1

INTRODUCTION

McKesson Corporation delivers pharmaceuticals, medical supplies and healthcare information

technology. Its goal is to make healthcare safer while reducing costs. McKesson Corporation operates in

two segments. The McKesson Distribution Solutions segment distributes drugs, medical-surgical

supplies and equipment and health and beauty care products throughout North America. The McKesson

Technology Solutions segment delivers enterprise –wide clinical, patient care, financial, supply chain,

strategic management software solutions, pharmacy automation for hospitals, as well as connectivity,

outsourcing and other services, including remote hosting and managed services, to healthcare

organizations.

Team JRDR has been hired as consultants to perform a financial statement analysis on McKesson

Corporation. Statements from 2013, 2012 and 2011 will be used to carry out the analysis. The team will

use vertical analysis to gain insight on McKesson’s intra-company performance and compare it to one of

its competitors, Cardinal Health. Horizontal and ratio analysis will also be conducted on both companies

to help determine which company will grant a better return on investment and therefore be the better

choice for investors.

2

2011-2013 *We compared Cardinal Health and McKesson between these fiscal years*

Company Descriptions

Cardinal Health

Cardinal Health, Inc. is a Fortune 500 health care services company based in Dublin, Ohio. The firm specializes in distribution of pharmaceuticals and medical products, serving more than 60,000 locations.

McKesson Corporation

McKesson Corporation is an American company distributing pharmaceuticals at a wholesale level and providing health information technology, medical supplies, and care management tools.

“The current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets. In order to make the most of these future growth opportunities, the industry must fundamentally change the way it operates.” PricewaterhouseCoopers

Which stock looks like the most attractive MFI investment? The statistics are relatively close for the two stocks. Both have similar profiles for debt as well. The statistics don't show a clear winner. So, we need to dig a little bit into business prospects. The following are MagicDiligence's ranking of the two stocks in order of increasing attractiveness based on assumed business prospects:

2. Cardinal (CAH)

Although it is the cheapest of the three and paying the best dividend, Cardinal also has the least attractive profile going forward. The bulk of Cardinal's business is to big customers like CVS and Walgreen (45%), and an increasing amount of business is coming from bulk sales to the drug-by-mail providers. The problem with this is that bulk sales generate margins below 0.5%, not where you want to be. Cardinal's customer base is just not that attractive, and the company has no other businesses to fall back on after it spun off CareFusion (CFN).

1. McKesson (MCK)

McKesson has similar problems, with nearly 30% of business coming from CVS and Rite Aid (RAD - a misnomer). There are two concerns with this. One, McKesson's CVS business comes from a legacy contract with since-acquired Caremark, and CVS could decide to consolidate under its legacy supplier, Cardinal. Second, Rite Aid has been losing ground to its competitors for years and is by far the weakest national chain, possibly facing bankruptcy. On the other hand, McKesson also has an attractive medical software business, a sweet spot in the discussion over health care reform. This segment had good growth prospects, higher margins, and has decent moat potential stemming from high switching costs.

WEBSITE WHERE ARTICLE WAS FOUNDED http://articles.mercola.com/sites/articles/archive/2008/04/19/shocking-facts-about-the-pharmaceutical- industry.aspx

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Comparative Balance Sheets

McKesson CORPORATION CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts) Change % Change % Change $ Change $

2013 2012 2011 2013- 2012

2012- 2011

2013- 2012

2012- 2011

ASSETS

Current Assets

Cash and cash equivalents $2,456 $3,149 $3,612 -22% -13% $(693) $(463)

Receivables, net 9,975 9,977 9,187 0% 9% $(2) $790

Inventories, net 10,335 10,073 9,225 3% 9% $262 $848

Prepaid expenses and other 404 404 333 0% 21% - $71

Total Current Assets 23,170 23,603 22,357 -2% 6% $(433) $1,246

Property, Plant and Equipment, Net 1,321 1,043 991 27% 5% $278 $52

Goodwill 6,405 5,032 4,364 27% 15% $1,373 $668

Intangible Assets, Net 2,270 1,750 1,456 30% 20% $520 $294

Other Assets 1,620 1,665 1,718 -3% -3% $(45) $(53)

Total Assets $34,786 $33,093 $30,886 5% 7% $1,693 $2,207

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Drafts and accounts payable $16,108 $16,114 $14,090 0% 14% $(6) $2,024

Short-term borrowings - 400 - - - - -

Deferred revenue 1,359 1,423 1,321 -4% 8% $(64) $102

Deferred tax liabilities 1,626 1,092 1,037 49% 5% $534 $55

Current portion of long-term debt 352 508 417 -31% 22% $(156) $91

Other accrued liabilities 1,912 2,149 1,861 -11% 15% $(237) $288

Total Current Liabilities 21,357 21,686 18,726 -2% 16% $(329) $2,960

Long-Term Debt 4,521 3,072 3,587 47% -14% $1,449 $(515)

Other Noncurrent Liabilities 1,838 1,504 1,353 22% 11% $334 $151

Other Commitments and Contingent Liabilities (Note 22)

Stockholders’ Equity Preferred stock, $0.01 par value, 100 shares authorized, no shares issued

or outstanding - - - - - - -

Common stock, $0.01 par value, 800 shares authorized at March 31, 2013 and 2012,

376 and 373 shares issued at March 31, 2013 and 2012 4 4 4 0% 0% - -

Additional Paid-in Capital 6,078 5,571 5,339 9% 4% $507 $232

Retained Earnings 10,402 9,451 8,250 10% 15% $951 $1,201

Accumulated Other Comprehensive Income (Loss) (65) 5 87 -1400% -94% $(70) $(82)

Other 14 4 10 250% -60% $10 $(6)

Treasury Shares, at Cost, 149 and 138 at March 31, 2013 and 2012 (9,363) (8,204) (6,470) 14% 27% $(1,159) $(1,734)

Total Stockholders’ Equity 7,070 6,831 7,220 3% -5% $239 $(389)

Total Liabilities and Stockholders’ Equity $34,786 $33,093 $30,886 5% 7% $1,693 $2,207

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Comparative Balance Sheets

CARDINAL HEALTH CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts) Change % Change % Change

$ Change

$

2013

2012

2011

2013- 2012

2012- 2011

2013- 2012

2012- 2011

ASSETS

Current Assets

Cash and cash equivalents $1,901 $2,274 $1,929 -16% 18% $(373) $345

Trade Receivables, net 6,304 6,355 6,156 -1% 3% $(51) $199

Inventories, net 8,373 7,864 7,334 6% 7% $509 $530

Prepaid expenses and other 1,192 1,017 897 17% 13% $175 $120

Total Current Assets 17,770 17,510 16,316 1% 7% $260 $1,194

Property, Plant and Equipment, Net

1,489

1,551

1,512

-4%

3%

$(62)

$39

Goodwill 5,574 4,392 4,259 27% 3% $1,182 $133

Other Assets 986 807 759 22% 6% $179 $48

Total Assets $25,189 $24,260 $22,846 4% 6% $929 $1,414

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Accounts payable $12,295 $11,726 $11,332 5% 3% $569 $394 Current Portion of long-term obligations and other short-term

borrowings

168

476

327

-65%

46%

$(308)

$149

Other accrued liabilities 2,127 1,972 1,711 8% 15% $155 $261

Total Current Liabilities 14,590 14,174 13,370 3% 6% $416 $804

Long-Term-term obligations, less current portion

3,686

2,418

2,175

52%

11%

$1,268

$243

Deferred income taxes and other liabilities 1,568 1,424 1,452 10% -2% $144 $(28)

Stockholders’ Equity

Preferred Shares, without Par Value

Authorized-500 thousand shares, Issued-none

Common Shares, without par value: Authorized-755 million shares, Issued-364 million shares at June

30, 2013 and 2012

2,953

2,930

2,898

1%

1%

$23

$32

Retained Earnings 4,038 4,093 3,331 -1% 23% $(55) $762 Common Shares in treasury at cost: 25 million shares and 21 million shares at June 30, 2013, and 2012 respectively

(1,084)

(816)

(457)

33%

79%

$(268)

$(359)

Accumulated other comprehensive income 68 37 77 84% -52% $31.00 $(40.00)

Total Stockholders’ Equity 5,975 6,244 5,849 -4% 7% $(269) $395

Total Liabilities and Stockholders’ Equity $25,819 $24,260 $22,846 6% 6% $1,559 $1,414

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Comparative Income Statements

McKesson CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

Change %

Change %

Change $

Change $

2013

2012

2011 2013- 2012

2012- 2011

2013- 2012

2012- 2011

Revenues $122,455 $122,734 $112,084 -0.23% 9.50% $(279) $10,650

Cost of Sales (115,471) (116,167) (106,114) -0.60% 9.47%

$696 $(10,053)

Gross Profit $6,984 $6,567 $5,970 6.35% 10.00% $417 $597

Operating Expenses Selling (805) (764) (767) 5.37% -0.39% $(41) $3

Distribution (1,042) (997) (920) 4.51% 8.37% $(45) $(77)

Research and development (480) (440) (407) 9.09% 8.11% $(40) $(33)

Administrative (2,351) (2,068) (1,842) 13.68% 12.27% $(283) $(226)

Litigation Charges (Credit) (72) (149) (213) -51.68% -30.05% $77 $64

Gain on business combination 81 - - - -

$81 -

Total Operating Expenses (4,669) (4,418) (4,149) 5.68% 6.48%

$(251) $(269)

Operating Income 2,315 2,149 1,821 7.72% 18.01% $166 $328

Other Income, Net 35 21 36 66.67% -41.67% $14 $(15)

Impairment of an Equity Investment (191) - - - - $(191) -

Interest Expense (240) (251) (222) -4.38% 13.06% $11 $(29) Income from Continuing Operations Before

Income Taxes 1,919 1,919 1,635 0.00% 17.37%

-

$284

Income Tax Expense (581) (516) (505) 12.60% 2.18% $(65) $(11)

Income from Continuing Operations 1,338 1,403 1,130 -4.63% 24.16% $(65) $273

Discounted Operation - gain on sale, net of tax - - 72 - - -

$(72)

Net Income $1,338 $1,403 $1,202 -4.63% 16.72% $(65) $201

Earnings Per Common Share

Diluted Continuing Operations 5.59 5.59 4.29 0.00% 30.30% - $1.30

Discontinued Operation - gain on sale - - 0.28 - - -

$(0.28)

Total $5.59 $5.59 $4.57 0.00% 22.32%

- $1.02

Basic

Continuing Operations 5.71 5.70 4.37 0.18% 30.43% $0.01 $1.33

Discontinued Operation - gain on sale - - 0.28 - - -

$(0.28)

Total 5.71 5.70 4.65 0.18% 22.58% $0.01 $1.05

Weighted Average Diluted Common Shares

Diluted 239 251 263 -4.78% -4.56% $(12.00) $(12.00)

Basic 235 246 258 -4.47% -4.65% $(11.00) $(12.00)

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Comparative Income Statements

CARDINAL HEALTH CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

Change %

Change %

Change $ Change $

2013

2012

2011 2013- 2012

2012- 2011

2013- 2012

2012- 2011

Revenues $101,093 $107,552 $102,644 -6.01% 4.78%

$(6,459) $4,908

Cost of product sold 96,172 103,011 98,482 -6.64% 4.60% $(6,839) $4,529

Gross Profit 4,921 4,541 4,169 8.37% 8.92% $380 $372

Operating Expenses

Distribution, selling, general, and administrative expenses

2,875 2,677 2,528 7.40% 5.89%

$198

$149

Restructuring and employee severance 71 21 15 238.10% 40.00% $50 $6

Acquisition-related costs 158 33 90 378.79% -63.33% $125 $(57)

Impairments and loss on disposal of assets 859 21 9 3990.48% 133.33% $838 $12

Litigation Charges (recoveries)/changes, net (38) (3) 6 1166.67% -150.00% $(35) $(9)

Total Operating Expenses 3,925 2,749 2,648 42.78% 3.81% $1,176 $101

Operating Income 996 1,792 1,514 -44.42% 18.36% $(796) $278

Other income, net (15) (1) (22) 1400.00% -95.45%

$(14)

$21

Interest expense, net 123 95 93 29.47% 2.15% $28 $2

Gain on sale of investment in CareFusion - - (75) - -100.00% - $75 Earnings before income taxes and discontinued

operations 888 1,698 1,518 -47.70% 11.86%

$(810)

$180

Provisions for income taxes 553 628 552 -11.94% 13.77%

$(75)

$76

Earnings from continuing operation 335 1,070 966 -68.69% 10.77% $(735) $104

Loss from discontinued operations, net of tax

(1)

(1)

(7)

-

-

-

$(72)

Net Income $334 $1,069 $959 -68.76% 11.47% $(735) $110

Basic earnings/(loss) per common share:

Continuing operations $0.98 $3.10 $2.77 -68.39% 11.91% $(2.12) $0.33

Discontinued operations - - (0.02) - -100.00% - $0.02

Net basic earnings per common share $0.98 $3.10 $2.75 -68.39% 0.00% (2.12) $0.35

Diluted earnings/(loss) per common share:

Continuing operations $0.97 $3.06 $2.74

Discontinued operations - - (0.02) - -100.00% - $0.02

Net diluted earnings per common share $0.97 $3.06 $2.72 - - - $(0.28)

Weighted Average Diluted Common Shares outstanding:

Basic 341 345 349 -1.16% -1.15% $(4.00) $(4.00)

Diluted 344 349 353 -1.43% -1.13% $(5.00) $(4.00)

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Horizontal Analysis

McKesson has purchased various businesses between December 2010 and October 2012. These

acquisitions have influenced Balance Sheet and Income Statement financial data for fiscal years 2011,

2012 and 2013.

In December of 2010, McKesson purchased US Oncology to expand to cancer care and medicines.

This acquisition strengthened McKesson’s position in cancer drug distribution. The following year,

McKesson bought System C Healthcare and Portico Systems. System C Healthcare was a strategic move

to expand its presence in the U.K., while the Portico Systems purchase was a response to a 2010 health

reform law that required the healthcare industry to transform its financial management and payment

systems. In January of 2012, McKesson acquired another two companies, Drug Trading Co. and Medicine

Shoppe Canada, Inc. With these purchases, McKesson expanded its business in Canada. PeerVue, Inc. was

also purchased in 2012. It helped broaden McKesson’s portfolio of enterprise imaging and information

management systems. Finally, in October of 2012, McKesson bought PSS World Medical with the goal of

securing annual cost savings of $100 million by the fourth year after the purchase.

Cardinal Health also acquired businesses that influenced financial data on their Balance Sheet and

Income Statement. The most significant purchase was in March of 2013, when it acquired AssuraMed for

$2.07 billion to enter into the home-health supply market. Cardinal Health funded the purchase through

the issuance of notes and cash on hand. In July of 2010, Cardinal Health also purchased P4 Healthcare.

The company is also going through a huge restructuring of their Nuclear Pharmacy Services division and

a planned restructuring of their Medical segment.

Balance Sheet

Assets

From 2011 to 2012, McKesson’s Total Assets increased by 7%, or $1,693 million. This was slightly

higher than the 5% increase ($2,207 million) it experienced from 2012 to 2013. Significant offsets were

reported within McKesson’s various asset accounts. Most notably Cash and cash equivalents, Property,

Plant and Equipment, Goodwill and Intangible assets.

Cardinal Health experienced a 6% increase in Total Assets from 2011 to 2012 and a 4% increase

from 2012 to 2013. The lower percentage change in 2013 was partial due to decreases in Cash & Cash

Equivalents. It also realized increases in Goodwill and Other Assets.

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Cash & Cash Equivalents

From fiscal years 2012 to

2013, McKesson experienced a 22%

decrease in Cash & Cash Equivalents.

This is larger than its 13% decrease

from fiscal years 2011 to 2012. To

determine why the big difference,

we must look at the Statement of

Cash Flows.

In 2013, 2012 and 2011

McKesson showed a net decrease in cash and cash equivalents of $693 million, $463 million and $119

million, respectively. The decreases in Cash and cash equivalents were created by increases in Net cash

used by investing activities, specifically Acquisitions, net of cash and cash equivalents acquired.

Acquisitions, net of cash and cash equivalents acquired grew from $292 million in 2011 to $1,156 million

in 2012 to $1,873 million in 2013. This increase trend reflects McKesson’s strategy of purchasing

businesses to expand into other markets and regions.

Cardinal Health’s Cash and Cash Equivalents balance was $1,901 million in 2013 and $2,274

million in 2012. The decrease in 2013 was due to acquisitions, share repurchases and dividends paid.

Property, Plant and Equipment

McKesson experienced a 27% increase

in Property, Plant and Equipment from 2012 to

2013. This is a huge difference when

compared to the increase of 5% from 2011 to

2012. This difference is partially due to the

fact that on April 6, 2012, McKesson purchased

the remaining 50% ownership interest in their

corporate headquarters building located in San Francisco, California for $90 million, which was funded

from cash on hand. In addition, it acquired further property, plant and equipment when it purchased PSS

World Medical.

9

Goodwill and Intangible Assets

McKesson has $6,405 million and $5,032 million of goodwill in 2013 and 2012, as well as $2,270

million and $1,750 million of intangible assets in 2013 and 2012. From 2011 to 2012, McKesson realized

a 15% increase in Goodwill after purchasing Portico Systems, Drug Trading Co. and Medicine Shoppe

Canada. It doesn’t, however, compare to its 27% increase from fiscal years 2012 to 2013 after purchasing

PSS World Medical. Regarding Intangible Assets, McKesson experienced a 30% increase from 2012 to

2013. From 2011 to 2012, however, they only experienced a 20% increase. These changes are also as a

result of acquiring the businesses.

Cardinal Health experienced a 3% increase in Goodwill during 2011 and 2012. From 2012 to

2013 this increase grew to 27%. Regarding Other Assets, Cardinal Health experienced a growth of 22%

from 2012 to 2013. This was a much larger growth than the previous years 2011 to 2012, which was

only 6%. The increase in Goodwill and Other Assets was due to Cardinal Health’s purchase of AssuraMed.

Liabilities and Stockholders Equity

From 2011 to 2012, McKesson’s Total Liabilities and Stockholders Equity increased by 7%, or

$1,693 million. This was slightly higher than the 5% increase ($2,207 million) it experienced from 2012

to 2013. Within its various Liability and Stockholders Equity accounts, McKesson experienced significant

changes, specifically in Deferred Tax Liabilities, Current Portion of Long-Term Debt, Long-Term Debt,

Other Noncurrent Liabilities, and Accumulated Other Comprehensive Income (Loss).

Deferred Tax Liability

In 2012, McKesson sold their 49% equity interest in Nadro, S.A. de C.V., a wholesale

pharmaceutical distribution business in Mexico. The company would have had to pay the taxes on the

income received from the sale under its regular financial accounting but may have elected to defer

payment to the future by way of the tax code. This may explain the 49% increase in Deferred Tax

Liability from 2012 to 2013.

Current Portion of Long-Term Debt

From 2011 to 2012, McKesson realized a 22% increase in Current Portion of Long-Term Debt.

From 2012 to 2013, it experienced a 31% decrease. McKesson increased its Current Portion of Long-

10

Term Debt when it acquired businesses in 2011 and 2012. The decrease in 2012 to 2013 is due to

McKesson paying off the redemption of notes due in February of 2013.

Long-Term Debt and Other Noncurrent Liabilities

From 2012 to 2013, McKesson experienced a 47% increase in Long-Term Debt and a 22%

increase in Other Noncurrent Liabilities. These increases are likely due to the purchase of PSS World

Medical, which it financed through cash at hand and the issuance of long-term debt. Furthermore, the

deal to purchase PSS World Medical included the assumption of a $480 million debt.

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income decreased by 1400% from 2012 to 2013 and

decreased by 94% from 2011 to 2012 for McKesson. These changes are as a result of losses yet to be

realized from a variety of sources.

Income Statement

Net Income

Net Income for McKesson increased by 17% from 2011 to 2012. From 2012 to 2013, it decreased

by 5%. Net Income for 2013 was offset by a large decrease in Litigation Charges and a large increase in

Other Income.

From 2011 to 2012, Cardinal Health’s Net Income increased by 11%. Unfortunately, from 2012 to

2013, it decreased by 69%. The 69% decrease was caused by huge increases in Restructuring and

Employee Severance, Acquisition-related Costs, and Litigation Charges.

Litigation Charges

From 2012 to 2013, McKesson experienced a 52% decrease in Litigation Charges. This is larger

than the 30% decrease from 2011 to 2012. These decreases were partially due to lower Average

Wholesale Price (AWP) litigation charges. AWP litigation charges were $72 million, $149 million and

$213 million in 2013, 2012 and 2011. As the AWP litigation charges decreased so did Litigation Charges

for McKesson.

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Litigation Charges for Cardinal Health decreased from 2011 to 2012 by 150%. From 2012 to 2013,

they increased by a whopping 1,167%. During fiscal year 2013, Cardinal Health experienced a $38

million increase in income resulting from settlements of class action antitrust claims.

Other Income

For McKesson, Other Income fluctuated from year to year. In 2011 it was, $36 million. It

decreased from there to $21 million in 2012 but then went back up to $35 million in 2013. The increase

in 2013 was due to an impairment of an asset in 2012. Other Income decreased in 2012 compared to

2011 because McKesson in 2011 received a $16 million reimbursement of post-acquisition interest

expense by former shareholders of US Oncology.

Current Portion of Long-Term Obligations and Other Short-Term Borrowings

Here, Cardinal Health experienced a 65% decrease from 2012 to 2013. From 2011 to 2012, it was

a 46% increase. In February of 2013, Cardinal Healthy used cash on hand to repay $300 million of notes

that were due on June 15, 2013.

Long-Term Obligations, Less Current Portion

From 2011 to 2012, there was an 11% increase in Cardinal Health’s Long-Term Obligations, Less

Current Portion. This is much smaller than the 52% increase they experienced from 2012 to 2013. The

increase is most likely due to the fact that Cardinal Health purchased AssuraMed with cash on hand and

by acquiring long-term debt.

Restructuring and Employee Severance

Regarding Restructuring and Employee Severance, Cardinal Health experienced huge increases:

40% from 2011 to 2012 and 238% from 2012 to 2013. The large increase is partly due to a

recognized$11 million of employee-related costs related to a restructuring of their Nuclear Pharmacy

Services division. Also, in January of 2013, Cardinal Health announced a restructuring plan within their

Medical segment. The estimated total cost of the restructuring plan is approximately $79 million.

Acquisition-Related Costs

Cardinal Health experienced large changes in Acquisition-Related Costs. From 2011 to 2012, they

decreased by 63% and from 2012 to 2013 they increased by 379%. The increase in 2013 was partly due

12

to the acquisition of AssuraMed. Acquisition-Related Costs for fiscal year 2012 included income

recognized upon adjustment of the contingent consideration obligation incurred in connection with the

P4 Healthcare acquisition.

Impairments and Loss on Disposal of Assets

Cardinal Health experienced large increases in Impairments and Loss on Disposal of Assets. 2011

to 2012 showed an increase of 133%. This doesn’t compare to the staggering 3,990% increase from

2012 to 2013. In 2013, Cardinal Health recognized an $829 million goodwill impairment charge.

Conclusion

Both McKesson and Cardinal Health have made strategic choices to expand into markets and

regions by acquiring different businesses. McKesson has done a better job of acquiring more of the

market by expanding its presence in the U.K. and Canada. Both companies purchased their new

businesses by cash on hand and by taking on long-term debt. As a result, both experienced decreases in

Cash and Cash Equivalents, and increases in Goodwill and Intangible Assets. They both also recognized

increases in acquisition related accounts and long-term debt. These offsets made it so that there was

little change to Total Assets of both companies.

Net Income for both companies was negatively affected, specifically in 2013. However, Cardinal

Health experienced the larger decrease from 2012 to 2013, 69%, whereas McKesson only experienced a

5% decrease in the same period. It seems like McKesson has done a better job at not allowing business

acquisitions to negatively affect their Net Income. Plus, Cardinal Health’s decision to go through a

restructuring during this fiscal year has negatively affected its Net Income.

13

Common-Size Comparative Balance Sheets

McKesson CORPORATION CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

Change %

Change %

Change %

2013 2012 2011 2013 2012 2011

ASSETS

Current Assets Cash and cash equivalents $2,456 $3,149 $3,612 7.06% 9.52% 11.69%

Receivables, net 9,975 9,977 9,187 28.68% 30.15% 29.74%

Inventories, net 10,335 10,073 9,225 29.71% 30.44% 29.87%

Prepaid expenses and other 404 404 333 1.16% 1.22% 1.08%

Total Current Assets 23,170 23,603 22,357 66.61% 71.32% 72.39%

Property, Plant and Equipment, Net 1,321 1,043 991 3.80% 3.15% 3.21%

Capitalized Software Held for Sale, Net 126 144 152 0.36% 0.44% 0.49%

Goodwill 6,405 5,032 4,364 18.41% 15.21% 14.13%

Intangible Assets, Net 2,270 1,750 1,456 6.53% 5.29% 4.71%

Other Assets 1,620 1,665 1,566 4.66% 5.03% 5.07%

Total Assets $34,786 $33,093 $30,886 100.00% 100.00% 100.00%

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Drafts and accounts payable $16,108 $16,114 $14,090 75.42% 74.31% 75.24%

Short-term borrowings - 400 - - 1.84% -

Deferred revenue 1,359 1,423 1,321 6.36% 6.56% 7.05%

Deferred tax liabilities 1,626 1,092 1,037 7.61% 5.04% 5.54%

Current portion of long-term debt 352 508 417 1.65% 2.34% 2.23%

Other accrued liabilities 1,912 2,149 1,861 8.95% 9.91% 9.94%

Total Current Liabilities 21,357 21,686 18,726 61.40% 65.53% 60.63%

Long-Term Debt

4,521

3,072

3,587

13.00%

9.28%

11.61%

Other Noncurrent Liabilities 1,838 1,504 1,353 5.28% 4.54% 4.38%

Other Commitments and Contingent Liabilities (Note 22) Stockholders’ Equity

Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding

-

-

-

-

-

- Common stock, $0.01 par value, 800 shares authorized at March 31, 2013

and 2012,

376 and 373 shares issued at March 31, 2013 and 2012 4 4 4 0.01% 0.01% 0.01%

Additional Paid-in Capital 6,078 5,571 5,339 17.47% 16.83% 17.29%

Retained Earnings 10,402 9,451 8,250 29.90% 28.56% 26.71%

Accumulated Other Comprehensive Income (Loss) (65) 5 87 -0.92% 0.07% 0.28%

Other 14 4 10 0.04% 0.01% 0.14%

Treasury Shares, at Cost, 149 and 138 at March 31, 2013 and 2012 (9,363) (8,204) (6,470) -26.92% -24.79% -20.95%

Total Stockholders’ Equity 7,070 6,831 7,220 20.32% 20.64% 23.38%

Total Liabilities and Stockholders’ Equity $34,786 $33,093 $30,886 100.00% 100.00% 100.00%

14

Common-Size Comparative Balance Sheets

CARDINAL HEALTH CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

Change %

Change %

Change %

2013 2012 2011 2013 2012 2011

ASSETS

Current Assets

Cash and cash equivalents $1,901 $2,274 $1,929 7.36% 9.37% 8.44%

Trade Receivables, net 6,304 6,355 6,156 24.42% 26.20% 26.95%

Inventories, net 8,373 7,864 7,334 32.43% 32.42% 32.10%

Prepaid expenses and other 1,192 1,017 897 4.62% 4.19% 3.93%

Total Current Assets 17,770 17,510 16,316 68.83% 72.18% 71.42%

Property, Plant and Equipment, Net

1,489

1,551

1,512

5.77%

6.39%

6.62%

Goodwill and other intangibles, net 5,574 4,392 4,259 21.59% 18.10% 18.64%

Other Assets 986 807 759 3.82% 3.33% 3.32%

Total Assets $25,819 $24,260 $22,846 100.00% 100.00% 100.00%

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Accounts payable $12,295 $11,726 $11,332 47.62% 48.33% 49.60% Current portion of long-term debt obligations and other short-term

borrowings

168

4,756

327

1.15%

33.55%

1.43%

Other accrued liabilities 2,127 1,972 1,711 8.24% 8.13% 12.80%

Total Current Liabilities 14,590 14,174 13,370 56.51% 58.43% 58.52%

Long-term obligations, less current portion

3,886

2,418

2,175

15.05%

9.97%

9.52%

Deferred income taxes and other liabilities 1,568 1,424 1,452 6.07% 5.87% 6.36%

Stockholders’ Equity

Preferred shares, without par value: - - - - - -

Authorized-500 thousand shares, Issued-none

Common Shares, without par value: Authorized-755 million shares, Issued-364 million shares at June 30, 2013

ad 2012

2,953

2,930

2,898

11.44%

12.08%

12.68%

Retained Earnings 4,038 4,093 3,331 15.64% 16.87% 14.58% Common shares in treasury, at cost 25 million shares and 21 million shares at June 30, 2013 and 2012, respectively

(1,084)

(816)

(457)

-4.20%

-3.36%

-2.00%

Accumulated other comprehensive income 68 37 77 0.26% 0.15% 0.34%

Total Stockholders’ Equity 5,975 6,244 5,849 23.14% 25.74% 25.60%

Total Liabilities and Stockholders’ Equity $25,819 $24,260 $22,846 100.00% 100.00% 100.00%

15

Common-Size Comparative Income Statements

McKesson CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

Change %

Change %

Change %

2013 2012 2011 2013 2012 2011

Revenues $122,455 $122,734 $112,084 100.00% 100.00% 100.00%

Cost of Sales $(115,471) $(116,167) $(106,114) -94.30% -94.65% -94.67%

Gross Profit $6,984 $6,567 $5,970 5.70% 5.35% 5.33%

Operating Expenses

Selling (805) (764) (767) -0.66% -0.62% -0.68%

Distribution (1,042) (997) (920) -0.85% -0.81% -0.82%

Research and development (480) (440) (407) -0.39% -0.36% -0.36%

Administrative (2,351) 2,068 1,842 -1.92% 1.68% 1.64%

Litigation Charges (Credit) (72) (149) (213) -0.06% -0.12% -0.19%

Gain on business combination 81 - - 0.07% - -

Total Operating Expenses (4,669) (4,418) (4,149) -3.81% -3.60%

-3.70%

Operating Income 2,315 2,149 1,821 1.89% 1.75% 1.62%

Other Income, Net 35 21 36 0.03% 0.02% 0.03%

Impairment of an Equity Investment (191) - - -0.16% - -

Interest Expense (240) (251) (222) -0.20% -0.20% -0.20% Income from Continuing Operations Before Income

Taxes 1,919 1,919 1,635 1.57% 1.56%

1.46%

Income Tax Expense (581) (516) (505) -0.47% -0.42% -0.45%

Income from Continuing Operations 1,338 1,403 1,130 1.09% 1.14% 1.01%

Discounted Operation - gain on sale, net of tax - - 72 - -

0.06%

Net Income $1,338 $1,403 $1,202 1.09% 1.14% 1.07%

Earnings Per Common Share

Diluted

Continuing Operations 5.59 5.59 4.29

Discontinued Operation - gain on sale - - 0.28

Total $5.59 $5.59 $4.57

Basic

Continuing Operations 5.71 5.70 4.37

Discontinued Operation - gain on sale - - 0.28

Total 5.71 5.70 4.65

Weighted Average Diluted Common Shares

Diluted 239 251 263

Basic 235 246 258

16

Common-Size Comparative Income Statements

CARDINAL HEALTH CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

Change %

Change %

Change %

2013 2012 2011 2013 2012 2011

Revenues $101,093 $107,552 $102,644 100.00% 100.00% 100.00%

Cost of Products Sold 96,172 103,011 98,482 95.13% 95.78% 95.95%

Gross Profit 4,921 4,541 4,162 4.87% 4.22% 4.05%

Operating Expenses

Distribution, selling, general and administrative expenses

2,875 2,677 2,528 2.84% 2.49%

2.46%

Restructuring and employee severance 71 21 15 0.07% 0.02% 0.01%

Acquisition-related costs 158 33 90 0.16% 0.03% 0.09%

Impairments and loss on disposal of assets 859 21 9 0.85% 0.02% 0.01%

Litigation (recoveries)/charges, net (38) (3) 6 -0.04% 0.00% 0.01%

Total Operating Expenses 3,925 2,749 2,648 3.88% 2.56%

2.58%

Operating Income 996 1,792 1,514 0.99% 1.67% 1.48%

Other Income, Net

(15)

(1)

(22)

-0.01%

0.00%

-0.02%

Interest Expense 123 95 93 0.12% 0.09% 0.09%

Gain on sale of investment in CareFusion - - (75) 0.00% 0.00% -0.07% Earnings before income taxes and discontinued

operations 888 1,698 1,518 0.88% 1.58%

1.48%

Provisions for income taxes

553

628

552

0.55%

0.58%

0.54%

Earnings from continuing operations 335 1,070 966 0.33% 0.99% 0.94%

Loss from discontinued operations, net of tax

(1)

(1)

(7)

0.00%

0.00%

0.01%

Net Income $334 $1,069 $959 0.33% 0.99% 0.93%

Basic earnings/(loss) per common share:

Continuing operations $0.98 $3.10 $2.77

Discontinued operations - - (0.02)

Net basic earnings per common share $0.98 $3.10 $2.75

Diluted earnings/(loss) per common share:

Continuing operations $0.97 $3.06 $2.74

Discontinued operations - - (0.02)

Net diluted earnings per common share $0.97 $3.06 $2.72

Weighted Average Diluted Common Shares

Diluted 341 345 349 Basic 344 349 353

17

Vertical Analysis Income Statement

Cost of Goods Sold & Operating Expenses for McKesson

Looking at McKesson’s Income Statement, Cost of Goods Sold makes up a major portion of

expenses for the company; its expenses decreased by 0.35% in 2013 from 94.65% in 2012 to 94.30% in

2013. The decrease was associated with the acquisition of cheaper products during the year as the

company switched its purchasing plan from brand-name product to generic product. This switch had a

positive impact on McKesson as its Gross Profit for 2013 grew to 5.70% from 5.35% in 2012. Another

item that made up a large percent of expenses for McKesson, but not as much as Cost of Goods Sold, were

Operating Expenses in 2012. Operating Expenses were 3.60% of expenses and in 2013 it was 3.81%.

That is an increase of 0.21 percent. The increase was primarily driven by the acquisition of PSS World

Medical of 1.9 billion in 2013, higher employee compensation, higher benefit costs, 40 million charge for

legal disputes, and 36 million charges for goodwill impairment. This was offset in 2013 primarily by

market growth in drug utilization, expanded volume with existing customers, and new customers

obtained in 2012. In the end, McKesson managed to bring down its Cost of Goods Sold by 0.35% but its

Operating Expenses went up 0.21%, therefore diminishing its expense to a decrease of only 0.14%.

Costs of Goods Sold & Operating Expenses for Cardinal Health

If we look at Cardinal Health’s Income Statement, its Cost of Goods Sold constitutes a major

portion of expenses for the company. In 2012, 95.78% of expenses were attributed to Cost of Goods Sold.

However in 2013, expenses went down to 95.13%. That is a decrease of 0.65%. Cardinal Health’s change

from brand to generic drugs impacted its revenue for 2013 as it decreased 6% from 107,552 million in

2012 to 101.093 million in 2013. The decrease in revenue was caused by a decrease in customers who

decided to source their generic products directly from generic drug manufacturers as opposed to

Cardinal Health and the fact that generic drugs generally sell at a lower price. The second item that made

up a large percent of expenses was Operating Expenses. Operating Expenses made up 2.56% in 2012 and

3.88% in 2013. The increase in expenses for 2013 was caused by a 2.07 billion acquisition of privately

held AssuraMed. The acquisition will allow Cardinal Health to offer medical supplies to patients in the

home. In the end, while Cardinal Health managed to bring down its Cost of Goods Sold by 0.65% its

Operating Expenses when up by 1.32% and revenue decrease by 6%.

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Comparison of COGS & Operating Expenses between MCK/ CAH

Both McKesson and Cardinal Health’s major expenses were Cost of Goods Sold and Operating

Expenses but unlike Cardinal Health who managed to bring down its expenses for the year by 0.67%

McKesson only brought down its expenses by 0.14 percent. A switch caused the decrease in expenses by

both companies from brand name pharmaceuticals to generic products. On the other hand, Cardinal

Health saw a larger impact on its sales as they decreased by 6,459 million as opposed to McKesson with a

decrease in sales of 279 million. The ability to absorb the change in products reflects the fact that

McKesson is a more established company than its competitor Cardinal Health, a growing global company.

Balance Sheet Accounts Receivable, Accounts Payable, Long-Term Liabilities & Acquisitions for McKesson

If we move on to the Balance Sheet to see how each company is allocating its resources, we can see

that McKesson Accounts Receivables makes up 28.68% in 2013 as opposed to 30.15% in 2012, which

was caused by a decrease in Canadian pharmaceutical distribution in 2013. Moreover, McKesson

Account Payables make up 75.42% of Liabilities and Stockholder’s Equity, which was primarily driven by

expenses to acquire inventory according to the 10-K footnotes. The asset section reflects the use of

Accounts Payable to purchase inventory as it makes up 29.71% in 2013 and 30.44% in 2012. McKesson’s

Long-term Liabilities increased by 3.72% from 9.28% in 2012 to 13.00% in 2013. The increase was

driven by a 900 million dollar loan borrowed from Bridge Loan that was used for PSS World Medical

acquisition to expand McKesson Medical-Surgical business. If we move on to Total Assets we can see that

that the amount of Total Current Assets decreased from 71.32% to 66.61%, that’s a decrease of 4.71%.

However, Goodwill increased from 15.21% in 2012 to 18.41% 2013 due to the acquisition of PPS World

Medical Inc.

Long-Term Obligations & Acquisitions for Cardinal Health

If we move on to Cardinal Health and examine how the company has allocated its resources to

acquire assets we can see that Cardinal Health’s Long Term Obligations makes 15.64% of Liabilities and

Stockholder’s Equity; Cardinal Health issued 1.3 billion in fixed rate notes to acquired AssureMed in an

attempt to provide medical supplies to homecare providers and patients in the home. As a result of these

acquisitions, Cardinal Health’s Goodwill and Other Intangible Assets makes up 21.59% of Total Assets,

19

which is an increase of 3.49% from 18.10% in 2012 to 21.69% in 2013. Moreover, Cardinal Health’s

receivables like McKesson had similar increases and decreases in accounts.

An in-depth analysis on MCK & CAH Assets

When we contrast both companies’ Balance Sheets to determine how each company has allocated

its resources we can see that McKesson’s Balance Sheet reflects that it is more efficient and has a more

established presence in the market. To begin with, McKesson’s asset section has a high Account

Receivable account of 28.68% for 2013 as opposed to Cardinal Health’s lower Accounts Receivable of

24.42% of Total Assets. In dollar amounts, that’s a difference of 3,031million dollars. The reason why

McKesson has a high Accounts Receivable is because as a better-established company it is able to take on

more risks by offering its competitors a higher credit limit than Cardinal Health. If we look at McKesson

and Cardinal Health’s ratio we can see that the Accounts Receivable turnover for McKesson was 12.28 as

opposed to Cardinal Health’s low turnover of 3.99. The turnover difference for McKesson is three times

higher than Cardinal Health’s in spite of its large Accounts Receivable account that has more reliable

buyers and higher demand. Moreover, the Inventory account also shows McKesson’s efficiency in the

market against its competitor by having a low Total Asset Inventory account of 29.7% in 2013 to meets

its buyers demands as opposed to Cardinal Health’s Inventory account of 32.4%; Cardinal Health’s high

inventory account might seem to be great from the naked eye but if we consider both companies’

turnover ratio we can see that McKesson is the better competitor. The Inventory turnover ratio for

McKesson was 11.32 as opposed to Cardinal Health’s low 2.96 and like the Account Receivable turnover

McKesson has a better advantage. To summarize this section McKesson’s high Accounts Receivables and

low Inventory depicts the demand buyers have for its products.

Goodwill

If we move on to examine both companies Goodwill account we can see that Cardinal Health’s

Balance Sheet reflects its presence in the market as a growing company and McKesson as a more mature

rival. The Goodwill for Cardinal Health increased from 18.21% percent of Total Assets in 2012 to 21.59%

percent in 2013 due to its new acquisition of AssureMed. On the other hand, McKesson’s Goodwill is

lower both years with Total Asset percent of 15.21% in 2012 and 18.41% in 2013.

20

An in-depth analysis on MCK & CAH Liabilities and Equity

McKesson’s liability section, like its asset section, once again shows its overall well performance

and establishment in the market as opposed to Cardinal Health. McKesson’s Account Payable section for

2013 makes up a total of 75.42% of Total Liabilities and Stockholders’ Equity, which has been consistent

since 2011, as opposed to Cardinal Health’s low and consistent 47.62%. This finding leads us to believe

that McKesson as a more well establish company has better trust from its suppliers and creditors to meet

its yearly responsibilities as opposed to Cardinal Health. For example, McKesson’s prepaid expenses for

2013 only make up 1.16% percent of Total Assets as opposed to Cardinal Health’s 4.62%, which signifies

that McKesson has chosen to pay its immediate responsibilities using credit as opposed to cash like

Cardinal Health. This tactic frees McKesson’s cash for investment and the trend can be seen since 2011

starting with the acquisition of US Oncology in 2011, that was acquired with cash on hand, the acquisition

of Drug Trading Company Limited and Medicine Shoppe Canada Inc. (both located in Canada) in 2012 also

acquired with cash on hand, and the acquisition PSS World Medical also funded with cash on hand and

long-term debt in 2013. This tactic is a luxury not many companies are able to take. If we look at Cardinal

Health’s cash sections its trend has been to keep less cash than McKesson to meet its immediate

responsibilities and use less credit. For example, Cardinal Health’s cash total assets trend has been to

keep, starting in 2011, and 8.44%, 9.37%, and 7.36% cash of total assets. On the other hand, McKesson’s

trend has been, starting in 2011, 11.69%, 9.52%, and 7.06% cash of total asset, which concurs with our

assumption that McKesson’s tactic has been to use credit as a leverage to invest more. If we look at

Cardinal Health’s acquisitions in 2012 of P4 Healthcare and Assure Med in 2013 both have been funded

using long-term debt and short-term borrowings. For example, the short-term debt for Cardinal Health in

2012 was 33.55% and 1.15% in 2013 and its long-term debt was 9.97% in 2012 and 2013% in 2013.

In comparison, McKesson’s short-term borrowing was 6.56% in 2012 and 6.36% in 2013 and long-term

debt 9.28% in 2012 and 13.00% in 2013. This data supports our hypothesis that McKesson has been

using short-term credit to free its cash for investments.

An in-depth analysis on MCK & CAH Retained Earnings

Moreover, not only has McKesson outperformed its rival in sales, investment strategies, and

controlling long-term debt, but also in Retained Earnings. McKesson’s Retained Earnings for 2012 and

2013 have been 28.56% and 29.90% of Total Liabilities and Stockholders’ Equity compared to Cardinal

21

Health’s low 16.87% in 2012 and 15.64% in 2013; in 2013 that is a difference of 6,364 million more

Retained Earnings for McKesson than Cardinal Health. Equally important, McKesson’s Treasury Stock

made up in 2013 26.92% percent of Total Liabilities and Stockholders’ Equity compared to Cardinal

Health’s minimal 4.20%. The high amount of Retained Earnings and Treasury Stock that McKesson has

attained shows the stability McKesson has in the market and assertive behavior that its company has

been undervalue in the stock market by purchasing backs stocks. As of November 16, 2013 the stock

market price for McKesson is 160.15 dollars per share and Cardinal Health’s is 64.84 dollars per share

according to Yahoo Finance. In the end, McKesson outperformed Cardinal Health in all areas by double or

triple amounts and allocation of resources. Both McKesson and Cardinal Health are fortune 500

companies according to CNN Money website and should be compared at equal levels even though

Cardinal Health is a younger company that is growing and expanding.

The Affordable Care Act and Pharmaceutical Companies

Lastly, we will describe the reasons why both pharmaceutical companies had to convert from

name brand product to generic products. As we know the Affordable Care Act will enter into action in

2014. The Affordable Care Act will impact pharmaceutical companies by requiring them to offer rebates

to Medicaid for prescription drugs, which will cost the industry about 20 billion over the next ten years

according to Daily Finance. The Affordable Car Act will also require pharmaceutical companies to pay a

new excise tax on name brand products, which has been implemented already over the past two years

and amounted to 5.3 billion in costs according to Daily Finance. Lastly, the Affordable Care Act will

require pharmaceutical companies to offer a 50% discount to senior citizens who reach the level of

spending that is require to get the 50% discount, unfortunately Daily Finance did not comment on what

the level was. If we sum up all the economic activity that both McKesson and Cardinal Health have

performed to avoid name product taxes, McKesson has been able to absorb this impact at a much higher

level than Cardinal Health. McKesson’s sales have only decrease 279 million compared to Cardinal

Health’s decrease of 6,459 million. This is due to decreases in inventory sale prices as generic drugs sale

at a lower price and customers opt to buy directly from manufactures. The bottom line of McKesson was

also affected less, as its net earnings only decrease 4.63% compared to Cardinal Health’s bottom line that

decreased 68.76%.

22

Ratio Analysis

Ratio Analysis consists of determining three aspects of a business from the information in their financial

statements; liquidity, solvency and profitability. The liquidity ratios of a business demonstrate its ability

to cover the cost it incurs during business operations. The solvency ratios, express a business’s long-term

fiscal health. The profitability ratios identify operating success from a company’s ability to produce

income from its operation or services rendered. Through these ratios, we will determine which company

between McKesson and Cardinal Health hold the stronger position in the pharmaceutical drug wholesale

industry.

Liquidity Ratios

McKesson

2013 2012

Liquidity Ratios

Current Ratio 1.08 1.09

Acid-Test Ratio 0.58 0.61

Receivable Turnover 12.28 12.81

Inventory Turnover 11.32 12.04

Cardinal Health 2013 2012

Liquidity Ratios

Current Ratio 1.22 1.24

Acid-Test Ratio 0.56 0.61

Receivable Turnover 3.99 3.54

Inventory Turnover 2.96 3.39

Liquidity Analysis

McKesson and Cardinal Health ratios that will be focused upon are receivables turnover and

inventory turnover.

Receivable Turnover Ratio

Pharmaceutical firms intend on maintaining accounts receivable because they are indirectly

extending interest-free loans to their clientele. When it comes to receivable’s turnover, a higher ratio

implies either that the company operates strictly on a cash basis or that its extension of credit and

collection of accounts receivable is efficient.

23

However if the firm contains a lower ratio, it would imply that McKesson or Cardinal Health;

should re-assess its credit policies, in order to ensure collection of the imparted credit that is not earning

interest for them. For McKesson, it has been able to consistently collect at a rate of 12 times a year. From

2012 to 2013, it has rates of turnover of 12.81 and 12.28. This ratio is running a higher rate than its

competitor Cardinal Health. Cardinal Health (CAH) has a receivable turnover rate of 3.54 for 2012 and a

rate of 3.99 in 2013.

McKesson having a higher ratio would lead me to believe that the reasoning behind this is their

ability to provide interest-free loans to their clientele basis. Also, the cash and cash equivalents is much

higher in McKesson than Cardinal Health. The reason I bring this up is perhaps McKesson operates with a

more liquid business model because it has a higher ratio and it is able to do so with an efficient accounts

receivable.

Inventory Turnover

We also analyzed the Inventory Turnover for both McKesson and Cardinal Health. A low Inventory

turnover implies that the firm had poor sales and, therefore, excess inventory. A high ratio implies that the

firm either had strong sales or inefficient purchasing of goods. When the inventory levels become high

within a firm it is unhealthy because their rate of return of an investment is zero.

Cardinal Health’s inventory ratio had a minimal loss comparatively from 2012 to 2013. The rate

for 2012 was 3.39 and the rate for 2013 came to 2.96. Even though the rate went down from the previous

year, the difference was small enough to say that Cardinal Health was able to maintain a reliable turnover

of their inventory.

Recievable Turnover

McKesson Cardinal Health

24

McKesson inventory ratio was higher than Cardinal Health’s. All though from 2012 to 2013 there

was a slight drop in its rate of turnover the difference is minimal. In 2012 the company was able to

turnover at a rate of 12.04 times while in 2013 was at a rate of 11.32. The high ratio of Inventory

Turnover is due its distribution clientele being larger and their efficient marketing creates an easier

method to distribute their goods during the fiscal year than Cardinal Health.

We can also make the conclusion that based on these rates McKesson is able to turnover its inventory

at a faster rate but also collect on its receivables more often than Cardinal Health.

Solvency Ratios

McKesson

2013 2012

Solvency Ratios

Debt to Total Assets Ratio 61% 66%

Times Interest Earned 3.3 3.72

Cardinal Health

2013 2012

Solvency Ratios

Debt to Total Assets Ratio 77% 74%

Times Interest Earned 7.2 17.87

Solvency Analysis

After evaluating McKesson and Cardinal Health’s debt to total assets ratio and times interest earned ratio,

we conclude that McKesson is the more solvent company. McKesson has a more favorable debt to total

assets ratio and Cardinal Health has a more favorable times interest earned ratio.

Inventory Turnover

McKesson Cardinal Health

25

Debt to Total Assets

Debt to total assets ratio measures the percentage of total assets that is provided by creditors. In

2012, McKesson’s debt to total assets ratio was 66%. This was reduced to 61% in 2013. Cardinal Health

had a much higher debt to total assets ratio in 2012 and 2013, 74% and 77%, respectively. McKesson

and Cardinal Health managed to lower their debt to total assets ratio from 2012 to 2013.

For both McKesson and Cardinal Health, most of their assets are financed through debt, indicating

greater risk with business operations. It is not surprising to see high numbers due to the fact that both

companies took on more debt to purchase businesses during these fiscal periods. Both companies could

be in danger if creditors start to demand repayment of the debt. However, because McKesson is the

larger, more stable and established company, it can take on more debt without adding too much risk for

investors. Furthermore, McKesson’s cash flow is more predictable and stable which makes it easier and

cheaper for it to borrow money. Cardinal Health must be very careful not to allow its debt to total assets

ratio to get too high because it may find it difficult to obtain loans for future projects or acquisitions.

Although both companies have high debt to total assets ratios, McKesson is in a better position with a

lower ratio.

Times Interest Earned

Times interest earned ratio measures a company’s ability to meet interest payments as they come

due. For both 2012 and 2013, McKesson had a smaller times interest earned ratio (3.72 and 3.3,

respectively) compared to Cardinal Health. Cardinal Health was able to lower there times interest earned

ratio from 17.87% to 7.2% from 2012 to 2013.

McKesson’s lower times interest earned ratio means that it has fewer earnings available to meet

interest payments. This also means that it is in a more vulnerable position if interest rates go up.

Debt to Total Assets

McKesson Cardinal Health

26

Cardinal Health has the greater ability to repay interest and debt.

Profitability Ratios

McKesson

2013 2012

Profitability Ratios

Payout Ratio 0.16 0.15

Profit Margin 0.13% 0.14%

Return on Assets 0.04 0.04

Asset Turnover 3.61 3.84

Return on Common Stockholder's Equity 0.19 0.2

Earnings Per Share 5.59 5.59

Price-Earnings Ratio 25.43 25.43

Cardinal Health

2013 2012

Profitability Ratio

Payout Ratio 1.12 0.29

Profit Margin 0.33% 0.99%

Return on Assets 0.0033 0.011

Asset Turnover 1.01 1.14

Return on Common Stockholder's Equity 0.01 0.08

Earnings Per Share 0.98 3.1

Price-Earning Ratio 51.98 8.84

Profitability Analysis

The Profitability Ratios measure the income or operating success of a company. Creditors and

investors focus on these ratios when deciding the potential for growth in a company. The ratios that will

be highlighted are the Profit Margin and Return on Assets. Profit Margin is read as the percentage of each

dollar of sales that results in net income. Return on Assets is a measure of overall profitability for the

company.

Profit Margin

The reason why we chose to discuss Profit Margin is because when we look at the earnings of a

company often doesn't the true valuation of its profit is not explained. Now, increased earnings are good for

McKesson or Cardinal Health, but the increase does not mean that the profit margin of either company

27

is improving. For instance, if McKesson or Cardinal Health’s costs have increased at a greater rate than its

sales, than that would lead to a lower profit margin for either company. This would then provide the

indication from a consultant’s aspect of the company that its costs need to be under better control.

McKesson had profit margins of 0.13% for 2013 and 0.14% for 2012. McKesson was able to

maintain a consistent profit margin in line with the previous year. Cardinal Health had a higher profit

margin than McKesson with 0.33% for 2013 and 0.99% for 2012.

Return on Assets

We also analyzed McKesson and Cardinal Health’s profitability using the Return on Assets Ratio

(ROA) or Return on Investment (ROI). ROA gives an idea as to how efficient management is at using its

assets to generate earnings.

ROA tells you what earnings were generated from the firm’s investments. ROA for public

companies can vary substantially and will be highly dependent on the industry. This is why when using

ROA as a comparative measure; it is best to compare it against a company's previous ROA numbers or the

ROA of a similar company.

The Return on Assets of McKesson and Cardinal Health’s figure provides investors with an idea of

how effectively the company is converting the money it has to invest into net income. The higher the

amount is for ROA, the better, because the company is earning more money on less investment.

The Return on Asset ratio for McKesson was respectively 0.4 for 2013 and 0.4 for 2012. McKesson

had a higher ROA, which is great for the company because it demonstrates it’s efficient on obtaining solid

returns on their investments on a consistent basis. From an investment perspective in a comparative

Profit Margin

McKesson

Cardinal Health

28

analysis between McKesson and Cardinal Health, the ROA amount remaining consistent since 2012 to

2013, you would undoubtedly choose to invest within McKesson. When we examine Cardinal Health’s

Return on Assets, we see that they have lower ROA rates of .011 and .0033 for the years 2012 and 2013.

The data shows that Cardinal Health is able to generate a much higher profit margin than McKesson,

with the difference in 2013 being .20% but that McKesson is able to neutralize that advantage by having a

higher return on assets by a rate of 2.

Return on Assets (ROA)

McKesson

Cardinal Health

29

CONCLUSION

Based on our analysis using comparative, common-size, and ratio analysis, we conclude that

McKesson compared to Cardinal Health has a more efficient business model and therefore be a better

choice for investors. Both McKesson and Cardinal Health acquired new businesses during the fiscal years

2012 and 2013. McKesson has done a better job of acquiring more of the market by expanding its

presence in the U.K. and Canada. Net income for both companies was negatively affected. However,

Cardinal Health experienced the larger decrease from 2012 to 2013, 69%, whereas McKesson only

experienced a 5% decrease in the same period. McKesson has been more efficient in acquiring

businesses than Cardinal Health. Both companies would benefit from paying off more of its long-term

debt to decrease their debt to total assets ratio, making it more attractive to investors. Both companies

lost revenue due to their conversion from brand name to generic pharmaceutical drugs. Cardinal Health

lost more revenue than McKesson. Both companies also lost customers. But McKesson was able to

absorb.

30

REFERENCES

1. Accounting Principles, 10th edition, by Weygandt, Kieso and Kimmel. Published by John Wiley & Sons, 2011.

2. McKesson 10K http://www.mckesson.com/

3. Cardinal Health 10K http://www.cardinal.com/

4. McKesson to Purchase US Oncology in Deal Valued at $2.16 Billion http://www.bloomberg.com/news/2010-11-01/mckesson-agrees-to-buy-us-oncology-in-

transaction-valued-at-2-16-billion.html 5. McKesson Plans to Buy PSS World Medical for $1.62 Billion

http://www.bloomberg.com/news/2012-10-25/mckesson-agrees-to-buys-pss-world-for-2-1- billion.html

6. McKesson Absorbs Drug Trading Co. http://www.zacks.com/stock/news/72064/McKesson-Absorbs-Drug-Trading-Co

7. McKesson Buys Portico To Gain ACO Financial Tools http://www.informationweek.com/healthcare/admin-systems/mckesson-buys-portico-to-gain-

aco-financ/231000348 8. MFI Article Used for Introduction of Cardinal and McKesson

http://articles.mercola.com/sites/articles/archive/2008/04/19/shocking-facts-about-the- pharmaceutical-industry.aspx

9. Cardinal Health Completes Acquisition Of AssuraMed, Leading Direct-To-Home Medical Supplies Distributor

http://ir.cardinalhealth.com/releasedetail.cfm?releaseid=749252 10. Is Obamacare a Disaster Waiting to Happen for Big Pharma?

http://www.dailyfinance.com/2013/03/23/is-obamacare-a-disaster-waiting-to-happen-for-big/ 11. Why Cardinal Health?

http://www.cardinal.com/mps/public/!ut/p/c0/04_SB8K8xLLM9MSSzPy8xBz9CP0os3gjA3cDAwtfZ18f V2NTA09HL_dAYz8TQ4NQM_2CbEdFADfU32U!/?WCM_PORTLET=PC_7_20G008MCMLCQD0I6KL912K3 005_WCM&WCM_GLOBAL_CONTEXT=/mps/wcm/connect/us/en/Careers/WhyCardinalHealth/

12. Yahoo! Finance Stock Portfolio - McKesson http://finance.yahoo.com/q?s=MCK&ql=1

13. Yahoo! Finance Stock Portfolio – Cardinal Health http://finance.yahoo.com/q?s=CAH&ql=1

14. Fortune 500 Rankings – Cardinal Health http://money.cnn.com/magazines/fortune/fortune500/2013/snapshots/3052.html

15. Fortune 500 Rankings – McKesson http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/2219.html