McKesson Corporation (MCK) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to McKesson Corporation Quarterly Earnings 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, Anthony. Good afternoon, and welcome to the McKesson's Fiscal 2013 First 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 1 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 law. 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 expenses and related adjustments, 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 first quarter fiscal 2013 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.

Thank you, Erin. And thanks, everyone, for joining us on our call. Today, we reported a good start to fiscal 2013 with total company revenues of $30.8 billion and adjusted earnings per diluted share of $1.55. We continue to expect to achieve our adjusted earnings guidance of $7.05 to $7.35 for fiscal 2013. Turning for a moment to the broader industry environment. On June 28, the Supreme Court affirmed that the Affordable Care Act will proceed much as it was originally enacted by Congress. The act will drive many changes in health care in the coming years. But through all of this change, the issues of quality, access and cost will continue to remain at the center of all health care discussions. System-changing reform is taking place throughout health care as payers, providers, manufacturers, pharmacies prepare for the expansion in coverage under the Affordable Care Act. As patient volumes increase, our customers will need to respond with increased efficiency. Our customers will need to continue to reduce cost and improve the quality of patient care through the use of information technology. They will be judged by adherence to evidence-based protocols and improved outcomes. And they will be experimenting with new approaches to reimbursement models, like patient-centered medical home and accountable care. As a leader in health care services and information technology, McKesson has a great opportunity to help our customers meet these goals of reducing costs and promoting value across the health care system. Before I turn to the first quarter results for Distribution Solutions, I'll provide an update on our average wholesale price litigation. As a reminder, McKesson had previously settled all private payer AWP claims during the third quarter of fiscal 2009. During the second quarter of fiscal 2012, we completed a settlement of local public entity claims. Most recently, we finalized a settlement of the Federal share of Medicaid claims related to AWP during the fourth quarter of fiscal 2012. Today, we reached final agreement with the Coalition of State Attorneys General to resolve the majority of state Medicaid claims related to AWP. That leaves a few outstanding state cases that we plan to vigorously defend. This settlement represents another important step in bringing resolution to claims related to AWP. Now let me turn back to our operations. Distribution Solutions started the year with solid revenue and operating profit growth. Although it's still very early in our fiscal year, we remain confident in our full-year expectations. As I highlighted in our initial guidance on April 30, fiscal 2013 represents a robust year for all generic launches. McKesson is well-positioned with our strong manufacturer relationships and customer-focused proprietary programs to continue to provide value across our extensive generic offering. We also expect that our broad range of value-added services for branded manufacturers should contribute to steady levels of compensation. We continue to renew and expand our customer footprint in our distribution and wholesale business by delivering unique value to our customers. Like all customers, they are focused on competitive prices and great service. However, in today's health care environment, that alone is not sufficient. Today, our customers have to be more productive, deliver error-free and high-quality care, and increasingly connect to others involved in the financial and care processes, including the patient. As you know, we have a large technology business that is only part of our value proposition as a company. Perhaps, more important today is our ability to use technology in combination with the blocking and tackling of distribution to help all of our customers with their business, clinical and connectivity challenges. Sure, all of our markets are competitive, but no more so than before. The key to our continued success is adding innovation to the equation, which in turn brings value to our customers. That value is being added today with customers from the smallest physician office to the largest retailers in the world. For example, last month our U.S. Pharmaceutical business brought together thousands of independent pharmacy owners and pharmacists to our annual trade show to learn about the industry's latest trends impacting their business. During the event, we underscored McKesson's commitment to helping independent pharmacies achieve better results and better patient health. At the conference we highlighted solutions that helped independent pharmacists enhance patient loyalty and outcomes and broaden the range of services they provide. Solutions like McKesson's sponsored clinical services network, which enables independent pharmacists to play a greater role in providing patient care and services, in addition to growing their revenues. Sponsored clinical services is a network of 13,000 community pharmacies delivering a suite of patient-centered programs, including education, support and behavioral coaching. The network streamlines the relationship between pharmacies, manufacturers and payer-sponsored programs focused on increasing adherence and improving patient care. Participating pharmacies benefit from the opportunity to increase customer loyalty, earn service fees and build their relationships with patients as a partner in their health care. We also demonstrated new social, web and mobile technologies to help our customers connect with their patients and with health care peers in entirely new ways. A significant number of attendees were Heath Mart pharmacy owners and pharmacists. With nearly 3,000 stores across the country, Health Mart has become the franchise model of choice for independent pharmacy owners looking to complement their local identity with a national brand. Health Mart continues to invest in new solutions to help these stores grow their business, including private label over-the-counter health care products and new consumer-facing web and mobile platforms. In our Canadian Distribution business, we performed as we expected in the first quarter. We did have 4 fewer sales days in the quarter compared to prior year. So as a result, revenues were down 4% on a constant currency basis. The team continues to do a tremendous job of integrating the recent acquisition of Katz, and I'm pleased to see the early positive results from these efforts. Turning to our Medical-Surgical business. We continue to be very pleased with the performance of this business. Revenues were up 9% for the quarter. We've enjoyed good organic growth and have gained new primary care and extended care customers in addition. We have a great position in these markets. We offer a compelling value proposition to our customers through the services and technologies that we provide. As physicians move to practices in larger groups, which can be affiliated with or owned by hospitals or integrated delivery networks, McKesson participates in this growth by offering products and technology that service the unique needs of these larger customer markets. And as I mentioned in my opening comments on the distribution segment, it is often our technology that differentiates McKesson in our conversations with customers. For example, our Medical-Surgical business offers technology that helps us customers better track and manage their inventory, saving them time and money. Individual group practice and affiliated physicians also benefit from our revenue management solutions business, which is actually part of our Technology Solutions segment. McKesson Revenue Management Solutions offers leading outsourced financial and billing solutions, helping our physician customers focus their time on providing quality patient care. In summary, I'm pleased with the performance of our Distribution Solutions segment. We are well positioned with our successful proprietary generics program, and we are benefiting from a period of significant generic product introduction. Our recent acquisitions in this segment, US Oncology and the Katz acquisition, are both performing well and adding the important strategic capabilities and scale to better serve our customers. And our Medical-Surgical business continues to win with customers through our combination of great service and great technology. We're off to a solid start, and we are confident in our outlook for the rest of the year. Turning now to Technology Solutions. Our performance across the segment at this early point in the year is in line with our expectations. Revenues were up 4% for the quarter and adjusted operating margins were roughly 13%. We continue to make steady progress across all of our technology businesses. We remain committed to ensuring our customers' success in supporting them on their journey to reaching the important Meaningful Use milestones. The domestic health care services industry is in a period of time where the focus is on automating health care. Taking a step back, all of the time, money and energy spent converting the old paper-based health care data into electronic records will only work if that data can be used by our customers to see trends and make changes in care and affect those trends. By connecting financial information and clinical information, our customers can use their data to not only improve their operations but improve patient outcomes. Across all 3 of our technology businesses, you've heard us talk about the importance of providing business intelligence capability. So I wanted to take a moment to give you a little more insight into what we are doing for our customers. In our Provider Technologies business, we've analytic solutions in more than 1,000 facilities including core McKesson customers and many customers who operate on other core systems. Our analytic solutions enable customers to gather data from across their organizations and present that data to medical staff in a meaningful way to improve patient and business outcomes. This can be done at a high level or at a very detailed level with the common goal of optimizing interaction with and care for the patient. Using our McKesson Enterprise Intelligence Solutions, our customers have achieved significant results. For example, one of our customers use McKesson technology, along with internal process changes, to significantly reduce ventilator-acquired pneumonia in its facilities. They did this by leveraging visual alerts consistent with their protocols for complex care to help caregivers deliver the right care at the right time. Another product recently launched by RelayHealth is RelayAnalytics Pulse. It enables hospitals and health systems to monitor their own key performance metrics and compare their financial health with other organizations and peers. With our other analytic solutions, there is a long lag time between data aggregation and the delivery to the end-user. Some competitive solutions provide benchmarking data that is as much as a year old. RelayAnalytics Pulse provides daily data updates, which is a unique and compelling capability. In our Health Solutions business, actionable business intelligence is core to the underpinning of our payer-focused technology products and services. One example is our claims analysis service, which is part of our broader Total Payment Solution. Customers using McKesson's Total Payment Solution can successfully adjudicate claims under an increasingly complex mix of current and emerging value-based reimbursement methodologies. One of the powerful features of this solution is the embedded claims analysis service, which helps our customers identify opportunities where they can realize additional medical and administrative savings by enhancing their claims payout automation processes. Taking this back to my opening comments on the Supreme Court ruling on the Affordable Care Act. Our analytic solutions are one of the many ways we are focused on helping our customers achieve sustainable cost reduction, provide timely insight to their operations and promote value within the health care system. This is becoming a top-of-mind issue for all of our customers. In summary, I'm pleased with our results this quarter, which represent a good start to fiscal 2013. In addition to our operating performance, we continue to have a strong balance sheet. And our expectation to deliver cash flow from operations between $2 billion and $2.5 billion for fiscal 2013 remains unchanged from our original guidance. With that, I'll turn the call over to Jeff, and we'll return to address your questions when he finishes. Jeff?

Thanks, John, and good afternoon, everyone. As you've just heard, McKesson delivered solid first quarter results and is off to a good start for the new fiscal year. Let me begin by briefly mentioning 2 items that while not impacting our adjusted earnings, did impact our GAAP results this quarter, specifically, a $16 million AWP litigation charge and the $81 million pretax acquisition-related gain. First, as John highlighted in his remarks, we continue to work through the remaining AWP claims. As a result of the progress made towards resolving these remaining claims, the litigation reserve has been increased by a pretax charge of $16 million. This charge has been recorded in the Distribution Solutions segment, and it equates to $0.04 per diluted share. Second, as I discussed on our April 30 earnings call, in the first quarter we completed a business combination in which we acquired the remaining 50% ownership interest in our corporate headquarters building. The way the accounting rules in this area work, this creates a pretax acquisition-related gain of approximately $81 million. Similar to how we treat other acquisition-related items, this transaction has been excluded from our adjusted earnings results. My remaining comments today will focus on our $1.55 adjusted earnings per share, which as you'll recall excludes 3 types of items: amortization of acquisition-related intangibles, acquisition expenses and related adjustments, 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. Let me now turn to our consolidated results for the quarter, which can be found on Schedule 2. Consolidated revenues of $30.8 billion for the quarter, up 3% from the prior year, with both segments contributing nicely to this result. On this 3% revenue growth, adjusted gross profit for the quarter increased 6% to $1.6 billion. Total adjusted operating expenses of $1 billion were up 5% for the quarter, roughly in line with the overall growth of the business. Other income was flat for the quarter at $8 million. Interest expense declined $8 million versus the prior year to $56 million, driven primarily by the repayment of $400 million in long-term debt in February of fiscal 2012. Moving now to taxes. Our adjusted tax rate for the quarter of approximately 28% benefited from $17 million of net favorable discrete tax items. As I mentioned at our Investor Day in June, the $17 million of net favorable discrete items did come earlier in the fiscal year than we had originally planned. And as a result, this pure timing shift from later in the fiscal year added roughly $0.06 to $0.07 relative to what we originally expected for our first quarter performance. Looking to the full year, however, we are still tracking to the 31% adjusted tax rate that we included in our original guidance assumptions. Adjusted net income for the quarter was $372 million, up 15% from the prior year. Our adjusted earnings per share was $1.55, an increase of 22% compared to last year's adjusted EPS of $1.27. To wrap up our consolidated results, diluted weighted average shares outstanding decreased by 6% year-over-year to 240 million. This year-over-year decline is primarily due to the cumulative impact of our share repurchases, which include more than $3.9 billion of share repurchase since Q1 of fiscal 2011. This is a testament to the strength of our cash flows and balance sheet, particularly since over the same time period, we also spent over $3 billion on acquisitions, including US Oncology and the Katz acquisition. Turning back to share count. For fiscal 2013, we continued to expect our full-year average diluted share count will come in around our original guidance assumption of 239 million shares. Let's now move on to our segment results, which can be found on Schedule 3. In Distribution Solutions, overall revenue growth was 3% compared to the same quarter last year. Looking at the components, direct distribution and services revenues were up 2% for the quarter to $21.3 billion. As always, there are some moving pieces here. We had some customer wins and losses, which were roughly offset. We benefited from an increase in volume with certain existing customers. And the branded price increase environment roughly offset the loss in brand revenues from new generic launches. Our warehouse revenues increased 9% year-over-year, primarily benefiting from expanded volumes with existing customers. For the full year, we continue to expect unusually strong growth in our warehouse line. Moving on to Canada. On a reported basis, revenues were down 8% for the quarter. There are really 2 main drivers of this result: the impact of having 4 fewer sales days in the quarter this year; and an unfavorable foreign currency impact. When you adjust for both of these items, Canadian revenues grew 2% for the quarter. We are pleased to see this growth in our Canadian revenues given the government-imposed price reductions on generic drugs that we have been talking about for some time. Staying on Canada for one more minute, I do want to remind you that our Katz acquisition does not have a material impact on revenues as we were already providing distribution services to the Katz stores. The acquisition does, however, favorably impact our adjusted gross profit, and it also added 1 to 2 percentage points to our Distribution Solutions adjusted operating expense growth this quarter. Turning now to Medical-Surgical. Revenues were up a strong 9% for the quarter to $795 million, driven by market growth and new customers. Adjusted gross profit for the segment increased 8% for the quarter to $1.2 billion on the 3% revenue growth. Overall, we are pleased with this result. We did, of course, have tremendous growth in our oral generic profits this quarter. But this was somewhat offset due to the year-over-year decline in specialty generics and also due to the mix impact of the strong warehouse revenue growth we posted. Remember that the impact on our earnings of higher warehouse revenues is quite modest, as we earn lower margins on our warehouse revenues relative to the margins on our direct revenues. Distribution Solutions adjusted operating expenses were up 7% for the quarter, primarily driven by the Katz acquisition and some charges we recorded this quarter related to the optimization of our Canadian network. When you exclude these 2 items, our adjusted operating expense growth was closer to 3% to 4% for the quarter. Adjusted operating margin rates for the quarter were 185 basis points, an improvement of 9 basis points versus the prior year. Given the quarter variability in this segment we always focus, as you know, on full-year margins. In this context, for full year fiscal 2013, we continue to expect adjusted operating margin improvement in the mid- to high-single-digit basis points compared to our full year fiscal 2012 adjusted operating margin rate of 210 basis points. In summary, we are pleased with the solid first quarter performance in Distribution Solutions. Turning now to Technology Solutions. Total revenues were up 4% for the quarter to $838 million, with all businesses in the segment contributing to this growth. Adjusted gross profit for this segment increased 1% to $388 million. Technology Solutions gross R&D spending was $113 million compared to $105 million in the prior year. Of this amount, we capitalized just 6% versus 10% a year ago. Adjusted operating expense increased 6% in the quarter to $280 million, primarily driven by growth in the business and the increase in net R&D spending. Our Technology Solutions adjusted operating profit was down 8% versus a year ago to $109 million. And our adjusted operating margin was 13.01% compared to 14.84% a year ago. Overall, these results were in line with our expectations. As first mentioned on our April 30 earnings call, we continue to expect results in this segment to be weighted towards the back half of this fiscal year. And with respect to the full year, we continue to expect our adjusted operating margin to be in the low end of our long-term Technology Solutions adjusted operating margin goal range of mid-teens or 14% to 16%. Leaving our segment performance and turning briefly to the balance sheet and our working capital metrics. As you've heard me say before, each of our working capital metrics can be impacted by timing, including the timing of payments or what day of week marks the close of any given quarter. So this quarter our receivables were $9.6 billion, up from the prior year balance of $9.4 billion, with our days sales outstanding decreasing to 24 days from 25 days last year. Compared to a year ago, inventories increased 6% to $10 billion, and our payables increased 4% to $15.2 billion. This resulted in our days sales and inventory increasing by 1 day to 31 days, with our day sales in payables also increasing by 1 day to 47 days. In the quarter, we used $552 million in operating cash flow. There were 2 primary drivers of this result, which is a little unusual. First to remind you, in the quarter we made $273 million of payments on previously accrued AWP liabilities. Second, this quarter was impacted by some inventory purchasing in payable patterns that should reverse out in the September quarter. So overall for the full year, we continue to expect our cash flows from operations will be between $2 billion and $2.5 billion. We ended the quarter with a cash balance of $2 billion, and we remain confident in our ability to create shareholder value through the continued use of our portfolio approach to capital deployment. Overall, our gross debt-to-capital ratio was 33.2% for the quarter, well within our target range of 30% to 40%. Internal capital spending was $84 million for the quarter, and we continue to expect full year internal capital spending between $425 million and $475 million. Now I'll turn to our outlook. Our first quarter results were solid and on track. And as John mentioned earlier, we're maintaining our guidance on adjusted earnings of $7.05 to $7.35. One other point about our fiscal 2013 outlook, we expect $0.54 for amortization of acquisition-related intangible assets, and due to the AWP litigation charge we recorded this quarter, we're now assuming $0.04 for litigation reserve adjustments. In addition, as a result of the $81 million pretax acquisition-related gain, we now expect acquisition expenses and related adjustments to add approximately $0.19. Thanks. And with that, I'll turn the call back over to the operator for your questions. [Operator Instructions] Operator?

[Operator Instructions] We will take our first question from Glen Santangelo from Crédit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: I just want to ask a couple of quick questions on the out margin within your Distribution Solutions segment. John, what I was wondering about, given some of the high-profile deals in the marketplace, if you're seeing that have any impact on pricing, in particular your sell side margins as it relates to new business. And secondarily, I was curious if you're seeing anything new with respect to branded price inflation or generic pricing that maybe makes you more or less confident in the margin outlook.

Well, let me start at end of that conversation and work my way back the other way. On the branded and generic pricing, our trends are basically in line with what our expectations were as we came out with our plans for the year. Albeit a couple of big launches early in this quarter probably were a little more competitive than we had expected. But in the mix of things, we're feeling pretty good about where branded and generic price trends seem to be headed. But obviously it's still early in the year. As it relates to pricing and margins delivered through our customer relationships, as you know we focus on long-term value with our long-term customers. And we continue, as I had mentioned in my prepared remarks, to sell solutions and technology to our customers in combination with distribution that helps to differentiate what we do every day. I think that's obvious in our margin structure that we not only do a great job of delivering day-to-day service in a very productive way and really low-cost, but we also, I think, are afforded an opportunity to sell solutions to our customers that enhance their performance and deliver sustainable value that may take the focus more on value delivered rather than price for the service. And we think that's the way customers should make decisions, and we try to stay out of price-oriented conversations. And one last comment on market pricing. As you know, we spend most of our time focused on our existing customers, so I can't tell you I have a big experience set with the new customer comment that you made, because we don't bring on a lot of new customers. We've been focused heavily on our existing business and making sure those renewals are happening the way they always have historically.

We will hear our next question from Larry Marsh with Barclays.

So I guess I'd like to -- my question really centers on some of the comments you made at your Analyst Day. And I just want to tie that in with some of your comments today. It seems like the theme certainly of the Analyst Day was around the balance of the business, the mix of business that's allowing you great results over a longer period of time and obviously very solid results. Today, you continue that trend. In addition to that, though, you've got an outlook that I think, John, you highlighted, is going to be subject to a lot of change with health care reform, in an environment with a greater focus in the customer environment around generics and the value proposition there. My question is really, as you think about this year, you've gotten customer relationships that are up for renewal toward the end of the year. You've had a really good record of renewing those. You also have another, I guess, a grocery customer who said they may be up for sale. So how do you balance that? And, I guess, specifically my question is, in an environment where everybody is chasing after generic dollars, what are you doing specifically in this environment to differentiate yourselves, so that the conversation moves away from just pricing and continues to drive toward what you define as a differentiated value proposition?

I think the pressure that our customers are feeling this year is probably not that much different than the pressures they've felt in the past. I think we've always had a competitive environment. And certainly, our customers have always been afforded the opportunity to not only buy from other wholesalers, but they have been afforded the opportunity to buy generics from various channels, including direct. And our challenge over the years has been to build a portfolio of capabilities both in terms of the price of the product that we provide, but also in terms of the service that we can provide, in particular, to our customers on generics that they may not be able to deliver on their own or in some other model. Obviously, there's tremendous operational efficiency to place one order at night, and the next day receive all of your product to all of your stores from McKesson and not have to fragment those orders through your own internal capabilities, through some kind of an internal direct sourcing capability, or to fragment it through other smaller companies that are out there trying to sell generics as a sole offering. And our ability to focus our customers on the total value that we deliver has to remain key and our ability to remain disciplined around the price that we deliver to the marketplace, charging for the value that we deliver not chasing commodity price-oriented deals and focusing on those customers that really appreciate what we do. I think if we didn't have confidence that we could continue to expand our margins in spite of some of these pressures that continue, we wouldn't have guided this year to the margin expansion that we've already guided to. And clearly we are already above the market and believe that we can continue to be relative to our peers in terms of operating margin because of the mix of our business, because of the value that we sell, because of the discipline in our selling process, and our focus on those -- continued evolution of that strategy. Having said all of that, clearly things can change. Our view is that nothing's changed thus far, and things remain competitive but stable, but it's always one of those deals that you have to pay attention to what's going on in the market and stay focused. But I think we remain optimistic, Larry. Nothing's really changed from our Analyst Meeting.

Great, okay. And just a follow-up maybe, Jeff. I think you did a good job of calling out the tax good guy, I guess, at the Analyst Meeting which obviously you saw. And the message is the rest of the year is going to sort of accrue [ph]. Back to that, as you say, 31%. So notwithstanding the fact you usually don't think about guiding the quarters or the puts and takes, now that you've gotten through the first quarter, is there anything of note that would lead you to think about any different progression of earnings versus last year then for the next couple of quarters?

Well, the short answer, Larry, is really no. This was the one big group of tax planning initiatives that we thought we'd get to this year and it came a little earlier. The rest of the tax rate will be similar, and boy, our quarterly results the rest of the year will be subject to all the same kind of variability we always have, including a back-half loaded Technology Solutions, a quarter of the usual strong March quarter in Distribution Solutions just due to the structure of our agreements with many brand manufacturers. But I think really none of that is particularly different from we were on April 30.

We'll hear our next question from Lisa Gill with JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: I just wanted to follow up on a comment, John, that you made around the strong warehouse sales and the fact that you expect them to continue. Can you just talk about what you're seeing from a customer perspective around warehouse sales? And then secondly, the inventory purchases -- is that tied to the increase in warehouse sales? Or are you seeing opportunities from an inventory appreciation perspective?

It's really not inventory, Lisa, as much as existing customers who are gaining some share, and I think a continued view that our warehousing operations provide benefit to those customers and synergy that they otherwise wouldn't obtain on their own. And as you know, some of our larger customers have experienced some share shift this year as a result of contracts that they may have won that will flow through that or market share changes that have taken place in the chains that have been very visible in the industry. So other than that, there really hasn't been any significant action. And I don't know, Jeff, you might have something you would want to add there.

Yes, I'll just make 2 points. On warehouse sales, I'd just remind you that, that's really not a standalone product. It's a combination that's very valuable to certain of our very largest customers who also do lots of direct store business with us. And we think of those relationships as an overall economic relationship. On the cash issue, I -- maybe I managed to confuse people. So the day of the week that the quarter ended and just the way we happened to have some of our inventory purchases fall, drove a bunch of cash into the September quarter that in past years would have fallen into the June quarter. It had absolutely nothing to do actually with the growth in warehouse sales from one of our larger customers and certainly wasn't tied to -- if you go back a few years with anything going on, on the buy side. It's really just timing of when things got stocked up. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And then I guess just as one other follow-up would just be around med-surg. You talked about 9% growth in the quarter, which was very good growth. Can you just talk about what you're seeing as far as underlying growth for that business segment versus what it sounds like some competitive wins in the segment in the quarter?

Yes, I think that the market growth rates, Lisa, are probably in the 3% to 4% range. You might recall that we have a strong position in physician office. We have a strong position in long-term care. And we have a strong position in home health care and sort of the miscellaneous side of things. And all 3 of those segments had -- or pieces of the business had very strong growth and above-market growth. I think our combination of service and the technology offering that I mentioned earlier that has really changed the face of just delivering product to delivering more complete solutions has made a difference. And the migration of physicians out of small practices into more aggregated practices -- we're seeing that phenomenon both at US Oncology, our revenue cycle management business, and our med-surg business, where this aggregation actually plays to our strengths. Because these customers are more sophisticated, they're more technologically oriented, and they appreciate the value that we deliver. They're not just price oriented. They're more value focused and we're able to beat the competition, who primarily have been focused on moving boxes from point a to point b at a low price. And so I think that this larger value proposition is helping us win in med-surg.

We will take our next question from Bob Willoughby from Bank of America.

You guys came in well under my D&A assumption for the year. I was just kind of curious, is this in the ballpark of a run rate to use going forward? And can you comment on just the other income line? There was a nice gain there, but what's the run rate for the year on that line item?

Well, so on the D&A -- do you mean overall D&A, Bob, or are you talking about the acquisition-related amortization?

Just what your target for the year would be.

Well, on the acquisition-related amortization -- just pulling it out here, for the full year, we think it will be about $0.54 based on all the acquisitions that have been completed to date. If you are looking at broader depreciation and amortization, there's not really anything going on unusual from quarter-to-quarter. So you should really be able to take that number and just annualize it.

With the Katz deal, I was surprised it didn't rise, though, in the first quarter.

Well, remember we've been an acquisitive company for many, many years. And so when you think about acquisition-related amortization, some of it starts to drop off over time. And so I might remind you, for example, we bought Per-Se back in 2007 or thereabouts, and so some of those charges are starting to roll off.

Okay. And just the other income. There's some variability there. What's a good run rate?

The other income is going to vary by a little bit each quarter, but there's nothing particularly unusual this quarter. And so I would still take a mixture of look at last year's number, look at this quarter's number and annualize it and pick something in the middle, and that's going to get you pretty close.

We'll take our next question from Tom Gallucci from Lazard.

John, I'm not sure if there's an easy way to answer this first question, but certainly I think you talked about your, sort of, your total value proposition as one way to sort of combat the competitive pressures out there and help your customers become more efficient over time. Is there any measure that you can point to in terms of maybe multiple services per customer or something like that, that we can actually see how you're gaining from that standpoint and having that broader array of offerings?

Well, I think if you look at our track record over the last decade, we've been able to show evidence of our ability to not only grow in line with the marketplace in almost all of our businesses or above in the businesses where there's still opportunities like med-surg, for example. And I think that the fact that our margins have expanded at a nice rate show that there's a value orientation to what we're doing. And our customers aren't only focused on price, and we're selling that value. And you've heard us talk about our various offerings on calls like this and our analyst meetings and with customers if you go to various events that we might be having. And I think a good example would be our ability to, for independent pharmacies, to tie our own software systems for point-of-sale and the automation of the pharmacy dispensing process behind the counter with our RelayHealth pharmacy network to help them adjudicate their claims and optimize their performance along with the automation equipment behind the counter to help them reduce labor and improve productivity and then wrap that in the Health Mart franchise. There are very few -- probably not any companies in the industry that can combine wholesaling with all of that capability under one umbrella in a more integrated way. And surely our, for example, Relay would have share in our competitors' customers from a distribution perspective. But when we tie it into our own customer base, our customers realize the value that they otherwise wouldn't achieve, because of the integration with the systems we're able to provide. So as a simple example, and clearly internally as we manage our book of businesses, we look at the overlap between hospital and distribution and pharmaceuticals with the physician office distribution of medical supplies in those same integrated networks with the IT footprint we have installed and the robotic systems we have in place and the cabinets we have on the floor. So you'll recall that 10 years ago, other companies were pursuing this more integrated approach. And I think that today, we're really the only ones that have got the technology footprint to pull it off. And I think it's been successful for us. Now clearly that success, Tom, wouldn't happen if we couldn't get the price right and the service right. That earns us the privilege to talk about these other things.

Sure, okay. Fair enough. That's good. And then you touched on the competitive landscape. I think a lot of those comments were sort of more focused on the traditional oral solids side of the business. Is there -- how would you characterize the landscape at this stage of the game in the specialty side? Obviously some peers maybe trying to build that business. Others have been in it, and are pretty big and maybe defending some turf. So is there anything unusual or new going on there?

Well, I think the biggest change we've seen in the specialty side of the business is the continued interest that physicians have to reach out and get help from someone who's capable of providing that help. And so standalone community oncologists, as an example, are looking for opportunities to automate, opportunities to buy better, opportunities to improve their ability to attract and retain talent and manage their offices, attract patients, adopt best-demonstrated protocols, a whole myriad of things that have caused them to have an increased interest in networking with each other. And clearly our acquisition of US Oncology not only provided us with significant scale, but gave us some capabilities, frankly, that are untouched in the industry in terms of our ability to have an intimate relationship with the physician, allowing them to get back to clinical care, while we take over some of the administrative tasks. Now clearly some of them may choose to sell out to a hospital and some may choose to move into a group that's not affiliated with US Oncology. But I think the days of independent physicians in probably all of our markets are beginning to wane, and the aggregation of physicians plays well to the strategy that McKesson has been laying out for the last decade, and I think we'll benefit from that. But as it relates to competitive pressures in these markets, I think it's fair to say that distribution has always been competitive. And it's particularly competitive if you find it difficult to differentiate your service. So we have been attempting to train our sales force to sell on value. We try to incent them to maintain these relationships and renew them over time. We try not to chase price-oriented-only buyers because it ends up as a futile exercise anyway. And I think we have been successful at that.

Our next question will come from Robert Jones with Goldman Sachs.

It just looks like you guys you ended the quarter here with about $2 billion in cash. So just looking at an update on potentially implementing a more meaningful buyback in this fiscal year. Or are there maybe specifically areas that you guys are evaluating right now on the M&A front? Just looking for an update around capital deployment.

Well, a couple of things. I'd remind you that, yes, we ended with $2 billion of cash. And while we don't call out the offshore cash each quarter, back in March, it was about $1.4 billion. So a good chunk of that cash is offshore. Certainly, we build into our plan each year some amount of share repurchase. We don't call that out publicly. And, frankly, we manage a little bit based on what the acquisition environment offers us, how the year is going relative to the overall targets we've set, et cetera. We have, as a reminder, about $1 billion in outstanding authorization right now from our board. On acquisitions, I don't think anything has changed. So as usual, we see a range of alternatives and opportunities across almost all of our businesses in both segments, where there are companies out there that we think we could uniquely create some value with. But, boy, it's tough to predict when any of those companies are either available for sale or, much more importantly, available for sale at prices that make any sense for our shareholders.

Sure, it's also fair to say there's lots of volatility in those valuations as you look at the quarters tick by. So I think patience has been one of our virtues as well.

Fair enough. Just to confirm then around the guidance obviously reaffirm the EPS range. I assume that the full year diluted share count that you laid out is intact then?

Correct. In fact, I specifically pointed out that we are sticking with our 239 million share outstanding for the year assumption.

Built into that guidance.

Built into the guidance, correct.

I appreciate that. And just one if I could sneak in on the Technology Solutions segment. It looks like you're a little bit shy of the long-term target. I know you said today that you expect to be in that low teens range. Just curious if there was anything specific in the quarter that weighted below that average or maybe what you guys expect over the next 3 quarters that should get it back into that range?

Well, this is really mechanically as simple as we told you back in April 30. This year would be unusually back-end loaded just due to some product GAs that we have in the back half of the year that will hold up wherever I can tell they happen later in the year. And so actually the quarter came in very much as we had expected.

We'll move to our next question, which will come from Ricky Goldwasser with Morgan Stanley.

One follow-up question and -- actually, 2 questions. So following up on US Oncology, we've heard earlier today some talk about oncology practices consolidating and gaining purchasing power. John, based on your earlier comments on the call, it sounds like McKesson is in a very good position to be a share taker. So can you take a little bit about how fast is the US Oncology physician base growing?

Well, Ricky, I think what I should have said or meant to say is we're optimistic that our solution set is attractive to physicians. And whether they're existing physicians of ours that are aggregating together or whether they're physicians that don't use any of our services that are aggregating together, will be seen over time. I think our goal is not to gain share for share's sake. Our goal is to grow our business in a profitable way with customers that appreciate the value that we deliver. And we don't plan to compete in a way that doesn't take a holistic view, I guess, of what we have to deliver. And the customers that are interested in a US Oncology relationship with us are the more sophisticated customers that frankly have moved beyond their evaluation from simple distribution services to something much more significant. And so those are the customers that are usually open to that dialogue. I think that we will continue to see progress. Health care is a slow-moving world, and I don't think you're going to see sea changes, but I think, directionally, our view is that we're positively positioned.

Okay. And then on your warehouse sales. Do you expect any impact to warehouse sales in the second half now that Walgreens and Express reached an agreement? Is the potential reversal in some of the share gains that we've seen earlier in the year?

Well, we're a little distant from this, Ricky, in that these are questions our customers are probably better suited to answer. From a distance, I would say that there are probably some customers who will move back to their incumbent relationships with Walgreens. But there are probably some customers that have moved away from Walgreens, and they have found another store that is as convenient as where they were buying before. So I really don't feel I'm well-positioned to talk much about the share move. I would say that relative to our warehouse view, I don't think you'll see any material change to our warehouse sales as a result of anything that's going on in the industry.

And we'll move on to our next caller, which comes from Eric Coldwell with Robert W. Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Just a couple of quick ones. Generic, I was curious if we could get the impact on revenue in the quarter.

Do you mean, Eric, in terms of generic revenue growth? Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Well, I'd like to get the -- both actually, revenue growth for generics, if you will, and then also the impact on branded conversions.

So for us, given our mix of customers and drugs, the interesting thing is if you look at the revenue decline due to branded drugs losing patent protection, it almost completely matched and was offset by the growth in generic revenues due to all the generic launches. So they were almost identical in size. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then the follow-up or the other quick question is, at the end of your prepared remarks, Jeff, you said something about $0.19 being additive to the number this year. I think I heard that, but the phone cut out, so I was just hoping you could refresh me on that.

Yes, so in the -- we have the unusual accounting around our acquisition of the remaining 50% of the headquarters building we've been in since the 1960s. And so that drives an $81 million gain. We're pulling it out of our adjusted earnings because it's acquisition related. And so that gain netted against a couple of cents of acquisition expenses means that you're going to -- as you do a reconciliation from GAAP to non-GAAP, you've got a $0.19 good guy that you add to the non-GAAP to get to the GAAP.

We will hear next from George Hill with Citi.

Jeff, you guys are doing well in the distribution part and the real estate investment part it seems. I'm going to ask a quick question though. Two follow-ups from the health care IT business. Maybe, John, could you give us an update on how the clinical conversions are going from the Horizon business to the Paragon business? And then maybe this one's a little weegee. Within the RelayHealth business, as we're starting to see e-prescribing come up the curve and utilization get pretty high, how should we think about the growth in Relay profitability going forward?

The clinical conversions -- when we talked about our Horizon to Paragon strategy, we talked about the fact that we believe it is a viable solution for our customers, and that over time they need to evaluate that as an alternative because of its more tightly integrated infrastructure and its lower cost of operations. It also has some build out required to fully function in the way that all of our Horizon customers would require. So we've seen many of our Horizon base evaluate the products. We've seen some of that base already contract to move to Paragon, and some already have moved because of whatever remaining development is necessary and Paragon was not of import to those customers. Others have said, you know what, we're going to go, but we want you to build out another module or we're going to go after we get our Meaningful Use dollars settled and we have a bit of breather. And others frankly will probably wait until they have their Meaningful Use 2 or Meaningful Use 3 situation well in hand before they make that migration. So I think we've made good progress. I frankly am -- continue to be pleased with the reception our customer base has given to the Paragon solution. And frankly, taking it up a level, I think they're quite interested in the larger messages that McKesson has been delivering around our payer business and the need for the payer and provider solutions to come together, and also for our connectivity business. And I think the RelayHealth question is a good one. We are really pleased with our position in RelayHealth. I have to admit that the e-prescribing portion of the market's transition is not a particular profit driver for us. We're in that transaction both in our electronic medical record businesses as well as in Relay. But that's not really where the opportunity lies. The opportunity lies in the continued build out of our financial systems. As you know, we process well over $1 trillion in financial claims over our networks. Our Pharmacy Systems, which not only adjudicate pharmacy claims, but also helped us deliver more value to our customers through things like E-Voucher, where the manufacturers and the retailers work on behalf of the patient to provide better care and other offerings that RelayHealth is building out. Not the least of which is our new clinical information network or health information exchange. So I think we're pleased with our position on Relay. Electronic prescribing is a piece of it, but not the central driver financially.

We'll hear next from Steven Valiquette with UBS.

So this was somewhat addressed in a previous question. But in the health care IT we obviously have seen some choppy results from a few of your competitors. And I guess my question is maybe just to quickly remind us of a couple of drivers of the acceleration in the tech solutions profit growth you expect in the back half of the year. I'm just trying to revisit your own level of visibility on your business plan for FY '13 for tech solution in light of potentially changing market conditions. So are you sort of worried about this? Do you feel you can achieve your targets kind of regardless of market conditions? Just trying to get a general sense for that.

I have to admit that I'm -- I would think there would be pretty good visibility in tech buying at this point. And if it's a surprise to anyone that clinical buying is beginning to wane, they must not be deep in the industry. We believe that our customers have largely made their clinical decisions. And what's great about McKesson's technology platform is we're actually in many businesses, as you're aware. We have 3 major lines of business there: our Relay connectivity business, our Payer businesses and clearly our Provider Technology business. But even inside our Provider Technology, in my prepared remarks I talked about over 1,000 customers installed in our analytics products. You know that we have a market-leading Medical Imaging business and some of our other lines that aren't just clinical transaction processing businesses for hospitals. And so I think that we see the clinical buying beginning to wane, has waned. We're in the implementation phase now. Actually if you look at our results under the cover, you actually will see that our hospital buyers are beginning to come back to purchasing other solutions beyond clinicals. And I think those companies that don't have a portfolio beyond clinicals are probably feeling the effect of a pipeline that is probably headed in a different direction. We are pleased with our performance. We think we have visibility to it through the rest of this fiscal year, and we believe that business will perform in line with our expectations. I think we've run out of time. I want to thank you, Anthony, and thanks to all of you on the call for your time today. I'm certainly pleased with our first quarter performance and excited about the opportunities that lie ahead for all of us. I will now hand the call off to Erin for her review of upcoming events for the financial community. Erin?

Thanks, John. I have a preview of upcoming events. On September 6, we will present at the Baird Health Care Conference in New York. On September 10, we will present at the Morgan Stanley Conference, also in New York. On November 15, we'll present at the Crédit Suisse Health Care Conference in Phoenix. We will release our second quarter earnings results in late October. We look forward to seeing you at one of these upcoming events. Thank you and have a great evening.

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