicely for fiscal 2013, where we are pleased again to provide double-digit growth adjusted earnings per share guidance. In my remarks today, I'll cover both the fourth quarter and full year results. As you know, we provide our guidance on an annual basis due to both the seasonality and the quarter-to-quarter fluctuations that are inherent in some of our businesses. In this context, an annual look at our financial results can provide more meaningful insight into some of the key trends. So I'll focus today more on the annual numbers than the quarterly ones, and I'll also comment on what these trends might mean for fiscal 2013. My comments today will also focus on our full year FY '12 adjusted EPS of $6.38, which as you recall, excludes 3 items: acquisition-related expenses; amortization of acquisition-related intangibles; and certain litigation reserve adjustments. The numbers I'll review in my discussion today will all be based on an adjusted earnings basis and can be found on Schedules 2 and 3 included in today's press release. One other quick reminder. We fully lapped the US Oncology acquisition as of the end of the third quarter. Let me now begin with our consolidated results, which can be found on Schedules 2A and 2B. For the full year, consolidated revenues increased 10% to $123 billion versus $112 billion a year ago. Excluding the impact of US Oncology, total revenues increased approximately 7% for the full year, with both segments contributing nicely to this result. Total gross profit was up 10% for the year on the 10% increase in overall revenues. Although we did see a little bit of gross margin improvement in both segments. Total operating expenses for the full year were up 8% to $4.1 billion. Our full year operating expenses were higher primarily due to the US Oncology acquisition. As an aside, excluding the impact of US Oncology, full year operating expenses were up roughly 4% year-over-year, in line with our expectations. Moving down the P&L. Other income was fairly flat for the full year at $21 million. Full year interest expense increased $54 million to $251 million primarily due to the debt we've put in place as a result of the US Oncology acquisition. Turning now to taxes. As of the end of the third quarter, our full year estimate of the tax rate was 32%. In the fourth quarter, however, we recognized some favorable tax discrete items, which drove our full year tax rate down to 30%. Looking forward, our fiscal 2013 outlook assumes an adjusted tax rate of 31%, which creates a modest headwind for next year. Net income for the full year was $1.6 billion and our earnings per diluted share was $6.38. To wrap up our consolidated results, this year's earnings per share number was aided by the cumulative impact of our share repurchases, which lowered our full-year diluted weighted average shares outstanding by 5% year-over-year to $251 million. We were pleased that our board recently increased our share repurchase authorization to a total of $1 billion. While we don't comment on the timing or amount of future share repurchases, we do give guidance on our weighted average diluted shares outstanding assumption, which for fiscal 2013 is 239 million. Let's now turn to the segment results, which can be found on Schedules 3A and 3B. In Distribution Solutions, total revenues increased 10% for the full year and also 10% for the quarter. Direct distribution and services and sales to customers' warehouses revenues were both up 10% for the year. Full year direct revenues reflect the favorable impact of market growth and the US Oncology acquisition. Warehouse revenues, as we have discussed over the past several quarters, increased primarily due to a new customer. To focus for a second on just the fourth quarter results, we did see particularly strong revenues in both the direct and warehouse lines, primarily due to an increase in volume with several of our largest existing customers. Looking ahead, given the record number of expected generic launches in our fiscal 2013, we anticipate direct revenues will be fairly flat and possibly even down a bit next fiscal year. Since our economics are better on generic drugs, this is, of course, a good thing for our customers and the company. Shifting to warehouse revenues in fiscal 2013, we do expect unusually strong double-digit growth in our warehouse line, primarily due to expanded volumes with existing customers. I would remind you, of course, that the impact on our earnings of higher warehouse revenues is quite modest, as we earn lower margin on our warehouse revenues relative to the margin on our direct revenues. Moving back now to fiscal 2012. Canadian revenues on a constant currency basis increased 3% for the full year and 13% for the quarter. Both the full year and quarter benefited from having 5 extra sales days in the quarter. When you exclude these 5 days, Canadian revenues on a constant currency basis were up 1% for the full year. Given the ongoing generic price reduction challenges we face, we're fairly pleased with the 1% full year growth and expect similar flat to low levels of growth in fiscal 2013. Medical-Surgical revenues were up 8% for both the full year and the quarter, primarily driven by market growth and new customers. Gross profit for the segment increased 11% for the full year. Excluding the impact of the US Oncology acquisition, gross profit would be up approximately 5% for the full year. Distribution Solutions operating expense increased 9% for the full year, primarily due to the US Oncology acquisition. Once we've finished lapping the US Oncology acquisition, you saw our fourth quarter operating expense increase just 3% versus the prior year. For the full year, operating profit grew 13% to $2.5 billion, and we ended the year with an operating margin rate of 210 basis points. This is up 6 basis points year-over-year, and reflects a nice, steady, upward movement within our 200 to 250 basis point target range. Turning now to Technology Solutions. Revenues were up 4% for the full year to $3.3 billion, and full year operating profit was up 21% to $440 million. And as noted on Schedule 3B, our full year operating margin rate was 13.29%. Focusing on just the fourth quarter, you did see our revenues down 2% to $860 million and operating profit was down 20% for the quarter. I'd remind you that in fiscal 2011, our financial results were heavily skewed towards the March quarter due to several product GAs and certifications that occurred in last year's fourth quarter. This created some lapping challenges in our Technology segment in the March quarter, compared to the same March quarter in fiscal 2011. Operating expenses in this segment increased 3% for the full year, and we're pleased with the team's ability to control expense growth. Despite this focus on controlling costs, as another example of our commitment to our customer success, we continue to invest across all our technology businesses. Technology Solutions gross R&D spending for the year was $451 million, up 3% compared to $436 million in the prior year. Of these amounts, we capitalized 8% compared to 12% a year ago. Moving now to the balance sheet and working capital metrics. We were pleased to see our cash flow from operations come in at $2.9 billion for the year. This is an outstanding result, and well above our original expectations. I view it as a great commentary on the businesses we are in and on the efforts of our management teams to continually find ways to more efficiently manage the business. For us as a company to grow our revenues 10%, adjusted earnings per share 20% and yet reduce our working capital by almost $0.5 billion is an outstanding result. This is reflected in our working capital metrics where our days sales outstanding decreased to 24 days from 25 days last year. Our days sales in inventory decreased by one day to 30 days, while our days sales in payables increased 2 days from a year ago, to 49 days. Looking ahead, we expect cash flow from operations to be between $2 billion and $2.5 billion in fiscal 2013. Overall, our gross debt to capital ratio was 36.8% at year end, leaving us right in the middle of our target range. Internal capital spending was $403 million for the year, slightly below our original expectations. You will see our fiscal 2013 guidance assumes an internal capital spending range between $425 million and $475 million. Moving now to provide some additional context for our fiscal 2013 adjusted earnings guidance of $7.05 to $7.35 per diluted share. John has already talked about our key -- he's already talked about our key business objectives and in our press release today, you will find a list of key assumptions underlying this guidance. So I won't go over these again here, but I would like to add a few points of additional color. I mentioned earlier that our fiscal 2012 operating margin in Distribution Solutions was 210 basis points. We expect improvement to this operating margin in the mid to high single-digit basis points. In Technology Solutions, we expect to get margin expansion of our fiscal 2012 operating margin rate of 13.29%, though we expect to still be within the low end of our long-term operating margin goal range of mid-teens. Turning to the quarterly progression. We expect the fiscal 2013 Technology Solutions results to be heavily weighted towards the back half, similar to fiscal 2011 results. Key products GAs in the back half of fiscal 2013 are the primary drivers of this expected result, just as we had key product GAs in the back half of fiscal 2011. To speak more broadly about our quarterly earnings per share progression, as you know, we do not provide quarterly EPS guidance due to the variability in the timing of certain items in our business. Over the course of a full year, these factors tend to even out. But within the year, they can create challenges when comparing year-over-year results on a quarterly basis. To remind you of a few of these factors, first, in Distribution Solutions, as we've talked about today, we anticipate a record number of oral generic launches in fiscal 2013. This unprecedented level of launches certainly has the potential to create some quarterly fluctuations, but it is important to think about this relative to all of the other factors that also influence our quarterly results. For example, also in Distribution Solutions, although our agreements with branded manufacturers provide a steady level of predictability for compensation, the structures of many agreements use price increases as the determinant of compensation timing, which we can't always foresee accurately quarter-to-quarter. In addition, in Technology Solutions, as I discussed earlier, the anticipated timing of various product releases and GAs next fiscal year will cause results in the segment to be back-half loaded. Last, as for all companies, tax is another area where we see quarterly fluctuations. While these adjustments may change our tax rate from quarter-to-quarter, in fiscal 2012, for example, we ranged from 27% to 32%. We believe that our annual tax rate is a better overall measure of our tax expense. Just to remind you, as I said earlier, our estimated adjusted tax rate for fiscal 2013 is 31%. So with all that being said, sitting here today as we look at our plans, when measured as a percentage of our annual earnings per share, we would expect the first quarter to be roughly similar to our experience in the fiscal 2012 first quarter. And again this year, our earnings per share will be weighted towards the back-half, and the fourth quarter will be exceptionally strong. With respect to our recent acquisition of the Katz Group assets, we are expecting accretion of approximately $0.15 on an adjusted earnings basis for fiscal 2013, and this accretion will be spread fairly evenly across all 4 quarters. Now let me briefly mention one last item that will impact our first quarter fiscal 2013 GAAP results. When you read the 10-K, you will see a subsequent events footnote pointing out that earlier this month, in April, we completed a business combination in which we acquired the remaining interest in our corporate headquarters build. The way accounting rules in this area work, this creates a pretax acquisition-related gain of approximately $75 million. Similar to how we treat other one-time acquisition-related items, this transaction will be excluded from our adjusted earnings results. To conclude, our fourth quarter results wrapped up another year of strong double-digit adjusted earnings growth, and we've laid a good foundation as we head into fiscal 2013. Thanks and with that, I'll turn the call over to the operator for your questions. [Operator Instructions] Operator?

[Operator Instructions] We'll take our first question today from Tom Gallucci with Lazard Capital Markets.

I guess, first one, just on the quarter to follow up on some of your comments and your remarks. You said that direct revenue growth, direct customer revenue growth was stronger due to the growth of some of your customers, can I assume that those were bigger customers that were probably a little bit of a lower margin?

Yes, that's a fair assumption, Tom. It is -- there's been some moving parts in the industry that have caused some of our larger customers to grow a little more rapidly than otherwise, and I think that's what's reflected in those numbers.

Okay. And then just thinking about the outlook. You guys mentioned some of the headwinds and tailwinds in quarterly ups and downs throughout the year. Can you just comment maybe at a high level, your thoughts on generics, and how that may affect the quarterly progression?

Well, as I said, Tom, while generics are an important driver for us in FY '13 given the unprecedented year in oral generics as we've also talked about of course, it's a down year for specialty generics. I'd really come back to the fact that there's other items that are just as big driving some quarterly volatility. So the guidance I gave at the end there for the effect on EPS by quarter, where in particular for the June quarter as a percentage of our total year's earnings, we'd expect it to look actually pretty similar to last year, and it will -- the results will again be back-half loaded, pretty similar to last year. So a lot of the differences in the oral generic launch calendar are getting offset by some of the other timing differences we see year-over-year.

We'll take the next question from Lisa Gill with JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Jeff, just as we look at bulk versus direct store deliveries, can you just remind us of, on a relative magnitude, the difference in the margins between the 2? And as we think about that next year, do you expect these increases in volumes to continue with these customers, or is this more related to the Walgreens-Express scripts dispute?

Well, while the Walgreens-Express dispute certainly drove some traffic everywhere else in the industry and many of our customers benefited from that and therefore, us. The increase, Lisa, in the warehouse revenues is really driven by the small handful of customers for whom we do warehouse business. I'd remind you that we only do warehouse business as part of a broader surface -- service offering to these customers where we do lots of direct store delivery. The warehouse revenues themselves are at a very low margin, which we don't disclose, but are an important part of the broader service offering to these customers. When you look at 2013, because the increase is more importantly, driven by some of the new business that our customers have won, we would actually expect double-digit growth in the warehouse revenue line in 2013.

And, Lisa, you might recall there's a large -- there was a large contract that changed hands between one of our competitor's customers and one of our customers. And as a result, our warehouse revenue for the next 3 quarters at a minimum will be growing nicely as a result. To Jeff's point though, it does come at a low margin, puts a little pressure on us from a mix perspective in terms of driving our margin rate up. But we did guide to a margin rate increase for the year, in basis points we talked about earlier. So even with that pressure I think we can still get good leverage in our business, and we're pleased that our customers are winning, and we get to reflect that through our revenue as well. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And then John, just as a follow-up. VA -- obviously congratulations on keeping that contract, can you comment at all if anything has changed within the contractual relationship? Obviously that the pricing was public, but how should we think that -- about that in context to some of your other customers, number one. And number two, are there any new services that you'll be providing to VA that you didn't previously provide in this new contract?

Well, as we said earlier we are really pleased that we were able to win that award, and renew that relationship, and we're very happy about that. The contract itself has some nuances associated with it, but I think it largely is similar to the contract we had before. As it relates to other customers though, this customer is unique in its approach and the contract reflects its uniqueness in terms of the way it buys and the way it behaves, and so we had an eight-year run understanding how the VA contract worked for us and clearly that gives -- gave us good insight as we put our proposal in and fortunately allowed us to win that award. We don't believe other customers have any confusion about the uniqueness of the VA, and so we're hopeful that we'll continue to move forward with them like we have in the past as well.

Our next question comes from Robert Willoughby with Bank of America Merrill Lynch.

Hey Jeff, can you make -- can you give us a comment, the accounts receivable up even with the IT business winding down a little bit on the software side, any comment there. And then secondarily, on the share base, I can't get to your fiscal '13 guidance without a much bigger buyback, so I'm wondering just what the ASR did for you in the fourth quarter. Would you have, maybe a balance sheet share base outstanding at the end of the fourth quarter?

Well, let me walk backwards on those. You're correct that in March we did a $1.2 billion ASR, and while the ultimate final timing or average price will be determined over the next few months. In effect, an estimate based on the then market price of how many shares we will ultimately get comes out of the share count right away. So when you see our 10-K in another day or so, you'll see that the March 31 share count, or I guess the mid-April share count for the 10-K, was about 235 million shares, because it reflects a very large reduction. I think once you plug that in you'll get right to our weighted average sales assumption. On receivables, I guess, I'd come back to it. Remember, we had a lot of growth in sales, so from a pure DSO perspective, you actually see our DSOs declining year-over-year from 25 to 24. And as always, that's really just driven more by customer mix than anything else, because it's really our U.S. Pharma business, it's the only one that's big enough to have much of an impact on that AR line, and we're actually pleased with that progress.

Okay. But nothing from Katz, or nothing from aging on that front?

No, the Katz transaction, while they did -- do appear in the balance sheet on March 31, there's no P&L results because we closed right at the end of March. The assets and liabilities they added are certainly not material at the AR line.

We'll take the next question from Larry Marsh with Barclays.

Just a couple of question follow-up. I guess for the record, John, there's obviously another RFP up for bid, Express Scripts has announced they've issued the RFP. I would assume you would have an interest. Can you confirm that? And if so, if you do win that, how would you balance servicing that customer with your other larger mail-order customers?

We are aware of the activity at Express Scripts. We typically don't talk about the activities of our existing customers, let alone the activities of other people's customers or potential customers. So I hesitate to comment on the Express Scripts opportunity other than to say that clearly, they're a large -- a large player in the industry now and will certainly command the interest of players in the industry, and I know that this will be sort of another mini VA question for people, but there's a time line to get it resolved. I think that from a service perspective, McKesson stands in a position where we are able to service customers and accomplish their requirements, both from a capacity perspective, but probably as important, in terms of the value we bring to our discussions with our customers, and that's what we try to focus the opportunity. Sometimes customers are open to those discussions and sometimes they're not. And clearly our team will have to reflect on that as they think about this opportunity going forward.

Okay, great. And as a follow-up, another, I guess, a timely question for you, John, just the Chairman of the largest overseas pharmaceutical supply chain company quoted today suggesting a real need for them to expand or [ph] partner in the U.S. Can you remind us of how you're viewing your expansion in the global footprint, given you're the largest supply chain company in the world already, and what would be important factors in your mind of positives and negatives of potentially expanding the acquisition globally?

Well I didn't see the quote, I can guess as to where it came from. The -- that same person probably also has a vertical opportunity in terms of retailing. So it's difficult to say necessarily where they may end up or go. Clearly, we have a North American footprint in Distribution today that we're very proud of, and we've performed very well in those markets. As it relates to international expansion, there are clearly some synergies that exist relative to product sourcing perhaps, and that may exist in terms of bringing best practices between various countries or markets, and we've done some of that clearly here between Canada, in particular, and the U.S. and we've taken a one McKesson approach into Canada, bringing other products and services there even outside of Distribution, because that footprint or platform gives us an opportunity to expand. And clearly that same argument could be made for other markets. That's the bull case for doing those kinds of things. The bear case, you'd have to think about growth rates in other markets. You have to think about the cost to buy into other markets or the greenfield in other markets and return on capital, and we are very focused on getting cash returns that are exceeding our cost of capital. We do think cash flow is very important, and we do think that you have to pay the right price or it doesn't matter how strategic a potential acquisition would be. And then so growth rates, what you have to pay, what synergies do you bring and then lastly, what are the characteristics of those markets. Are you -- as you've witnessed recently in other headlines, there are dangers in going off the American shores and participating in markets where business practices might be at minimum unfamiliar to us and at maximum, potentially hazardous to us. And I think that McKesson's very aware of those challenges and has to remain diligent and visual [ph] and remain focused on not poisoning ourselves through an acquisition that doesn't make sense in that characteristic. So we remain open, but albeit skeptical on some of this and we'll see how it plays out.

Yes, very good. You got the person right, it was just a blub on the Financial Times, FYI.

We'll hear next from Robert Jones with Goldman Sachs.

Jeff, just wanted to go back to the favorable tax discrete items in the quarter, and I was just curious if you could maybe share with us when you might have had visibility to that benefit. If I look at the other side, the operating expense side, costs are a little bit ahead of our model in the quarter. Just curious if there was anything pulled forward, relative to that benefit that you might have known was coming.

Well, maybe to answer your question just slightly more broadly, Robert, there's really 3 things that drive our tax rate. One is the mix of business which didn't -- international versus U.S. didn't really surprise us and, frankly, it's pretty similar next year. Two is tax law is always changing, the R&E credit's going away, for example, again, which is one of the things driving our tax rate up a little bit next year. And third, they're always truing up to actual tax returns, settling -- small settlements with states and foreign governments, and sometimes those are positives and sometimes they're negative, and they're pretty hard to predict. So we had a couple of positives in the March quarter that we really didn't have that much visibility too, until the March quarter. While we knew the disputes were out there, you never really know when and exactly how you're going to settle them until you get there.

Got it. And then if I could just, on my follow-up, slide in one on Technology Solutions. Sales and profit there, at least relative to our model were a little bit below expectations. Since making the decision around the Horizon suite of products, is there, I know you guys touched on this in your prepared remarks, but has there any meaningful customer pushback, and I guess how are you factoring in shifting clinical customers from Horizon to Paragon in the fiscal '13 guidance?

Well, at a high-level, the customers that we've -- that I've met with personally, I'll speak first-hand, have been very open to the discussion around, providing a product that's fully integrated, provide a product that is easier to implement and easier to manage and own over time, and one that is more prepared for the future where connectivity to payers and connectivity to consumers and dealing with a bundled pace -- bundled base pricing, those kinds of things. That they understand what -- where we need to be in the next 10 years and they're focused on getting there. Having said that, they're also very focused on getting their products installed and operating and getting their Meaningful Use dollars brought in. And that's, I think, the beauty of the strategy that we announced. We are not sunsetting the Horizon product line, and we have told our customers that the Horizon Clinical product line will be invested in through the Meaningful Use cycles in getting them to where they need to be from a regulatory perspective, to receive full access to the funds. Should they choose to go to Paragon, we want to position Paragon as a go-to platform for them, and that's really been the context of the discussion. As it relates to the fiscal '13 guidance, clearly there are some revenue recognition challenges that we've mentioned in the GA discussion that Jeff had, relative to the strong last half, in fact, strong fourth quarter to be more specific relative to this business. And so as we think about our customers' success, frankly, we're investing towards their success and less focused on near-term revenue rec issues and more focused on how do we make sure that they're getting the products they need, that we're investing against those products and that they're happy customers of McKesson. There'll be a little chance to have a discussion with them about their go-forward platform if we fail them on their near-term expectations, so our focus is to invest heavily to get them to where they need to be.

Your next question will come from Steven Valiquette from UBS.

So just a, I guess there was a comment this morning from a generic manufacturer on their conference call where they talked about the pricing on a large generic statin drug may be declining by about 96% from their -- the original brand price once you get beyond the exclusivity here in a month or 2. That could be surprising to some, not to others. I guess my general question is, since you guys hate talking about individual products. I'm just wondering whether the profitability on that, in particular large generic post-exclusivity, whether or not that's a big swing factor within your renewed guidance of $7.05 to $7.35. Or have you just taken a conservative stance in general on that product, just given its size?

Yes, I think our -- the answer on that particular product is we've -- we planned it appropriately and conservatively, and I think it's performing the way we had expected it to, and it is frankly -- will perform based on other expert thoughts where we think it will be. So we are, as I've said in the past, we sometimes are wrong in individual molecules, not very wrong usually, but sometimes wrong and maybe timing, maybe pricing, but generally speaking, the portfolio is right. And on these bigger drugs, we're probably even more accurate, because of the import to our company, and I think we are -- are where we expected to be.

We'll take the next question from Ricky Goldwasser with Morgan Stanley Smith Barney.

Just one -- a couple clarifications around guidance and one generic question. So Jeff, I think you mentioned that the June quarter, right, the implied guidance is similar to the first fiscal quarter of 2012. So just to confirm, this is as a percent of earnings, right? Not in absolute terms.

Correct, so as a percentage of earnings.

Okay. So and is 20% -- is the right percentage? I just took the $1.27 over what you've done for the year?

I would literally, Ricky, just go back and look at the FY '12 June quarter EPS and divide it by $6.38 and that's kind of the ballpark we're in here.

Okay. And then for the -- talking about fiscal year '13 being back-end loaded, so is the operating margin improvement year-over-year is also back-end loaded, especially skewed to the fourth quarter, is that how we should think about it?

Well, I guess I'm not sure we're giving operating margin guidance, Ricky, by quarter. I'd really just focus on the EPS and the drivers of the performance are going to vary each quarter as generics go in and out, as price increases, timing, various tax varies -- that's just the level of granularity we don't give guidance on. We feel very comfortable with the guidance for the full year of Distribution Solutions operating margin rate being up in the mid to high single digits.

I think it probably is fair, Ricky, that the margin variation you've seen in previous quarters and years is, in some way, an indicator, at least graphically, of what you might expect. I wouldn't focus, as Jeff said, so much of the numbers, but you're going to see that kind of variability like you always do.

Okay. And then on the generic side, can you just give us, I know you said that you saw very good growth in generics, what was the growth of generic in the quarter? And also Jeff said [ph] we had a reference point for the -- you talked about branded and generic pricing trends for next year, similar to this year, so if you can give us the context, what they were this year?

Well, on the price trends, to be very clear here, everybody measures price trends for both brand and generic a little differently. What we've stated in our guidance is that by whatever measurement you want to use, we're assuming that our fiscal year '13 looks similar to fiscal year '12, not better, but not worse, either. So you, we have our own metrics we use internally, but you can almost use whichever ones you want.

And on the generic question, Ricky, I think our generic growth was in line with what we had expected and in line with where the market is. We've gotten -- we continue to get a little bit of increased penetration in our existing customer base but clearly we continue to focus on making sure that we do the right job in terms of sourcing these products as well.

We'll take the next question from George Hill with Citi.

Just a couple of housekeeping questions. Jeff, first of all, corporate expenses, a little higher than I'd modeled, was there anything, any standout items in that line this quarter?

Short answer is no. That line jumps around -- it was just due to timing differences from year-to-year. If you look at next year's plan, for example, our plan actually shows for the year the number flattish, so I wouldn't read anything into that quarterly trend. It's really just timing.

Okay. And then I'll give -- lob one to Jeff and one to John. Jeff, any change given how much time you guys spent talking about the health car (sic) [care] key segment that you would give us a rough overview of how much of that segment is exposed to providers, how much is exposed to payers, how much is exposed to other. And then, John, Mark has been your right-hand man on the M&A side for a long time now. With Marc moving over to the specialty business, should we have any takeaways for how the company thinks about M&A with Marc doing something else?

Well, let me -- I'll just quickly do the break out. So what we've said, George, is when you look at our Technology segment, which is by far the broadest collection of technology businesses in health care, you've got at this point under half the profits that come from the hospital-facing portion of that business. And you've got 2 other big chunks of that business, one is the relay connectivity business which is a very, very steady transaction processing based business and then the third component is the payer-facing business, really built around 2 tremendous product lines and franchises in InterQual, and our claims extend network.

And before I answer the question on Marc, George, I might also point out in the hospital-facing businesses, we sometimes focus heavily on Horizon Clinicals and this Paragon discussion, even in that business we have a very strong and rapidly growing analytics business that wraps around anybody's core electronic medical record, we have a very large Medical Imaging business, you might recall that we were one of the leaders in PACS systems being installed. Our automation business is also in that hospital number that -- a reference that Jeff just made. So there are lots of pieces there that are very important to us that frankly, can rise and fall on their own performance, based on innovation and how they go to market. As it relates to Marc Owen, what's great about this team, having been together for over a decade for most of us, including Marc, there is a complete alignment around strategy and a complete alignment around capital allocation and around returns in a way we approach M&A and strategy and business development. Having said that, he's not easy to replace, and so we hope to look for someone that will bring his tremendous attributes and intellect to the party. But he's going to do a great job for us in the specialty business. As you might imagine, managing the physician space, in particular, in specialty health is extremely important. And strategically, the opportunities that are present for us in that business are quite significant. And so it's nice to have a resource that we know and we trust at the helm there that also has those skills and leadership capability. So we're delighted to have Mark assume that role and head off to Houston.

We will go next to Eric Coldwell with Robert W. Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: I have a 2-part question so I'll ask the first part and then follow up. The first part is that, while and I think most others probably under-modeled the warehouse sales in the quarter, which would explain the mix impact on margin, did you see any likelihood of a $5.5 billion quarter in that segment or were you surprised by the magnitude?

Yes, I think we were surprised by the strength of the warehouse sales, and pleasantly surprised. And that's part of why the -- for the year the operating margin in Distribution Solutions might have been a basis point or so below where we thought, mainly because revenues were higher. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Right, yes, I can get to that math do and I guess that is the follow-up. It's were there any other items that you'd care to talk about that impacted your margin, whether it be generics, which we've hit on today or LIFO customer contract changes, losses, et cetera, was there anything else in there that had an influence that we should be aware of?

No, I don't think so. I just -- I think you should think about the fastest-growing drivers of both revenue in the warehouse as well as direct revenues. Growth in customers that exist and in large customers that exists, so it probably was a little bit of mix pressure, both from the warehouse but also from the people in direct, that might have been benefiting from some of the industry challenges that were going on in those big metropolitan markets where you have lots of chains competing with each other. Those chains that were our customers that might have won business would have been lower margin, typically, than the independent stores or other people in our base. So I think that mixing works through both of those revenue lines. But we're still pleased, obviously with the margin performance in the business, and if you actually look underlying the covers, you take that revenue and normalize it a little bit, we're making the kind of progress we expect it to.

And that's all the time we have today for questions. I'll turn the call back over to Erin Lampert for any closing comments.

Well, I'm going to close up here, and I'll give it to Erin in just a moment. I want to thank all of you for being on the call today. We had a strong finish to our fiscal year. Our expectations for a solid performance in going into 2013 are certainly here, and our opportunity to continue to deploy capital in an appropriate way and in a portfolio way will allow us to continue, I think, to drive value for our customers and strong financial returns for our shareholders. With that, I'll turn it over to Erin.

Thank you, John. I have a preview of upcoming events for the financial community. We'll participate in the Bank of America Merrill Lynch Health Care Conference in Las Vegas on May 15, and the Goldman Sachs health care conference in Rancho Palos Verdes on June 5. We'll release first quarter earnings results in late July. We look forward to seeing you at one of these upcoming events. Thank you, and goodbye.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.