The Daily Magic Formula Stock for 08/22/2008 is McKesson Corp. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is 75-100 %.
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McKesson Corporation (â€śMcKesson,â€ť the â€śCompany,â€ť the â€śRegistrant,â€ť or â€śweâ€ť and other similar pronouns), is a Fortune 18 corporation providing supply, information and care management products and services designed to reduce costs and improve quality across the healthcare industry.
The Companyâ€™s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Companyâ€™s fiscal year.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the â€śExchange Actâ€ť), as amended, are available free of charge on our Web site ( www.mckesson.com under the â€śInvestors â€“ SEC Filingsâ€ť caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (â€śSECâ€ť or the â€śCommissionâ€ť). The content on any Web site referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.
We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products throughout North America. This segment also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, sells pharmacy software and provides consulting, outsourcing and other services. This segment includes a 49% interest in Nadro, S.A. de C.V., (â€śNadroâ€ť) the leading pharmaceutical distributor in Mexico and a 39% interest in Parata Systems, LLC (â€śParataâ€ť), which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies.
The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services. Our Payor group of businesses, which includes our InterQualÂ®, clinical auditing and compliance and medical management software businesses and our care management programs, are also included in this segment. The segmentâ€™s customers include hospitals, physicians, homecare providers, retail pharmacies and payors from North America, the United Kingdom, other European countries and Asia Pacific.
McKesson Distribution Solutions consists of the following businesses: McKesson U.S. Pharmaceutical, McKesson Canada, McKesson Medical-Surgical, McKesson Retail Automation and McKesson Specialty Distribution. We also own an approximate 49% interest in Nadro and an approximate 39% interest in Parata.
U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and other healthcare related products to customers in three primary customer segments: 1) retail national accounts (including national and regional chains, food/drug combinations, mail order pharmacies and mass merchandisers); 2) independent retail pharmacies, and; 3) institutional healthcare providers (including hospitals, health systems, integrated delivery networks, clinics and other acute-care facilities and long-term care providers).
Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through a network of 29 distribution centers, as well as a master redistribution center, a strategic redistribution center and two repackaging facilities, serving all 50 states and Puerto Rico. We invest in technology and other systems at all of our distribution centers to enhance safety, reliability and the best product availability for our customers. For example, in all of our distribution centers we use AcumaxÂ® Plus, a Smithsonian award-winning technology, which integrates and tracks all internal functions, such as receiving, put-away and order fulfillment. Acumax Plus uses bar code technology, wrist-mounted computer hardware, and radio frequency signals to provide our customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% accuracy. In addition, we offer Mobile Manager SM , which integrates portable handheld technology with Acumax Plus to give customers complete ordering and inventory control. We also offer Supply Management Online SM , an Internet-based tool that provides item look-up and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure that our customers have the right products at the right time for their facilities and patients.
To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology â€” an analytical approach that emphasizes setting high quality objectives, collecting data and analyzing results to a fine degree in order to improve processes, reduce costs and minimize errors. Furthermore, we continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.
Our U.S. pharmaceutical distribution businessâ€™ major value-added offerings, by customer group, include the following:
Retail National Accounts â€” Business solutions that help national accounts increase revenues and profitability:
â€˘ Central Fill â€” Prescription refill service that enables pharmacies to refill prescriptions remotely, faster, more accurately and at a lower cost, while reducing inventory levels and improving customer service.
â€˘ Redistribution Centers â€” Two facilities totaling 420 thousand square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologicals. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery.
â€˘ RxPak SM â€” Bulk repackaging service that leverages our purchasing power and supplier relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce working capital investment.
â€˘ Inventory Management â€” An integrated solution comprising forecasting software and automated replenishment technologies that reduce inventory carrying costs.
Independent Retail Pharmacies â€” Solutions for managed care contracting, branding and advertising, merchandising and purchasing that help independent pharmacists focus on patient care while improving profitability:
â€˘ Health MartÂ® â€” Franchise program that provides independent pharmacies with managed care that drives Pharmacy Benefit Manager recognition, branding that drives consumer recognition, in-store programs that drive manufacturer and payor recognition, and community advocacy programs that drive industry recognition.
â€˘ AccessHealthÂ® â€” Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow.
â€˘ McKesson OneStop GenericsÂ® â€” Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, lower up-front pricing and one-stop shopping.
â€˘ Prefer Rx â€” Discount program that offers aggressive prices on more than 100 branded drugs, helping retail independent pharmacies increase margins and eliminate rebate paperwork.
â€˘ SunmarkÂ® â€” Complete line of more than 1,000 products that provide retail independent pharmacies with value-priced alternatives to national brands.
â€˘ FrontEdgeâ„˘ â€” Strategic planning, merchandising and price maintenance program that helps independent pharmacies maximize store profitability.
â€˘ McKesson Home Health Care â€” Comprehensive line of more than 1,800 home health care products, including durable medical equipment, diabetes supplies, self-care supplies and disposables from national brands and the SunmarkÂ® line.
Institutional Healthcare Providers â€” Electronic ordering/purchasing and supply chain management systems that help improve efficiencies, save labor and improve asset utilization:
â€˘ Fulfill-Rxâ„˘ â€” Ordering and inventory management system that integrates McKesson pharmaceutical distribution services with our automation solutions, thus empowering hospitals to optimize the often complicated and disjointed processes related to unit-based cabinet replenishment and inventory management.
â€˘ Asset Management â€” Award-winning inventory optimization and purchasing management program that helps institutional providers lower costs while ensuring product availability.
â€˘ SKY Packaging â€” Blister-format packaging containing the most widely prescribed dosages and strengths in generic oral solid-medications. Enables acute care, long-term care and institutional pharmacies to provide cost-effective, uniform packaging.
â€˘ McKesson 340B Manager â€” Software solution that manages, tracks, and reports on the medication replenishment associated with the federal 340B Drug Pricing Program, helping institutional providers maximize their 340B return.
â€˘ AccessHealthÂ® â€” Expert service for third-party contracting and payment consolidation that helps institutional providers save time and accelerate reimbursement.
â€˘ High Performance Pharmacy â€” Framework that identifies and categorizes hospital pharmacy best practices to help improve clinical outcomes and financial results. The High Performance Pharmacy Assessment Tool and the High Performance Pharmacy Benchmarking Service enable hospital pharmacies to measure against comparable institutions and chart a step-by-step path to high performance.
International Pharmaceutical Distribution: McKesson Canada, a wholly-owned subsidiary, is the largest pharmaceutical distributor in Canada. McKesson Canada, through its network of 17 distribution centers, provides logistics and distribution to more than 800 manufacturers â€“ delivering their products to retail pharmacies, hospitals, long-term care centers, clinics and institutions throughout Canada. Beyond pharmaceutical distribution, logistics and order fulfillment, McKesson Canada has automated over 2,500 retail pharmacies and is also active in hospital automation solutions, dispensing more than 100 million doses each year. In partnership with other McKesson businesses, McKesson Canada provides a full range of services to Canadian manufacturers and healthcare providers, contributing to the quality and safety of care for Canadian patients.
We also own an approximate 49% interest in Nadro, the leading pharmaceutical distributor in Mexico.
Medicalâ€“Surgical Distribution: Medical-Surgical distribution provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers including physiciansâ€™ offices, surgery centers, extended care facilities, homecare and occupational health sites through a network of 29 distribution centers within the U.S. This business is the leading provider of supplies to the full range of alternate-site healthcare facilities, including physiciansâ€™ offices, clinics and surgery centers (primary care), long-term care, occupational health facilities and homecare sites (extended care). Through a variety of technology products and services geared towards the supply chain, our Medical-Surgical distribution business is focused on helping its customers operate more efficiently while providing the industryâ€™s most extensive product offering, including our own private label line. This business also includes ZEEÂ® Medical, North Americaâ€™s leading provider of first aid, safety and training solutions, providing services to industrial and commercial customers. This business offers an extensive line of products and services aimed at maximizing productivity and minimizing the liability and cost associated with workplace illnesses and injuries.
McKesson Retail Automation: This business supplies integrated pharmacy management systems and services to retail and institutional outpatient pharmacies as well as payors. We also own an approximate 39% interest in Parata which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies.
McKesson Specialty Distribution: This businessâ€™ product-specific solutions are directed towards manufacturers, payors and physicians to enable delivery and administration of high-cost, often injectable, bio-pharmaceutical drugs used to treat patients with chronic disease. The business facilitates patient and provider access to specialty pharmaceuticals across multiple delivery channels (direct-to-physician wholesale, patient-direct specialty pharmacy dispensing and access to retail pharmacy), provides clinical support and treatment compliance programs that help patients stay on complex therapies and offers reimbursement, data collection and analysis services.
Our Technology Solutions segment provides a comprehensive portfolio of software, automation, support and services to help healthcare organizations improve quality and patient safety, reduce the cost and variability of care and better manage their resources and revenue stream. This segment markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payors. This segment also includes our Payor group of businesses, which includes our InterQualÂ® and clinical auditing and compliance software businesses and our disease and medical management programs. The segment sells its solutions and services internationally through subsidiaries and/or distribution agreements in Canada, the United Kingdom, Ireland, other European countries, Asia Pacific and Israel.
The product portfolio for the Technology Solutions segment is designed to address a wide array of healthcare clinical and business performance needs ranging from medication safety and information access to revenue cycle management, resource utilization and physician adoption of electronic health records (â€śEHRâ€ť). Analytics software enables organizations to measure progress as they automate care processes for optimal clinical outcomes, business and operating results, and regulatory compliance. To ensure that organizations achieve the maximum value for their information technology investment, the Technology Solutions segment also offers a wide range of services to support the implementation and use of solutions as well as assist with business and clinical redesign, process re-engineering and staffing (both information technology and back-office).
Key solution areas are as follows:
Clinical management: Horizon ClinicalsÂ® is built with architecture to facilitate integration and enable modular system deployment. It includes a clinical data repository, clinical decision support/physician order entry, point-of-care documentation with bar-coded medication administration, enterprise laboratory, radiology, pharmacy, surgical management, an emergency department solution and an ambulatory EHR system. Horizon ClinicalsÂ® also includes solutions to facilitate physician access to patient information such as a Web-based physician portal and wireless devices that draw on information from the hospitalâ€™s information systems. In addition, the Horizon ClinicalsÂ® suite includes a comprehensive solution for homecare, including telehealth and hospice.
Enterprise imaging: In addition to document imaging to facilitate maintenance and access to complete medical records, the segment provides a suite of enterprise medical imaging and information management systems, including a picture archiving communications system and a comprehensive cardiovascular information system. The segmentâ€™s enterprise-wide approach to medical imaging enables organizations to take advantage of specialty-specific workstations while building an integrated image repository that manages all of the images and information captured throughout the care continuum.
Financial management: The segmentâ€™s revenue cycle solutions are designed to reduce days in accounts receivable, prevent insurance claim denials, reduce costs and improve productivity. Examples of solutions include online patient billing, contract management, electronic claims processing and coding compliance checking. The segmentâ€™s hospital information systems play a key role in managing the revenue cycle by automating the operation of individual departments and their respective functions within the inpatient environment.
Resource management: Resource management solutions consist of an integrated suite of applications that enhance an organizationâ€™s ability to plan and optimize the delivery of quality patient care. These solutions automate the management of the workforce, supply chain, surgical and anesthesia documentation, and provide analytics for performance measurement. Linking resource requirements to care protocols, the resource management solutions enhance predictability, improve communication, reduce variability and lower overall costs associated with care delivery.
Automation: Automation solutions include technologies that help hospitals re-engineer and improve their medication use and supply management processes. Examples include centralized pharmacy automation for unit-dose medications, unit-based cabinet technologies for secure medication storage and rapid retrieval, point-of-use supply automation systems for inventory management and revenue capture, and an automated medication administration system for ensuring accuracy at the point of care. Based on a foundation of bar-code scanning technology, these integrated solutions are designed to reduce errors and bring new levels of safety to patients.
Physician practice solutions: The segment provides a complete solution for physician practices of all sizes that includes software, revenue cycle outsourcing and connectivity services. Software solutions include practice management and EHR software for physicians of every size, specialty or geographic location. The segmentâ€™s physician practice offering also includes outsourced billing and collection services as well as services that connect physicians with their patients, hospitals, retail pharmacies and payors. Revenue cycle outsourcing enables physician groups to avoid the infrastructure investment and administrative costs of their own in-house billing office. Services include clinical data collection, data input, medical coding, billing, contract management, cash collections, accounts receivable management and extensive reporting of metrics related to the physician practice.
Connectivity: Through the segmentâ€™s vendor-neutral RelayHealthÂ® and its â€śintelligentâ€ť network, the company provides interactive solutions that streamline clinical, financial and administrative communication between patients, providers, payors, pharmacies and financial institutions. RelayHealth helps to accelerate the delivery of high-quality care and improve financial performance through online consultation of physicians by patients, electronic prescribing by physicians, point-of-service resolution of pharmacy claims by payors, pre-visit financial clearance of patients by providers and post-visit settlement of provider bills by payors and patients. RelayHealth securely processes more than 12 billion financial and clinical transactions annually.
In addition to the product offerings described above, the Technology Solutions segment offers a comprehensive range of services to help organizations derive greater value, enhance satisfaction and return on investment throughout the life of the solutions implemented. The range of services includes:
Technology Services: The segment has worked with numerous healthcare organizations to support the smooth operation of their information systems by providing the technical infrastructure designed to maximize application accessibility, availability, security and performance.
Professional Services: Professional services help customers achieve business results from their software or automation investment. The segment offers a wide array of quality service options, including consulting for business and/or clinical process improvement and re-design as well as implementation, project management, technical and education services relating to all products in the Technology Solutions segment.
Outsourcing Services: The segment helps organizations focus their resources on healthcare while the segment manages their information technology or operations through managed services, including outsourcing. Service options include remote hosting, managing hospital data processing operations, as well as strategic information systems planning and management, revenue cycle processes, payroll processing, business office administration and major system conversions.
Payor Group: The following suite of services and software products is marketed to payors, employers and government organizations to help manage the cost and quality of care:
â€˘ Disease management programs to improve the health status and health outcomes of patients with chronic conditions;
â€˘ Nurse triage services to provide health information and recommend appropriate levels of care;
â€˘ Clinical and analytical software to support utilization, case and disease management workflow;
â€˘ Business intelligence tools for measuring, reporting and improving clinical and financial performance;
â€˘ InterQualÂ® Criteria for clinical decision support; and
â€˘ Claims performance solutions to facilitate accurate and efficient medical claim payment.
Acquisitions, Investments and Discontinued Operations
We have undertaken strategic initiatives in recent years designed to further focus on our core healthcare businesses and enhance our competitive position. We expect to continue to undertake such strategic initiatives in the future. These initiatives are detailed in Financial Notes 2 and 3 to the consolidated financial statements, â€śAcquisitions and Investmentsâ€ť and â€śDiscontinued Operations,â€ť appearing in this Annual Report on Form 10-K.
In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition, both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution and large payor organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers (as well as other potential customers of the segment) which may from time to time decide to develop, for their own internal needs, supply management capabilities provided by the segment. Price, quality of service, and in some cases, convenience to the customer are generally the principal competitive elements in this segment.
Our Technology Solutions segment experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, hardware vendors and Internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered.
The principal trademarks and service marks of the Distribution Solutions segment include: AccessHealthÂ®, AcumaxÂ®, Closed Loop Distribution SM , CometsÂ®, ConsumerScript SM ,.com Pharmacy SolutionsÂ®, EconolinkÂ®, Empowering HealthcareÂ®, EnterpriseRxâ„˘, Expect More From Moore SM , FrontEdgeâ„˘, Fulfill-Rxâ„˘, Health MartÂ®, High Performance Pharmacy SM , LoyaltyScript SM , Max Impact SM , McKessonÂ®, McKesson AdvantageÂ®, McKesson Empowering HealthcareÂ®, McKesson Max RewardsÂ®, McKesson OneStop GenericsÂ®, McKesson Priority ExpressÂ®, McKesson Supply Manager SM , MediNetâ„˘, Medi-PakÂ®, Mobile Manager SM , Moore MedicalÂ®, Moorebrand SM , NOAÂ®, Pharma360Â®, PharmacyRxâ„˘, PharmaservÂ®, PharmAssure SM , ProInterceptÂ®, ProMedÂ®, ProPBMÂ®, RX Pak SM , RX Savings AccessÂ®, ServiceFirstÂ®, StaydryÂ®, SunmarkÂ®, Supply Management Online SM , TrialScriptÂ®, Valu-RiteÂ®, XVIII B Medi MartÂ® and ZEEÂ®.
The substantial majority of technical concepts and codes embodied in our Technology Solutions segmentâ€™s computer programs and program documentation are protected as trade secrets. The principal trademarks and service marks for this segment are: AcuDose-RxÂ®, ANSOSâ„˘, Ask-A-NurseÂ®, Care Fully Connectedâ„˘, CareEnhanceÂ®, CarePoint-RNâ„˘, Connect-RNâ„˘, Connect-RxÂ®, CRMSÂ®, DataStatÂ®, ePremisÂ®, Episode ProfilerÂ®, E-Scriptâ„˘, Fulfill-Rx SM , HealthQuestÂ®, Horizon Admin-Rxâ„˘, Horizon ClinicalsÂ®, HorizonWPÂ®, InterQualÂ®, LytecÂ®, MedCarouselÂ®, Medisoftâ„˘, One-CallÂ®, One-Staff Â® , ORSOSâ„˘, PACMEDâ„˘, Pak Plus-RxÂ®, ParagonÂ®, Pathways 2000Â®, Patterns Profilerâ„˘, Per-SeÂ®, Per-Se TechnologiesÂ® (and logo), PerYourHealth.comÂ®, Practice PartnerÂ®, PremisÂ®, RelayHealthÂ®, ROBOT-RxÂ®, SelfPaceÂ®, Series 2000â„˘, STAR 2000â„˘, SupplyScanâ„˘, TRENDSTARÂ® and WebVisitâ„˘.
We also own other registered and unregistered trademarks and service marks and similar rights used by our business segments. All of the principal trademarks and service marks are registered in the United States, or registrations have been applied for with respect to such marks, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. We believe we have taken all necessary steps to preserve the registration and duration of our trademarks and service marks, although no assurance can be given that we will be able to successfully enforce or protect our rights thereunder in the event that they are subject to third-party infringement claims. We do not consider any particular patent, license, franchise or concession to be material to our business. We also hold copyrights in, and patents related to, many of our products.
Other Information About the Business
Customers: In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2008, sales to our ten largest customers accounted for approximately 53% of our total consolidated revenues. Sales to our two largest customers, CVS Caremark Corporation (â€śCaremark,â€ť) and Rite Aid Corporation (â€śRite Aidâ€ť) accounted for 14% and 13% of our total consolidated revenues. At March 31, 2008, accounts receivable from our ten largest customers were approximately 43% of total accounts receivable. Accounts receivable from Caremark and Rite Aid were approximately 12% and 11% of total accounts receivable. Substantially all of these revenues and accounts receivable are included in our Distribution Solutions segment.
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than approximately 9% of our purchases in 2008. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers on the whole are good. The ten largest suppliers in 2008 accounted for approximately 48% of our purchases.
A significant portion of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. However, we also have certain distribution arrangements with manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our inventory being held at the new higher prices. For these manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to us, could adversely impact our gross profit margin. In 2008 and 2007, we benefited from certain branded manufacturersâ€™ price increases on selected drugs.
Research and Development: Our development expenditures primarily consist of our investment in software development held for sale. We expended $420 million, $359 million and $285 million for development activities in 2008, 2007 and 2006, and of these amounts, we capitalized 17%, 21% and 22%. Development expenditures are primarily incurred by our Technology Solutions segment. Our Technology Solutions segmentâ€™s product development efforts apply computer technology and installation methodologies to specific information processing needs of hospitals and other customers. We believe a substantial and sustained commitment to such expenditures is important to the long-term success of this business. Additional information regarding our development activities is included in Financial Note 1 to the consolidated financial statements, â€śSignificant Accounting Policies,â€ť appearing in this Annual Report on Form 10-K.
Environmental Regulation: We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Financial Note 17 to the consolidated financial statements, â€śOther Commitments and Contingent Liabilities,â€ť appearing in this Annual Report on Form 10-K. Other than any expenditures that may be required in connection with those legal matters, we do not anticipate making substantial capital expenditures either for environmental issues, or to comply with environmental laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2008 and is not expected to be material in the next year.
Employees: On March 31, 2008, we employed approximately 32,900 persons compared to 31,800 in 2007 and 26,400 in 2006.
Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 21 to the consolidated financial statements, â€śSignificant Accounting Policiesâ€ť and â€śSegments of Business,â€ť appearing in this Annual Report on Form 10-K.
John H. Hammergren
Chairman of the Board since July 2002; President and Chief Executive Officer since April 2001; and a director since July 1999. Service with the Company â€“ 12 years.
Jeffrey C. Campbell
Executive Vice President and Chief Financial Officer since April 2004; Senior Vice President and Chief Financial Officer from December 2003 to April 2004. Senior Vice President and Chief Financial Officer, AMR Corporation (2002-2003). Service with the Company â€“ 4 years.
Paul C. Julian
Executive Vice President, Group President since April 2004; Senior Vice President from August 1999 to April 2004; President of the Distribution Solutions business since March 2000. Service with the Company â€“ 12 years.
Paul E. Kirincic
Executive Vice President, Human Resources since April 2004; Senior Vice President, Human Resources from January 2001 to April 2004. Service with the Company â€“ 7 years.
Marc E. Owen
Executive Vice President, Corporate Strategy and Business Development since April 2004; Senior Vice President, Corporate Strategy and Business Development from September 2001 to April 2004. Service with the Company â€“ 7 years.
Pamela J. Pure
Executive Vice President, President, McKesson Technology Solutions (formerly, McKesson Provider Technologies) since April 2004; Chief Operating Officer of McKesson Information Solutions from January 2002 to April 2004. Service with the Company â€“ 7 years.
Laureen E. Seeger
Executive Vice President, General Counsel and Secretary since March 2006; Vice President and General Counsel of McKesson Provider Technologies from February 2000 to March 2006. Service with the Company â€“ 8 years.
Randall N. Spratt
Executive Vice President, Chief Information Officer since July 2005; Senior Vice President, Chief Process Officer, McKesson Provider Technologies from April 2003 to July 2005; Senior Vice President, Imaging, Technology and Business Process Improvement from January 2000 to April 2003. Service with the Company â€“ 22 years
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Revenues increased by 9% in the first quarter of 2009 compared to the same period a year ago. The increase was primarily due to our Distribution Solutions segment which accounted for 97% of our consolidated revenues.
U.S. pharmaceutical direct distribution and services revenues increased primarily reflecting market growth rates (which include growing drug utilization and price increases, offset in part by the increased use of lower priced generics), the acquisition of OTN in October 2007 and expanded business with new and existing customers. U.S. pharmaceutical sales to customersâ€™ warehouses decreased primarily as a result of a decrease in volume from a large customer, a shift of revenues to direct store delivery and reduced revenues associated with the consolidation of certain customers.
Canadian pharmaceutical distribution and services revenues increased primarily reflecting new and expanded business, a 10% favorable foreign exchange rate impact and market growth rates. In addition, these revenues benefited from two additional days of sales during the first quarter of 2009 compared to the same period a year ago.
Medical-Surgical distribution and services revenues increased primarily reflecting market growth rates.
Technology Solutions revenues increased primarily due to increased services revenues reflecting the segmentâ€™s expanded customer base, partially offset by lower disease management revenues. During the first quarter of 2008, the segment recognized $21 million of disease management deferred revenues for which expenses associated with these revenues were previously recognized as incurred.
Gross profit increased 8% in the first quarter of 2009 compared to the same period a year ago. As a percentage of revenues, gross profit margin decreased slightly compared to the same period a year ago primarily reflecting the impact of the $21 million of disease management deferred revenues recognized in the first quarter of 2008 (for which expenses associated with these revenues were previously recognized as incurred), partially offset by an improvement in our Distribution Solutions segmentâ€™s gross profit margin.
During the first quarter of 2009, gross profit margin for our Distribution Solutions segment was positively impacted by higher buy side margins, the benefit of increased sales of generic drugs with higher margins and a benefit associated with a lower proportion of revenues within the segment attributed to sales to customersâ€™ warehouses, which have lower gross profit margins relative to other revenues within the segment. These positive gross profit margin benefits were partially reduced by a decrease in antitrust settlements. In the first quarter of 2008, we received $14 million representing our share of cash proceeds from the settlement of two antitrust class action lawsuits.
Technology Solutions segmentâ€™s gross profit margin decreased primarily due to the recognition in 2008 of $21 million of disease management deferred revenues, for which expenses associated with these revenues were previously recognized as incurred, as well as a change in product mix.
Operating expenses increased 9% compared to the same period a year ago. As a percentage of revenues, operating expenses approximated that of the prior year. Operating expense dollars increased primarily due to our business acquisitions and additional costs incurred to support our sales volume growth.
Other income, net decreased in the first quarter of 2009 compared to the same period a year ago primarily reflecting a decrease in interest income due to lower cash balances and lower interest rates.
Operating profit as a percentage of revenues in our Distribution Solutions segment increased reflecting higher gross profit margin, partially offset by higher operating expenses as a percentage of revenues. Operating expenses increased primarily due to business acquisitions and additional costs incurred to support our sales volume growth. Operating expenses as a percentage of revenues increased primarily due to higher distribution and information technology costs, as well as due to a change in business mix. Restructuring expenses associated with the newly acquired businesses were not material during the first quarter of 2009. We are, however, continuing to evaluate other restructuring initiatives pertaining to our newly acquired businesses, which may have an impact on future net income.
Operating profit as a percentage of revenues in our Technology Solutions segmentâ€™s operating profit decreased primarily reflecting a decrease in gross profit margin and an increase in operating expenses as a percentage of revenues. Operating expenses increased primarily due to investments in research and development activities, additional share-based compensation expense, higher benefit expenses and business acquisitions, partially offset by a decrease in bad debt expense. Operating expenses as a percentage of revenues increased primarily due to the impact of the $21 million of disease management deferred revenues recognized in the first quarter of 2008 for which expenses associated with these revenues were previously recognized as incurred.
Corporate expenses, net decreased primarily due to lower interest income. Interest income decreased due to lower cash balances and lower interest rates.
Interest Expense: Interest expense for the first quarter of 2009 approximated that of the same period a year ago.
Income Taxes: The Companyâ€™s reported income tax rate for the first quarters of 2009 and 2008 was 34.4% and 34.0%. Fluctuations in our reported tax rate are primarily due to changes within state and foreign tax rates resulting from our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates. In addition, during the first quarter of 2009, the income tax provision included $5 million of expense for discrete items primarily relating to interest expense adjustments, net of a favorable tax settlement.
In the second quarter of 2009, we anticipate recognizing $65 million of previously unrecognized tax benefits and related interest expense as a result of the effective settlement of uncertain tax positions. This benefit will be included in the income tax provision within results from continuing operations.
Net Income: Net income was $235 million for the first quarters of 2009 and 2008, or $0.83 and $0.77 per diluted share. Diluted earnings per share benefited from the impact of share repurchases.
Weighted Average Diluted Shares Outstanding: Diluted earnings per share were calculated based on an average number of shares outstanding of 282 million and 304 million for the quarters ended June 30, 2008 and 2007. The decrease in the number of weighted average diluted shares outstanding reflects a decrease in the number of common shares outstanding as a result of repurchased stock, partially offset by exercised stock options.
Business Acquisitions and Investments
In 2009, we made the following acquisition:
â€“ On May 21, 2008, we acquired McQueary Brothers Drug Company (â€śMcQueary Brothersâ€ť), of Springfield, Missouri for approximately $190 million. McQueary Brothers is a regional distributor of pharmaceutical, health, and beauty products to independent and regional chain pharmacies in the Midwestern U.S. This acquisition expanded our existing U.S. pharmaceutical distribution business. The acquisition was funded with cash on hand. Approximately $122 million of the preliminary purchase price allocation has been assigned to goodwill, which primarily reflects the expected future benefits from synergies to be realized upon integrating the business. Financial results for McQueary Brothers are included within our Distribution Solutions segment since the date of acquisition.
In 2008, we made the following acquisition:
â€“ On October 29, 2007, we acquired all of the outstanding shares of Oncology Therapeutics Network (â€śOTNâ€ť) of San Francisco, California for approximately $531 million, including the assumption of debt and net of $31 million of cash acquired from OTN. OTN is a U.S. distributor of specialty pharmaceuticals. The acquisition of OTN expanded our existing specialty pharmaceutical distribution business. The acquisition was funded with cash on hand. Approximately $258 million of the preliminary purchase price allocation has been assigned to goodwill, which primarily reflects the expected benefits from synergies to be realized upon integrating the business. Financial results of OTN are included within our Distribution Solutions segment since the date of acquisition.
During the first quarter of 2009 and over the last two years, we also completed a number of other smaller acquisitions and investments within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition and, for certain recent acquisitions, may be subject to change as we continue to evaluate and implement various restructuring initiatives. Goodwill recognized for our business acquisitions is not expected to be deductible for tax purposes. Pro forma results of operations for our business acquisitions have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.
New Accounting Developments
New accounting pronouncements that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Financial Note 1, â€śSignificant Accounting Policiesâ€ť to the accompanying condensed consolidated financial statements.
Financial Condition, Liquidity and Capital Resources
Operating activities provided cash flow of $314 million and $432 million during the first quarters of 2009 and 2008. Operating activities for 2009 benefited from the accelerated receipt of $325 million of our accounts receivable through our accounts receivable sales facility. Operating activities for 2009 also reflect an increase in our net financial inventory (inventory, net of accounts payable) and accounts receivable primarily as a result of our revenue growth. Operating activities for 2008 reflect improved inventory management and an increase in accounts payable associated with longer payment terms. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers, inventory receipts and payments to vendors.
Investing activities utilized cash of $362 million and $97 million during the first quarters of 2009 and 2008. Investing activities for 2009 include payments for business acquisitions of $242 million compared to $22 million in 2008. Activity for 2009 includes the McQueary Brothers acquisition for $190 million.
Financing activities utilized cash of $130 million and $93 million in the first quarters of 2009 and 2008. Financing activities for 2009 include a $120 million decrease in the use of cash for stock repurchases and a $119 million decrease in cash receipts from employeesâ€™ exercises of stock options compared with the first quarter of 2008.
In April and September 2007, the Companyâ€™s Board of Directors (the â€śBoardâ€ť) approved two plans to repurchase up to $2.0 billion of the Companyâ€™s common stock ($1.0 billion per plan). In the first quarter and full year of 2008, we repurchased a total of 4 million and 28 million shares for $257 million and $1,686 million, fully utilizing the April 2007 plan, leaving $314 million remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase an additional $1.0 billion of the Companyâ€™s common stock. During the first quarter of 2009, we repurchased 2 million shares for $130 million, leaving $1,184 million available for future repurchases as of June 30, 2008. Stock repurchases may be made from time-to-time in open market or private transactions.
Working capital primarily includes cash, receivables and inventories, net of drafts and accounts payable, deferred revenue and other liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and new customer build-up requirements. Consolidated working capital decreased primarily reflecting a decrease in cash and cash equivalents and a decrease in net financial inventory (inventory, net of accounts payable).
Our ratio of net debt to net capital employed increased in 2009 primarily due to lower cash and cash equivalents balances.
In April 2008, the Board approved a change in the Companyâ€™s dividend policy by increasing the amount of the Companyâ€™s quarterly dividend from six cents to twelve cents per share which will apply to ensuing quarterly dividend declarations until further action by the Board. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Companyâ€™s future earnings, financial condition, capital requirements and other factors.
We fund our working capital requirements primarily with cash, short-term borrowings and our receivables sales facility.
In June 2008, we renewed our accounts receivable sales facility under substantially similar terms to those previously in place, except that we increased the committed balance from $700 million to $1.0 billion. The renewed facility expires in June 2009. Through this facility, we receive cash proceeds from selling undivided ownership interests in our trade receivables to qualified special purpose entities owned and operated by banks. These transactions are accounted for as a sale in accordance with SFAS No. 140, â€śAccounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,â€ť because we have relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables, net in the accompanying condensed consolidated balance sheets. Total receivables sold for the quarter ended June 30, 2008 were $1.2 billion and $325 million of the facility was utilized at June 30, 2008. There were no receivables sold for the quarter ended June 30, 2007. Discounts are recorded within administrative expenses in the condensed consolidated statements of operations. Although we continue servicing the sold receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
We have a $1.3 billion five-year, senior unsecured revolving credit facility which expires in June 2012. As of June 30, 2008, there were no amounts outstanding under this facility.
Our various borrowing facilities and long-term debt are subject to certain covenants. Our principal debt covenant is our debt to capital ratio, which cannot exceed 56.5%. If we exceed this ratio, repayment of debt outstanding under the revolving credit facility and $215 million of term debt could be accelerated. As of June 30, 2008, this ratio was 22.4% and we were in compliance with our other financial covenants. A reduction in our credit ratings or the lack of compliance with our covenants could negatively impact our ability to finance operations through our credit facilities or issue additional debt at the interest rates then currently available.
Funds necessary for future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flows from operations, existing credit sources and other capital market transactions.
Ana Schrank - Vice President of Investor Relations
Thank you, Angie. Good afternoon and welcome to the McKesson fiscal 2009 first quarter conference call for the financial community. With me today with John Hammergren, McKesson's Chairman and CEO; and Jeff Campbell, our CFO. John will 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 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 the 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 & Exchange Commission, please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements. Thanks, and here is John Hammergren.
John H. Hammergren - Chairman of the Board, President and Chief Executive Officer
Thanks, Ana. And thanks to everyone for joining us on our call today. McKesson turned in solid results for the first quarter, continuing our positive momentum of the prior three years. Our results were driven by an excellent performance in the distribution solution segment where both revenues and operating profit were up strongly. As we discussed at our recent investor day The Technology Solutions business is subject to quarterly volatility but we are optimistic about our full-year forecast. We continue to use our balance sheet and our solid operating cash flow to further the creation of additional shareholder value. The overall result was steady growth in earnings per share and we are off to a solid start in fiscal 2009.
Before I turn the call over to Jeff for a detailed review of our financial results, I will highlight the positive trends in our business and the progress that we are making to deliver sustained growth. Consolidated revenues for the first quarter were up 9% and earnings per diluted share were up 8% to $0.83. Our strong performance was driven by the Distribution Solutions segment, which still accounts for the largest part of earnings, and provides a great base for our Company.
With the scale we've achieved and the efficiencies we offer in our customers, the Distribution Solutions segment will continue to provide McKesson with a platform for growth in the years to come. In the quarter, Distribution Solutions revenue growth was 9%, reflecting the strength and diversity of our customer base in both the United States and Canada. Distribution Solutions revenue grew as a result of solid growth and new business from existing customers, and the acquisition of OTN.
Outstanding performance from U.S. Pharmaceutical continues to drive this segment with strong performance across the breath of our customer base. Our core direct revenues grew 16% for the quarter. While our revenues moved directionally like the pharma industry revenues our growth rate has typically been higher as we continue to have success in getting our customers to move more business through us as opposed to buying directly from manufacturers.
We recently held our annual Pharmacy Strategies Conference for independent retail customers, where we outlined our vision for independent pharmacy as a health and wellness destination, not just a place to pick up prescriptions, and we unveiled a number of solutions that can help make this vision a reality.
Today Pharmacists have an opportunity to elevate their role as healthcare providers in their communities. As trusted accessible healthcare professionals, independent Pharmacists are ideally suited to counsel their patient on medication therapy helping them manage conditions such as Diabetes, High Blood Pressure and Asthma. At the conference we demonstrated the McKesson Technology and Solutions work hand-in-hand. With technology providing gains in efficiency and profitability, pharmacists can spend more time delivering services that help their patients lead healthier lives.
The conference served as a showcase for McKesson full compliment of solution for independent pharmacies. Many of these solutions are integrated for members of McKesson's Health Mart franchise, which grew 50% during fiscal 2008. Health Mart customers are extremely loyal to McKesson particularly with their generic compliance. Compared to the independent segment as a whole, our Health Mart stores have a 10% better utilization of OneStop our proprietary generics than the rest of the segment.
We believe our OneStop generics program leads the industry in our recent performance supports that. In the first quarter sales growth for OneStop Generics was 20%, one again significantly above market growth. Because OneStop Generics is not a one size fits all program, we have participate across a wide range of customers including independence, regional chains, mail order firms, hospitals, including their group purchasing organizations, and long-term care pharmacy providers.
We recently expanded our relationship with Safeway to include Generics except an additional 1000 stores in our OneStop program. This is terrific example of our steady progress penetrating our customer base with unique programs tailored for specific needs.
We continue to benefit from our acquisition of OTN which gave us greater scale in the rapidly growing market for specialty pharmaceuticals and will accelerate growth until we lap the revenues from that acquisition. Bringing OTN into our family of distribution businesses provides us with a comprehensive value proposition for our customers and for our manufacturing partners.
The integration of OTN is proceeding as planned and we should be complete by September. Beyond U.S. Pharmaceutical there was significant contribution to growth from other businesses within Distribution Solutions. In the first quarter growth in the Canadian Distribution business was outstanding due to new and expanded customer agreements. By focusing on long-term customer relationships and operational excellences, McKesson Canada has continued to be a leading distributor in Canada.
We have strong market positions in our distribution businesses in the United States, Canada and Mexico, and through our joint venture in Nadrow [ph]. Each country operates a little differently, but we are able to make the strongest elements from each work together and exchange those best ideas across all three businesses. A good example of this is the recent acquisition we made in Canada. Of group farm ESAR, which is the marketing and purchasing arm for a network of close to 270 independently owned pharmacies located throughout QuĂ©bec, Ontario and the Atlantic Provinces that operate under a banner called Proxim.
In Canada banner is operated somewhat the same fashion as our Health Mart franchise and if they allow independent pharmacies to remain independently owned while achieving the scale and benefits of larger chain. McKesson Canada already owns several banners and the acquisition of Proxim banner fills out our offering. This acquisition demonstrates McKesson's commitment to the independent pharmacy business model, and our efforts to continue to expand our Canadian footprint.
Lastly, in Distribution Solutions our medical surgical business continues to execute well. In the first quarter the business had solid revenue growth with particular strong results reported from our home care group, which has improved its market position with a suite of proprietary technology tools that enable McKesson's Horizon home health customers to place product orders to med-surg directly from their operating platforms.
In summary, I'm very pleased with the strong performance of our distribution solutions segment. The scale and efficiency across our distribution businesses allows us to serve our customers with a high degree of satisfaction.
With our successful proprietary generics program, we are set to benefit from the period of significant generic product introductions over the next few years. We've also enhanced our overall value proposition with the OTN acquisition, which gives us a strong position in the fastest growing sector of the market, specialty distribution.
And in medical surgical solutions, our business is growing and we're executing very well these days. We have a terrific business and a stable industry, and I feel confident about our momentum for the remainder of the fiscal year.
Turning now to technologies solutions. Our results in the first quarter don't reflect our full year expectations for the segment. Jeff will take you through more of the specifics on our first quarter, but let me remind you that there is quarterly volatility in the business that can impact the results on a short-term basis, but it doesn't change our long-term view of what we can accomplish.
We are still very confident about our products and our strategy and we are optimistic about our full year results. Rights now, for example, Technology Solutions is hosting its Annual Executive Summit, it focuses on the role of technology in automating and connecting healthcare. The summit is for very senior hospital and health systems executives and even in this tough economy, we have a record number of first-time attendees.
We include in the summit a series of meetings with our top customers to provide updates on the role of technology in overcoming current challenges in healthcare. We also provide industry education and the opportunity to network with peers to discuss common challenges such as patient safety, and uncompensated care. Our customer's commitment to this annual event demonstrates their continued interest in our solutions.
As a result of our customer's interest when we look out into the future we see a robust pipeline. As Pam Pure told you at Investors Day this is a very big complex business and over the years we have succeeded because we have true expertise in healthcare and we have the broadest portfolio in the industry with unique solutions for hospitals, payers, physician offices, and pharmacies.
To meet the needs of our broad customer base, we continue to focus on innovation and invest in new product development. For decades McKesson has been a leader in revenue cycle solutions. To maintain that leadership position, we recently announced the introduction of Horizon enterprise revenue management, Horizon ERM, a new solution focused on helping customers manage the very complex reimbursement collection and patient-management issues in healthcare.
This new solution will run on Horizon architecture, and it is open, so that it integrates with both, McKesson and non-McKesson clinical solutions. Horizon ERM will better enable hospital financial managers to predict cash flow and net revenue by understanding the payment history of pairs and anticipated patient throughput. With this system, we're reinventing the way consumers interact with the health system and removing many of the administrative tasks currently performed after care is received to the front end of the care process.
In last year's first quarter we announced the move of our health solutions business from the distribution segment into technology solutions to more closely align the development of new offerings that connect the needs of payers and providers for information and financial flows. This quarter I want to provide you with an update on some of the recent activities in health solutions, a business that provides commercial and government payers with software and services designed to optimize their operations and health outcomes for parents.
Through McKesson health solutions we offer disease management programs and those three hour services to improve health status and health outcomes of patients with chronic conditions. We also provide business intelligence tools for measuring, reporting, and improving clinical and financial performance, including our InterCall criteria software for clinical decision support.
In our payer business, all of our top 25 managed care organizations, and more than 90% of the Blue Cross Blue Shield plans depend on our solutions to manage their business. And in the disease management and triage business, our services are employed by more commercial and government agencies than by any other vendor.
A great example of our ability to leverage expertise from our payer organization, and connectivity solutions from RelayHealth, and the power of our technology footprint in the ambulatory and health systems base [ph] was our announcement of community care advantage earlier this year.
Drawing on our extensive experience in disease management for Medicaid patients and success with consumer-based technology solutions, we developed an offering to help meet the medical needs of the indigent, chronically ill, and newly discharged patients. The goal of this solution is to reduce the cost of serving high-cost populations by helping hospitals target non-reimbursed cost for readmissions, emergency department visits, and hospital occupancy.
Community care advantage is a great example of our ability to use our scope and scale and combine our assets to help healthcare provider address their toughest challenges. On the disease management services side of the business we finished a successful first year in Illinois, with the largest and most complicated DM program in any state with 170 McKesson employees; nurses, physicians, and social workers on the ground, on the phone or in triage centers, helping the most costly Medicaid patients in Illinois.
The result was that we decreased the in-patient admissions by managing those patients at home or in non-acute care studies. We are pleased with the successes of our software and services in health solutions and the synergies we have gained from moving this into our technology solutions segment. This type of broad-based success across our customer base of hospitals, payers, physician offices, and pharmacies, they keep us optimistic about the full year results for technology solutions.
My last subject before I turn this call over to Jeff is the important topic of capital deployment. We continue to take a portfolio approach to capital deployment and in the first quarter we deployed $242 million in acquisitions, the largest of which was the McQueary Brothers for $190 million. In addition, we paid out our newly double dividend on July 1st.
In summary, we entered fiscal 2000 with a strong performance and the long-term prospects of two businesses remain extremely promising. Our solid balance sheet and operating cash flow provide resources to further the creation of shareholder value. Based on the healthy fundamentals underlying our business, and our ability to execute on our objectives, and the estimated benefit of a tax reserve release, we are now raising our previous outlook and now expect that McKesson should earn between $4 and $4.15 per diluted share from continuing operations for the fiscal year ending March 31st, 2009. I look forward to reporting to you on our continued success throughout the year.
With that I'll turn the call over to Jeff, and will return to address your questions when he finishes. Jeff?
Jeffrey C. Campbell - Executive Vice President and Chief Financial Officer
Thanks, John and good afternoon everyone. As you've just heard, McKesson had another solid start to the fiscal year, driven by the performance of our distribution solutions business and the strength of our balance sheet.
Let me begin by reviewing our financial results for the quarter, as always I'll first review our consolidated results, providing more color when I discuss each segment in more detail.
Revenues for the quarter grew 9% to $26 .7 billion from $24.5 billion last year. Our overall revenue growth is, of course, driven by the growth in distribution solutions which was up 9% from last year, and represents 97% of our consolidated revenues. Gross profit for the quarter was up 8% to $1.3 billion.
Distribution Solutions gross profit increased 14%, providing for nice margin expansion in the segment. Technology Solutions gross profit declined 6%, primarily due to our recognition in the prior year of $21 million of disease management deferred revenues, the expenses for which were incurred in prior quarters.
Moving below the gross profit line, our total operating expenses were up 9% to $897 million for the quarter. Higher expenses in the quarter were primarily driven by growth in the business and several acquisitions, particularly OTN, as well as $9 million of additional FAS 123R expenses.
Operating income for the quarter grew 4% to $371 million from $356 million a year ago. Moving below operating income, other income, of $21 million was 43% below last year, primarily due to lower interest rates on a lower cash balance. Given the current low interest rate environment, we are managing our cash very aggressively, and maintained a lower cash balances in the quarter. Interest expense of $34 million was relatively unchanged from the prior year.
Moving to taxes, our effective tax-rate of 34.4% in the quarter was a bit higher than the 34% effective rate in the first quarter a year ago. You will recall that this year's guidance on our tax rate is for a 33% run-rate versus last year's 34%. This year's June quarter was above the 33% run-rate as it included $5 million tax expense for discrete items.
Before I move on, I would like to take mat here to talk you through a discrete tax reserve adjustment that we expect to make in our September quarter. Let me remind you that in the past I have said that we do not include highly uncertain outcomes from settlements or other discrete tax items in our guidance. However, we are now confident that we will release a tax reserve in the September quarter of $65 million. Our outlook for the full year remains at a tax-rate of 33% before considering the impact of this expected reserve release.
Net income in the quarter was $235 million, unchanged from the prior year, While earnings per share of $0.83 was up 8% from $0.77 a year ago. This EPS leverage was driven by the impact of the aggressive $1.7 billion of share repurchases we made in fiscal year 2008, which lowered our diluted shares outstanding by 7% year-over-year to $282 million -- 282 million shares.
This quarter, our portfolio approach to capital deployment was more heavily weighted towards acquisitions. In the quarter, we deployed $242 million for acquisitions, million of which was for McQueary Brothers. We also repurchased a $130 million of stock which is little less than we've been doing in light of the acquisition spend this quarter. Its also worth noting that the cash proceeds we get from option exercises were down $119 million year-over-year this quarter.
Let's now move on to distribution solutions. In this segment we achieved overall revenue growth of 9%, compared to the same quarter last year. U.S. Pharmaceutical direct distribution and services revenue grew 16%, about 6 points of which were due to the acquisition of OTN. That leaves 10% growth driven primarily by strong performance across our entire customer base, and some shift from our warehouse customers to direct-store-store delivery. This shift also contributed to our warehouse revenues declining 8%, but the primary driver of the warehouse decline was the loss of a contract by a large warehouse customer which we've talked about beginning with the March quarter. So we'll be done lapping this loss beginning with the March quarter of fiscal 2009.
Canadian revenues increased 27% for the quarter. While a favorable currency impact of 10% and two additional sales days helped drive this increase, the largest factor was our continued success in securing new and expanded distribution agreements across our customer base. This is a great result. Medical surgical distribution revenues were up 6% for the quarter to $627 million growing roughly at market rates. Gross profit for the segment was up 14% to $934 million from $822 million a year ago, on 9% revenue growth, representing a nice improvement in gross margin of 15 basis points.
The increase in gross profit for the quarter was due to the impact of our agreements with branded pharmaceutical manufacturers and an improved mix of higher margin products and services including sales of OneStop Generics. We also benefited from the lower mix of warehouse sales. These are terrific results, especially given that we had $14 million in positive anti-trust settlements in the prior year quarter.
Our distribution solutions operating expenses were up 13% for the quarter, to $562 million, reflecting growth in our businesses, and the acquisitions of OTN and McQueary Brothers. Operating margin rate for the quarter was 148 basis points, compared to 143 basis points in the prior year. Truly impressive when taking in to account last year's favorable $14 billion in anti-trust settlements.
In summary, and before I move to Technology Solutions, we are very pleased with the revenue growth and margin expansion of our businesses within Distribution Solutions. We are off to a great start for the fiscal year in this segment, and I am optimistic about the fiscal year outlook.
Turning to February Technology Solutions, let me remind you as I did at investor day, that in this business we have contracts that are implementation-driven, and software sales, both of which can fluctuate from quarter-to-quarter. Last year, for example, we talked about our strong physician software sales, which were driven by regulatory deadlines that did not repeat this June quarter.
Additionally, last year we recognized the $21 million of previously deferred revenue on a management contract that fell straight though bottom line, something that did not recur this year. With these factors in mind, our services revenues were up 6% in the quarter, excluding the $21 million from the prior year services revenues. This growth reflects progress across the board of customers we serve, and products we offer.
Software and software systems revenue of $138 million in the quarter were unchanged from a year ago, primarily due to the strong sales of physician software in the prior year quarter. For the quarter Technology Solution had totaled gross R&D spending of $99 million an increase of 4% from the prior year. Of this amount, we only capitalized 14%, compared to 21% a year ago.
We continue to innovate and spend on R&D to maintain our leadership position, and expect our capitalization rate to be between 15% and 20% this year. Technology Solutions operating expenses increased 5% in the quarter to $270 million. Higher expenses in this segment were driven by growth in the business, higher net R&D expense, and additional FAS 123R charges at $5 million over the prior year.
Our operating profit in our technologies solutions segment this quarter was $66 million, down from $100 million a year ago. Operating margins in this segment were 8.87% for the quarter compared to 13.7% in the prior year.
While the first quarter gets us off to a slow start, we still expect to make operating margin improvements in this segment on an annual basis. And to make progress towards our long-term goal of low to mid-teens operating margins. Leaving our segment performance and turning briefly now to the balance sheet. You may have noticed from our press release filed earlier this afternoon, that we utilized $325 million of our AR sales facility at the end of the quarter.
As I mentioned before, given the size of our working capital, the fact that that we're churning through over $100 billion of receivables and payables a year, we have considerable daily fluctuations in our cash balance. As we have begun to manage our cash more aggressively in this low interest rate environment, we have begun to use your short-term liquidity facilities a bit for the first time in a few years.
Given this more aggressive approach to managing cash, we felt it prudent to increase the committed balance available to us through our AR facility from $700 million to $1 billion. This AR facility, combined with our $1.3 billion revolving credit facility, gives us total liquidity support, $2.3 billion.
Now to our working capital metrics. Adding back the $325 million sale of AR at quarter end, our receivables increased 11% to $7.5 billion, marginally higher than our sales growth. And our day sales outstanding would have been 22 days flat versus the prior year. Our inventories were $9.3 billion on June 30th, a 16% increase over last year. Our day sales and inventory of 33 was two days higher than a year ago.
Once again, there are fluctuations in our daily working capital, depending on what's happening the day the quarter ends. But going forward, we do not expect this increase in our year-over-year days sales and inventory to sustain itself. Compared to a year ago, payables were up 13% to $12.4 billion, our day sales and payables increased one day from a year ago to 44, reflecting primarily the growth of our generics business which typically has longer payment terms.
In the quarter, we used $11 million in operating cash flow, excluding the benefit of the $325 million receivables sales. This was driven strictly by timing of inventory purchases as reflected in our DSI, as well as a few other pure timing related issues. Going forward, we continue to expect to generate over $1.5 billion of operating cash in fiscal 2009.
Capital spending was $40 million for the quarter, $5 million higher than the $35 million the year ago. Capitalized software expenditures were down to $38 million from $41 million a year ago. Our annual guidance for capital and software expenditures in the range of $350 million to $400 million remains unchanged. We ended the quarter with $1.2 billion of cash and cash equivalents, down from the $1.4 billion we held at year end.
So overall, our first quarter results were solid and on track. Given the favorable tax reserve adjustment that I spoke about earlier, the solid first quarter results, and our confidence in the year, we are raising our guidance for EPS from continuing operations from $3.75 to $3.90, up to $4 to $4.15. On our May call we provided directional quarterly guidance, suggesting that our first quarter would be up slightly from the prior year.
Our diluted EPS of $0.83 came in a little better than we expected, it was mainly due to timing. We continue to expect second quarter earnings to be flat to up slightly, and a stronger second half. Other than the above mentioned tax adjustments, there are no other changes to our fiscal year 2009 earnings per share guidance assumptions which we laid out for you back in May and affirmed in late June. We feel that McKesson is on track for another good year.
Thanks, and with that I'll turn the call over to the operator for your questions. Operator?