DBRS Upgrades McKesson’s Long-Term Rating to A (low), Confirms Short-Term Rating at R-1 (low), Stable Trends

DBRS has today upgraded McKesson Corporation’s (McKesson or the Company) Senior Unsecured Debt Rating to A (low) from BBB (high) and confirmed the Commercial Paper rating at R-1 (low). The trends are Stable. This action extends from DBRS’s June 27, 2008 trend change (to Positive from Stable) on McKesson’s long-term rating, which reflected steady improvement in the Company’s earnings profile and credit metrics during F2007 and F2008. DBRS expected McKesson would likely continue to benefit from its leading market position and focus on higher-growth/higher-margin businesses, and stated the Company could achieve an upgrade in the following year if it maintained recently achieved credit metrics that are consistent with an A (low) rating.

Since then, McKesson has continued to deliver top-line and earnings growth as a result of both organic growth and successful acquisitions. The Company has maintained its leading market position in the pharmaceutical distribution business through acquisitions in higher-growth areas such as specialty/regional distribution (i.e., the purchase of McQueary Brothers ($190 million) in F2009 and Oncology Therapeutics Network ($519 million) in F2008). The Company’s Technology Solutions segment also continues to benefit from a number of successful acquisitions, particularly the $1.8 billion deal for Per-Se Technologies in F2007. Operating margin improved to 1.58% in F2009 and 1.68% for the first half of F2010 (from 1.45% in F2008) as a result of McKesson’s focus on higher-margin products/services and efficiency enhancement. Revenue growth and margin gains have together contributed to steadily increasing operating income ($1,843 million for the LTM ending September 30, 2009 compared with $1,689 million in F2009 and $1,473 million in F2008), while the mix also continues to improve. The higher-margin Technology Solutions segment contributed 21% of overall operating income in H1 F2010 compared with 13% in F2007.

In terms of financial management, McKesson kept share repurchases and acquisitions well within free cash flow over F2009 and H1 F2010. This discipline combined with steadily increasing operating income/cash flow has benefitted McKesson’s financial profile and has helped keep credit metrics at the strong levels achieved as of the end of F2008. Lease-adjusted cash-flow to gross-debt was steady at 59% for the LTM ending September 30, 2009 (versus 57% for F2009 and 59% for F2010) and lease-adjusted debt to capital was 33.5% (versus 35.3% at the end of F2009 and 30.5% at the end of F2008). (On a net-debt basis, credit metrics would be meaningfully stronger as most of the free cash flow generated over the past year-and-a-half has accumulated in cash and cash equivalents).

DBRS’s upgrade recognizes the traction McKesson has displayed with regards to keeping credit metrics (during F2009 and into F2010) at a level consistent with an A (low) rating, while the Stable trend reflects our view that this is sustainable by the Company going forward.

DBRS believes McKesson’s well-entrenched position in the industry combined with its focus on higher-growth, higher-margin business segments should continue to maintain the earnings profile. That said, DBRS recognizes that McKesson’s Distribution segment remains susceptible to several ongoing risk factors, including the potential for changes in government regulation (i.e., health-care funding levels and insurance programs), changes to pharmaceutical supply and/or pricing structure, and the potential for non-renewal of key contracts. DBRS also expects that McKesson will continue to deploy capital on an opportunistic basis and that the Company will limit the use of debt to a level that would keep gross debt-to-capitalization close to the 35% mark over the long term. Changes in these or other factors that affect McKesson’s profitability or financial profile in a meaningful way could impact the credit rating or trend in the future.

In terms of liquidity, DBRS believes the Company’s profile and A (low) long-term rating continue to support an R-1 (low) Commercial Paper rating, therefore the short-term rating and trend remain unchanged.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.

This is a Corporate rating.