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Ascendere Associates LLC January 27, 2010

Steve Castellano steve@ascenderellc.com

McKesson Corporation (NYSE: MCK)


Sector: Healthcare
Industry: Healthcare Distributors
McKesson Corporation has a very strong fundamental profile, is securely situated in an industry that should show considerable long-
term growth, and seems undervalued relative to its historical ROIC, growth prospects and to other Healthcare stocks. As such, it is
probably one of the best Healthcare Sector stocks to own at the current moment.

Conservative assumptions get us to about a 15.5-16x target multiple on NTM EPS of $4.67, or $75 -- which compares to a sell-side
range of $60-80 and average of $70. And it would not be a stretch to justify a target multiple of 19x using academically derived
WACC calculations. On a worst case basis -- one in which EPS could decline 25% next year to $3.66 and gradually resume for flat 5yr
growth on average, we still drive a fundamental fair value of $52, which is not far from the current stock price. In short, it seems that
the fundamentally calculated risk/reward for MCK is at an extremely compelling level.

LTM FY+1 FY+2 LTM 5yr Avg


MCK Description: McKesson Corporation is a
Insider health care drug and supply distribution
Stock Price $59.52 EPS: $ 3.10 EPS: $4.54 EPS: $4.76 ROE: 13.0% ROE: 18.5% Ownership0.2% company supply, and is a provider of
Market Cap / Shares EBITDA/ EBITDA/ # of
various healthcare technology solutions.
($B) $16.0 / 269 P/E: 19.2 P/E: 13.1 P/E: 12.5 Capital 26.2% Capital 19.9% Analysts 12 Roughly 97% of revenue and 82% of
operating profit is generated from its
EBIT EBIT
P/B 2.4 P/CF 7.1 P/CF 6.5 P/CF 6.3 Margin 1.7% Margin 1.4% Debt/Cap: 27.2%
distribution segment and the balance from
its healthcare IT business.
Income Income
Beta 0.82 P/S: 0.1 P/S: 0.1 P/S: 0.1 Margin 0.8% Margin 0.7% Div Yld: 0.8%

McKesson Appears Compelling on a Standalone and Relative Value Basis


McKesson has a very strong fundamental profile in terms of ROIC momentum, various operating efficiency metrics and balance
sheet strength. In addition, McKesson and other drug distributors and pharmacy benefit managers will probably increasingly
play a major and positive role in managing health care costs. Furthermore, the long-term demand for drugs, especially generic
drugs, and other products will increase as the baby boomers age. If we experience a resurgent economy, its health care
technology business will likely contribute to higher earnings growth and multiple expansion.

Even after its impressive 75% run to a recent close of about $59, this stock still has room to appreciate. A market-driven
correction could occur, but for portfolio managers that have an opening in a portfolio, this is probably one of the best
Healthcare Sector stocks to own at the current moment. Our confidence in this stock idea is supported by relative valuation on a
ROIC-adjusted basis and recently reported results that show the story is on track, as well as its strong balance sheet and solid
cash flow

McKesson is currently trading at 11.7x NTM consensus EPS estimate of $4.67 versus a 5yr average of 16x and a high of 22.1x
reached in 2006. Based on an academically derived WACC of 7.5% and conservative assumptions on cash flow growth, the stock
deserves to trade at a multiple of more than 19x. Even assigning a more conservative WACC of 8.5% on 10-year compounded
sales growth of 2% and EPS growth of 5%, together with a the stock deserves to trade at a 15.5-16x multiple -- or about $75 in
one year.

As of the time of this report -- one day after the company's report of fiscal 3Q results, the stock is down 4.5%. This is probably
because EPS for the fiscal year ending in March will contain about $0.55 in positive non-recurring gains and guidance is up only
$0.05-$0.10 for the year. Perhaps implicit in the recent negative stock price action is that this represents poor earnings quality
and a possible stagnation in positive analyst revisions as we head into the next fiscal year. However, the key metrics for earnings
quality -- improving levels of ROIC, working capital management and cash flow growth -- overwhelmingly point to the overall

Steve Castellano Ascendere Associates LLC


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quality of the company. We would also point out that McKesson has historically reported EPS and provided guidance that
includes nonrecurring items -- which provides some justification on valuation on a historical multiple basis.
A key quality that is probably not wholly embedded in the current valuation is McKesson's strong management and penchant for
deploying cash in a way that enhances value, whether through dividends, share repurchase or acquisitions. The company has
$3.4b cash and equivalents and about $2.5b in total debt. From McKesson's track record, it's a believable statement when CEO
John Hammergren states in the latest conference call transcribed by Seeking Alpha:

"...We’ve built a track record and if we choose to deploy any of our capital in acquisitions I
would hope to do so intelligently and in a way that creates more value than a share repurchase
would create for us.

So I think you’d find that we would look to the businesses that we’re in today and we bring
some knowledge. We bring some synergy. It’s unlikely that we will buy companies that our
shareholders could buy and we can’t add any value beyond what you could add to them to hold
them independently."

Typically, acquisitions obfuscate ROIC trends by setting a lower base upon which new cash flow growth can be measured
against. However, despite recent acquisitions (such as the McQueary Bros. Drug Company for $190m in April 2008 and
Oncology Therapeutics Network Corporation for $575m in October 2007 and Per-Se Technologies in November 2006 for $1.6b)
McKesson has a good track record of continuing to grow cash flow and ROIC over these periods. This is in part helped by the
occasional sale of noncore operations and, from an accounting ROIC point of view, making large repurchases of its stock. MCK
seems to manage its cash flows and balance sheet to drive growth in an economically value-added and accounting value-added
manner.

Valuation Summary
We have chosen 3 different scenarios in which to value McKesson. Numerous underlying factors can be summarized in the long-
term earnings growth rates on a 8.5% WACC and 2% terminal growth rate -- 9.3%, 4.8% and essentially 0%.

These various scenarios justify multiples of 19.9x, 16.2x and 12.7x on consensus EPS for the fiscal year ended March. Assigning a
20% probability to flat-long-term growth ($52 near-term target), 70% to 4.8% long-term growth ($75 12-month target) and 10%
to 9.3% growth ($92 12-month target) gets us a price target of $72 -- which is close enough to the $75 price target scenario that
we truly believe in.

Applying a 7.5% WACC (CAPM derived) and 3% terminal growth rate (Fed's estimate for long-term inflation) -- both of which are
very much justifiable -- could drive these price targets $10-20 higher.

Furthermore, whether on multiples alone or multiples adjusted for ROIC and earnings growth, MCK shows significant relative
value. For example, MCK is trading at 6.3x on Enterprise Value to 2010E EBITDA versus 8.5x for a peer average and 12.7x
calendar 2010E EPS versus 15.1x for the group. Even just compared to just the other two major drug distributors, Cardinal
Health (15.2x 2010E PE) and Amerisource Bergen (13.7x), MCK is a bargain.

This relative valuation comparison is further bolstered when comparing ROIC on a loosely defined basis -- for example, the
pharmacy benefit manager Medco trades at 18.7x 2010E EPS with LTM EBITDA/Total Capital at 25.6%. Meanwhile, McKesson
trades at 12.7x EPS with LTM EBITDA/Total Capital at a higher 26.2% figure. Granted, MHS estimated earnings growth is several
times that of MCK, but the relatively high "ROIC" coupled with a low PE and positive earnings growth makes MCK seem severely
undervalued in comparison.

Risks
Ascendere Associates LLC makes no guarantee on the accuracy of the data, estimates, assumptions or forecasts in this report.
Investing in MCK or any equity entails a high degree of risk. This report is not a solicitation to buy or sale any securities.

Steve Castellano Ascendere Associates LLC


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Steve Castellano Ascendere Associates LLC
steve@ascenderellc.com Page 3
About Ascendere Associates LLC
J. Stephen Castellano – Steve founded Ascendere Associates LLC to provide custom equity research and financial consulting
services for institutional clients. Steve has been involved in equity research, strategic studies and financial writing since 1995,
and has more than 10 years of experience in equity research analysis. At PaineWebber, Warburg Dillon Read and Credit
Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and
telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and
also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at
Babson College (2005) and a BA from Oberlin College (1993).

Steve’s career history is highlighted below:

 Ascendere Associates LLC (2009-Present)


 Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)
 Pyramid Research, Contract Consultant, Telecom Services (2002-2003)
 Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)
 Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)
 PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)

Steve Castellano Ascendere Associates LLC


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Summary of Various ROIC and Efficiency Ratios
McKesson Corporation
Healthcare
Healthcare Distributors
MCK

Operating Assets Components FQ FQ-1 FQ-2 FQ-3 FQ-4 FQ-5 FQ-6 FQ-7 FQ-8
Net PP&E 836 814 796 788 777 779 775 747 714
Goodwill 3,560 3,549 3,528 3,484 3,524 3,505 3,345 3,353 3,055
Other Intangibles 846 860 1,357 892 925 921 1,318 878 763
Other Long-term Assets 1,452 1,432 915 1,766 1,813 1,851 1,379 1,703 1,713
Net Working Capital (ex cash) 512 694 1,175 1,140 1,267 1,127 1,078 1,553 811
Cash (estimated requirement) 321 264 210 117 112 118 136 143 251
Total Operating Assets 7,527 7,613 7,981 8,187 8,418 8,301 8,031 8,377 7,307

LTM EBITDA 2,245 2,178 2,085 2,055 1,889


Average Operating Assets 7,945 8,100 8,184 8,263 8,087
Back of Envelope ROIC 28.3% 26.9% 25.5% 24.9% 23.4%

NYSE:MCK
CROC Model 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008
LTM EBITDA 2,500 2,495 2,452 2,402 2,323 2,245 2,178 2,085 2,085 1,933
Avg. Total Capital 9,735 9,550 9,301 9,081 8,817 8,563 8,324 8,152 8,102 8,177
EBITDA/Total Cap 25.7% 26.1% 26.4% 26.4% 26.3% 26.2% 26.2% 25.6% 25.7% 23.6%

LTM EBIT 2,025 2,022 1,980 1,950 1,924 1,848 1,782 1,694 1,655 1,522
Avg. Total Capital 9,735 9,550 9,301 9,081 8,817 8,563 8,324 8,152 8,102 8,177
EBIT / Total Cap 20.8% 21.2% 21.3% 21.5% 21.8% 21.6% 21.4% 20.8% 20.4% 18.6%

Earnings from Continuing Operations 1,245 1,246 1,200 1,164 1,127 850 876 823 847 1,068
Average Total Equity 7,266 7,085 6,853 6,638 6,450 6,339 6,244 6,214 6,276 6,320
Return on Equity 17.1% 17.6% 17.5% 17.5% 17.5% 13.4% 14.0% 13.2% 13.5% 16.9%

NYSE:MCK 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008
NOPLAT 1,878 1,883 1,853 1,834 1,821 1,757 1,475 1,403 1,584 1,936
Economic Charge 700 702 704 707 708 710 741 685 641 810
Economic Profit 1,178 1,182 1,149 1,127 1,112 1,047 734 719 943 1,125
Sequential growth 0% 3% 2% 1% 6% 43% 2% -24% -16% 5%

NOPLAT 1,878 1,883 1,853 1,834 1,821 1,757 1,475 1,403 1,584 1,936
Operating Capital 9,397 9,425 9,455 9,493 9,514 9,538 9,732 9,864 10,295 10,584
ROIC (NOPLAT / Operating Capital) 19.9% 19.9% 19.4% 19.0% 18.6% 17.6% 14.5% 13.7% 15.4% 19.3%
Sequential growth 0% 2% 2% 2% 6% 21% 5% -11% -20% 0%

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 5
Competitor Overview

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McKesson Corporation
NYSE:MCK >---------------------------Calendar Year---------------------------<
EV / EV /
Company Stock Mkt Total Total Enterprise Rev EBITDA EPS EPS PE PE
Ticker Name Price Val Cash Debt Other Val 2009E 2010E 2009E 2010E 2009E 2010E
NYSE:MCK McKesson Corporation $ 59.45 $ 16,797 $ 3,215 $ 2,511 $ - $ 16,093 0.1x 6.3x $ 4.47 $ 4.68 13.3x 12.7x
NYSE:CAH Cardinal Health, Inc. 31.61 11,748 1,585 2,466 - 12,629 0.1x 8.0x $ 2.70 $ 2.08 11.7x 15.2x
NYSE:ABC AmerisourceBergen Corporation 27.20 7,818 1,009 1,178 - 7,987 0.1x 7.5x $ 1.76 $ 1.99 15.5x 13.7x
NasdaqGS:HSIC Henry Schein Inc. 53.99 4,934 321 268 62 4,943 0.8x 8.2x $ 3.15 $ 3.46 17.1x 15.6x
NasdaqGS:PDCO Patterson Companies Inc. 28.99 3,559 170 525 (0) 3,914 1.2x 9.6x $ 1.75 $ 1.91 16.6x 15.2x
NYSE:MHS MedcoHealth Solutions Inc. 62.46 29,559 2,068 4,211 - 31,702 0.5x 10.1x $ 2.81 $ 3.35 22.2x 18.7x
NasdaqGS:ESRX Express Scripts Inc. 85.39 23,406 5,145 4,012 - 22,273 0.9x 9.3x $ 3.45 $ 4.68 24.8x 18.2x
NYSE:OCR Omnicare Inc. 24.95 2,986 324 2,149 - 4,811 0.8x 6.7x $ 2.50 $ 2.65 10.0x 9.4x

EV / EV /
Rev EBITDA EPS EPS PE PE
Calendar Year Comps 2009E 2010E 2009E 2010E 2009E 2010E
NYSE:MCK 0.1x 6.3x $ 4.47 $ 4.68 13.3x 12.7x

Peer Average 0.6x 8.5x 16.8x 15.1x


Peer Min 0.1x 6.7x 10.0x 9.4x
Peer Max 1.2x 10.1x 24.8x 18.7x
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


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Sensitivity Analysis

Steve Castellano Ascendere Associates LLC


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Sensitivity Analysis

McKesson Corporation
Healthcare
Healthcare Distributors
MCK $ 59.48 1/27/2010

>--------------------10-year Historical Range--------------------<


Low Average Median High YTD Scenario +2 Consensus Scenario -2
Adjusted Present Value current $ 84 $ 68 $ 52
Adjusted Present Value +12 months $ 92 $ 75 $ 59

Unlevered equity discount rate 9.2% 9.2% 9.2%


Tax shield discount rate 6.3% 6.3% 6.3%

Levered equity discount rate 9.2% 9.2% 9.2%


After tax cost of debt 4.8% 4.8% 4.8%
WACC 8.5% 8.5% 8.5%

Risk free rate 3.8% 3.8% 3.8%


Market risk premium 7.8% 7.8% 7.8%
Terminal growth rate 2.0% 2.0% 2.0%

Equity beta 0.82 0.82 0.82


Industry asset beta, company levered 0.71 0.71 0.71
Industry asset beta 0.70 0.70 0.70

Next 5yr Sales CAGR 2.8% 2.4% 2.0%


Next 5yr EPS CAGR 9.3% 4.8% -0.6%

ROIC FY2010E 17.4% 17.4% 17.4%


ROIC FY2011E 19.8% 16.2% 12.6%
ROIC FY2015E 22.7% 18.5% 14.4%
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 9
Sensitivity Analysis

McKesson Corporation
Healthcare
Healthcare Distributors
MCK $ 59.48 1/27/2010

>--------------------10-year Historical Range--------------------<


Low Average Median High YTD Scenario +2 Consensus Scenario -2
Adjusted Present Value current $ 84 $ 68 $ 52
Adjusted Present Value +12 months $ 92 $ 75 $ 59

Gross Margin FY2010E 4.2% 5.3% 5.0% 7.7% 4.9% 5.27% 5.27% 5.27%
Gross Margin FY2015E 5.55% 5.35% 5.15%
Gross Margin Expansion 0.27% 0.07% -0.13%

SG&A + R&D Margin FY2010E 3.0% 4.1% 3.5% 7.0% 3.2% 3.46% 3.46% 3.46%
SG&A + R&D Margin FY2015E 3.26% 3.46% 3.66%
SG&A Margin Expansion -0.20% 0.00% 0.20%

EBITDA Margin FY2010E 0.9% 1.6% 1.7% 2.1% 2.1% 2.18% 2.18% 2.18%
EBITDA Margin FY2015E 2.65% 2.25% 1.85%
EBITDA Margin Expansion 0.47% 0.07% -0.33%

EBIT Margin FY2010E 0.3% 1.2% 1.4% 1.7% 1.7% 1.81% 1.81% 1.81%
EBIT Margin FY2015E 2.29% 1.89% 1.49%
EBIT Margin Expansion 0.47% 0.07% -0.33%

Debt FY2010E 991 1,652 1,496 2,511 2,511 2,290 2,290 2,290
Debt FY2015E 599 599 599

Cash FY2010E 262 1,309 1,040 3,215 3,215 3,720 3,720 3,720
Cash FY2015E 9,662 8,020 6,415
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 10
Sensitivity Analysis

McKesson Corporation
Healthcare
Healthcare Distributors
MCK $ 59.48 1/27/2010

>--------------------10-year Historical Range--------------------<


Low Average Median High YTD Scenario +2 Consensus Scenario -2
Adjusted Present Value current $ 84 $ 68 $ 52
Adjusted Present Value +12 months $ 92 $ 75 $ 59

EPS FY2010E (+1 FY) 1.88 2.56 2.22 4.47 4.47 4.62 4.62 4.62
EPS FY2011E (+2 FY) 2.25 2.88 2.55 4.68 4.68 5.89 4.77 3.66
EPS FY2015E 7.21 5.82 4.49

Justified PE FY2010E (+1 FY) 13.3 19.9 16.2 12.7


Justified PE FY2011E (+2 FY) 12.7 15.6 15.7 16.1

Sales FY2010E (+1 FY) 108,427 108,427 108,427


Sales FY2011E (+2 FY) 112,661 112,227 111,794

Justified EV / Sales FY2010E (+1 FY) 0.2 0.2 0.1


Justified EV / Sales FY2011E (+2 FY) 0.2 0.2 0.1

EBITDA FY2010E (+1 FY) 2,364 2,364 2,364


EBITDA FY2011E (+2 FY) 2,897 2,437 1,981

Justified EV / EBITDA FY2010E (+1 FY) 9.5 7.6 5.8


Justified EV / EBITDA FY2011E (+2 FY) 7.8 7.4 6.9
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 11
WACC Assumptions

Steve Castellano Ascendere Associates LLC


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Peer Group Cost of Capital
McKesson CorporationCardinal Health, Inc.AmerisourceBergen Henry
Corporation
Schein Inc. Patterson Companies
MedcoHealth
Inc. Solutions
Express
Inc. Scripts Inc. Omnicare Inc.
Company NYSE:MCK NYSE:CAH NYSE:ABC NasdaqGS:HSIC NasdaqGS:PDCO NYSE:MHS NasdaqGS:ESRX NYSE:OCR Average
Cost of Equity:
Beta S&P (5-yr monthly) 0.82 0.81 0.75 0.72 0.81 0.45 0.89 0.45 0.71
Industry average beta, levered 0.70 0.72 0.70 0.66 0.70 0.70 0.71 0.93 0.73

Current Risk Free Rate (US 10yr bond) 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%
Equity Risk Premium 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8%
Cost of Equity 9.1% 9.3% 9.1% 8.8% 9.1% 9.1% 9.1% 10.9% 9.3%
Cost of Debt:
Estimated Cost of Debt 7.9% 7.4% 5.4% 6.0% 4.6% 4.4% 5.6% 5.2% 5.8%
Normalized Tax Rate 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5%
After Tax Cost of Debt 4.9% 4.6% 3.4% 3.8% 2.8% 2.7% 3.5% 3.2% 3.6%
Capital Structure:
Debt to Equity Ratio 15.3% 21.1% 15.3% 5.4% 14.8% 14.1% 17.1% 72.0% 21.9%
Unlevered Beta 0.75 0.72 0.68 0.70 0.74 0.42 0.80 0.31 0.64
Cost of Capital
Equity 16,465 11,682 7,724 4,968 3,559 29,955 23,406 2,986 12,593
Debt 2,511 2,466 1,178 268 525 4,211 4,012 2,149 2,165
Market Value of Total Capitalization 18,976 14,148 8,902 5,236 4,084 34,166 27,418 5,135 14,758
Weighting
Equity 86.8% 82.6% 86.8% 94.9% 87.1% 87.7% 85.4% 58.1% 83.7%
Debt 13.2% 17.4% 13.2% 5.1% 12.9% 12.3% 14.6% 41.9% 16.3%
Cost
Equity 9.1% 9.3% 9.1% 8.8% 9.1% 9.1% 9.1% 10.9% 9.3%
Debt 4.9% 4.6% 3.4% 3.8% 2.8% 2.7% 3.5% 3.2% 3.6%
Weighted Average Cost of Capital (WACC) =
8.5% 8.5% 8.3% 8.5% 8.3% 8.3% 8.3% 7.7% 8.3%
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


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$75 Stock Price Target Derived in Part by
Consensus Average Estimates

Steve Castellano Ascendere Associates LLC


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Consensus
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2020
Income Statement
Acquired sales - - - - - - - -
Disposed Sales - - - - - - - -

Total sales 106,632 108,427 112,227 114,893 117,191 119,535 121,926 134,616
Total sales growth 0.00% 1.68% 3.50% 2.38% 2.00% 2.00% 2.00% 2.00%

Gross margin 5.0% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
SG&A margin 3.46% 3.46% 3.46% 3.46% 3.46% 3.46% 3.46% 3.46%

EBITDA 2,085 2,364 2,437 2,589 2,641 2,694 2,748 3,034


EBITDA margin 1.96% 2.18% 2.17% 2.25% 2.25% 2.25% 2.25% 2.25%

EBIT 1,694 1,966 2,026 2,168 2,211 2,255 2,300 2,540


EBIT margin 1.59% 1.81% 1.80% 1.89% 1.89% 1.89% 1.89% 1.89%

Other recurring income - - - - - - - -


Nonrecurring income - - - - - - - -

Net interest expense (113) (92) (59) (33) 7 53 99 264

Tax rate 22.7% 33.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%
Earnings from Continuing Operations
1,223 1,256 1,298 1,409 1,464 1,524 1,584 1,850

Shares outstanding 279 272 272 272 272 272 272 272
EPS from Continuing Operations 4.38 4.62 4.77 5.18 5.38 5.60 5.82 6.80

Dividend per share 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48
Dividends (116) (131) (131) (131) (131) (131) (131) (131)

Cash Flow Statement


Cash from Operations 1,711 2,316 986 1,819 1,885 1,945 2,010 2,316
Cash from Investing (195) (356) (368) (384) (400) (416) (433) (528)
Cash from Financing (620) (350) (340) (340) (555) (555) (555) (131)
Change in Cash 896 1,611 278 1,094 931 974 1,022 1,658

Free Cash Flow to the Firm


EBIAT 1,310 1,317 1,337 1,431 1,459 1,489 1,518 1,676
Depreciation 391 398 412 421 430 438 447 494
Capital investment (195) (356) (368) (384) (400) (416) (433) (528)
Working capital investment 97 663 (723) (12) (9) (17) (21) (28)
Free cash flow 1,603 2,022 658 1,456 1,480 1,494 1,511 1,614

Economic Profit
Operating Capital 8,271 7,566 8,245 8,220 8,199 8,194 8,201 8,400
WACC (rough estimate) 7.5% 8.6% 8.6% 8.7% 8.8% 8.9% 9.0% 9.0%
Capital Charge 617 647 710 713 721 731 741 759
NOPAT (adjusted for leases, R&D)1,310 1,317 1,337 1,431 1,459 1,489 1,518 1,676
Economic Profit 693 670 627 718 738 758 777 917
EP as % of Operating Capital 8.4% 8.9% 7.6% 8.7% 9.0% 9.2% 9.5% 10.9%

Adjusted Present Value


Unlevered equity discount rate 8.7% 8.7% 8.7% 9.2% 9.2% 9.2% 9.7%
Tax shield discount rate 6.0% 6.0% 6.0% 6.3% 6.3% 6.3% 6.5%
Terminal growth rate 1.5% 2.0% 2.5% 1.5% 2.0% 2.5% 1.5%
Current Value 70 73 76 66 68 71 62
+12 Months Value 77 80 84 72 75 78 68
Source: Ascendere Associates LLC models and Capital IQ, Inc. data
Steve Castellano Ascendere Associates LLC
steve@ascenderellc.com Page 15
Consensus
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2020
Balance Sheet
Cash 2,109 3,720 3,998 5,093 6,023 6,998 8,020 15,888
Accounts Receivable 6,741 7,838 8,157 8,189 8,270 8,394 8,540 9,406
Inventory 8,527 8,598 8,948 8,983 9,072 9,208 9,368 10,318
Other Current Assets 1,294 279 290 291 294 299 304 335
Total Current Assets 18,671 20,435 21,394 22,556 23,661 24,898 26,233 35,947

Gross PP&E 1,723 2,079 2,447 2,831 3,231 3,647 4,080 6,522
Net PP&E 796 754 711 674 644 622 608 676
Other Fixed Assets 5,800 5,800 5,800 5,800 5,800 5,800 5,800 5,800
Total Fixed Assets 6,596 6,554 6,511 6,474 6,444 6,422 6,408 6,476

Total Assets 25,267 26,989 27,904 29,030 30,105 31,320 32,641 42,424

Accounts Payable 11739 12688 12655 12699 12828 13021 13249 14593
Other NIB Current Liabilities 3648 3515 3506 3518 3554 3607 3670 4043
Total NIB Current Liabilities 15387 16203 16161 16217 16382 16628 16919 18636

Total Debt 2,509 2,290 2,081 1,871 1,447 1,023 599 599
Capital Leases - - - - - - - -
Minority Interest - - - - - - - -
Shareholder Equity 6,193 7,318 8,485 9,764 11,098 12,491 13,944 22,011
Total Capital 8,702 9,608 10,566 11,635 12,545 13,514 14,543 22,610

Other Non Current Liabilities 1,178 1,178 1,178 1,178 1,178 1,178 1,178 1,178
Total Liabilities and SE 25,267 26,989 27,904 29,030 30,105 31,320 32,641 42,424

Working Capital
Current Assets Less Cash 16,562 16,715 17,395 17,464 17,637 17,900 18,213 20,059
Current Liabilities Less Debt 15,387 16,203 16,161 16,217 16,382 16,628 16,919 18,636
Net Working Capital 1175 512 1235 1247 1255 1272 1293 1423
NWC as a % of Sales 1.1% 0.5% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%
Working Capital Turnover 90.8 128.5 128.5 92.6 93.7 94.6 95.1 95.5

Cash Cycle
Days Inventory in Stock 31 30 30 30 30 29 29 29
Days Sales Outstanding 23 25 26 26 26 25 25 25
Days Payables Outstanding 42 43 43 43 42 42 41 41
Cash Cycle 12 12 13 14 13 13 13 13

Operating Efficiency
NI / Sales 1.1% 1.2% 1.2% 1.2% 1.2% 1.3% 1.3% 1.4%
Sales / Operating Assets 1289% 1433% 1361% 1398% 1429% 1459% 1487% 1603%
Operating Assets / Equity 1.3 1.0 1.0 0.8 0.7 0.7 0.6 0.4
Operating ROE 19.7% 17.2% 15.3% 14.4% 13.2% 12.2% 11.4% 8.4%

Accounting Efficiency
(EBITDA - Capex) / Net Interest 16.7 21.9 34.8 67.7 NMF NMF NMF NMF
Debt/Equity 41% 36% 28% 22% 16% 10% 6% 3%
Debt/Total Capital 29% 26% 22% 18% 14% 9% 6% 3%

NI / Sales 1.1% 1.2% 1.2% 1.2% 1.2% 1.3% 1.3% 1.4%


Sales / Assets 422.0% 415.0% 408.9% 403.6% 396.4% 389.2% 381.3% 325.3%
Assets / Equity 4.1 4.2 3.8 3.4 3.0 2.8 2.6 2.0
ROE 19.7% 20.3% 17.7% 16.6% 15.0% 13.7% 12.7% 9.1%

ROA 4.8% 4.8% 4.7% 5.0% 5.0% 5.0% 5.0% 4.5%


ROI (Earnings / TotalCap) 14.1% 13.7% 12.9% 12.7% 12.1% 11.7% 11.3% 8.5%
ROIC (RetainEarn / TotalCap) 12.7% 12.3% 11.6% 11.5% 11.0% 10.7% 10.4% 7.9%
ROIC (Noplat / Operating Assets) 15.8% 17.4% 16.2% 17.4% 17.8% 18.2% 18.5% 20.0%
EBIT / Capital 19.5% 21.5% 20.1% 19.5% 18.3% 17.3% 16.4% 11.7%
EBITDA / Capital 24.0% 25.8% 24.2% 23.3% 21.8% 20.7% 19.6% 13.9%
Book value per share $ 22 $ 27 $ 31 $ 36 $ 41 $ 46 $ 51 $ 81
Source: Ascendere Associates LLC models and Capital IQ, Inc. data
Steve Castellano Ascendere Associates LLC
steve@ascenderellc.com Page 16
Consensus

Stock price 59.48


Shares outstanding 268.0 274.5
Market value 15,940

Cash (3,215)
Non operating assets -
Debt market value 2,511
Preferred stock market value -
Minority interest -
Other non operating liabilities -
Enterprise Value 15,236

Unlevered Cost of Equity 9.2%


Pretax Cost of Debt 6.25%
Terminal growth rate 2.0%
Current WACC* 8.5%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm

Period - 1 2 3 4 5 6 7 8 9 10
Adjusted Present Value FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Sales 106,632 108,427 112,227 114,893 117,191 119,535 121,926 124,364 126,851 129,389 131,976 134,616
EBIT 1,694 1,966 2,026 2,168 2,211 2,255 2,300 2,347 2,393 2,441 2,490 2,540

Tax rate 23% 33% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%
Cash income taxes 384 649 689 737 752 767 782 798 814 830 847 864
EBIAT 1,310 1,317 1,337 1,431 1,459 1,489 1,518 1,549 1,580 1,611 1,643 1,676

Depreciation 391 398 412 421 430 438 447 456 465 474 484 494
Capital Spending, recurring (195) (356) (368) (384) (400) (416) (433) (450) (469) (488) (507) (528)
Working Capital Investment 97 663 (723) (12) (9) (17) (21) (24) (25) (26) (27) (28)
Free cash flow to the entity 1,603 2,022 658 1,456 1,480 1,494 1,511 1,531 1,551 1,572 1,593 1,614
Residual value of free cash flows 22,831
Free cash flow plus residual value 2,022 658 1,456 1,480 1,494 1,511 1,531 1,551 1,572 1,593 24,445

Present value of future cash flows - 602 1,221 1,136 1,050 973 902 837 777 721 10,127

Value of unlevered firm 18,345

Discount interest tax shields at cost of debt to determine value of interest tax shields

- 1 2 3 4 5 6 7 8 9 10
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Debt $ 2,509 $ 2,290 $ 2,081 $ 1,871 $ 1,447 $ 1,023 $ 599 $ 599 $ 599 $ 599 $ 599 $ 599
Cash interest expense as % of Debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Cash interest expense 157 150 137 123 104 77 51 37 37 37 37 37
Interest tax shield 49 46 42 35 26 17 13 13 13 13 13
Residual value of interest tax shields 305
Interest tax shields plus residual value 49 46 42 35 26 17 13 13 13 13 318

Cost of debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Present value of future cash flows - 44 37 29 21 13 9 8 8 7 174

Value of interest tax shields 350

Cost of Potential Bankruptcy


Probability of bankruptcy 4.0%
Negative impact to PV 100.0%
Unlevered firm value 18,345
Expected bankruptcy costs (734)

Valuation
Value of unlelvered firm 18,345
Value of interest tax shields 350
Expected bankruptcy costs (734) Current Value
Enterprise value 17,961 Terminal Growth
Equity 1.5% 2.0% 2.5% Tax shield
Cash 3,215 Current ValueConsensus0.0871276506826462
8.7% $ 70.11 $ 72.94 $ 76.23 6.0%
Other non-operating assets - Current ValueConsensus0.0921276506826462
9.2% $ 65.63 $ 67.99 $ 70.72 6.3%
Debt (2,511) Current ValueConsensus0.0971276506826462
9.7% $ 61.70 $ 63.69 $ 65.97 6.5%
Preferred -
Minority Interest -
Other non operating liabilities - Value 12+ months
Value of equity 18,665 Terminal Growth
Equity 1.5% 2.0% 2.5% Tax shield
Value 12+ monthsConsensus0.0871276506826462
8.7% $ 76.90 $ 79.97 $ 83.55 6.0%
Shares outstanding 274.5 274.5 Value 12+ monthsConsensus0.0921276506826462
9.2% $ 72.35 $ 74.92 $ 77.89 6.3%
Value per share 67.99 Value 12+ monthsConsensus0.0971276506826462
9.7% $ 68.34 $ 70.53 $ 73.02 6.5%
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 17
Assumptions Required for a Target of $92
(Above the $80 Consensus High Target)

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 18
Scenario +2
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2020
Income Statement
Acquired sales - - - - - - - -
Disposed Sales - - - - - - - -

Total sales 106,632 108,427 112,661 115,788 118,567 121,412 124,326 139,979
Total sales growth 0.0% 1.7% 3.9% 2.8% 2.4% 2.4% 2.4% 2.4%

Gross margin 5.0% 5.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
SG&A margin 3.5% 3.5% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%

EBITDA 2,085 2,364 2,897 3,072 3,146 3,222 3,299 3,714


EBITDA margin 2.0% 2.2% 2.6% 2.7% 2.7% 2.7% 2.7% 2.7%

EBIT 1,694 1,966 2,484 2,648 2,711 2,776 2,843 3,201


EBIT margin 1.6% 1.8% 2.2% 2.3% 2.3% 2.3% 2.3% 2.3%

Other recurring income - - - - - - - -


Nonrecurring income - - - - - - - -

Net interest expense (113) (92) (57) (24) 22 75 129 335

Tax rate 22.7% 33.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%
Earnings from Continuing Operations
1,223 1,256 1,602 1,732 1,804 1,882 1,961 2,334

Shares outstanding 279 272 272 272 272 272 272 272
EPS from Continuing Operations 4.38 4.62 5.89 6.37 6.63 6.92 7.21 8.58

Dividend per share 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48
Dividends (116) (131) (131) (131) (131) (131) (131) (131)

Cash Flow Statement


Cash from Operations 1,711 2,316 1,253 2,139 2,225 2,304 2,390 2,812
Cash from Investing (195) (356) (370) (387) (405) (423) (441) (549)
Cash from Financing (620) (350) (340) (340) (555) (555) (555) (131)
Change in Cash 896 1,611 544 1,412 1,266 1,327 1,394 2,132

Free Cash Flow to the Firm


EBIAT 1,310 1,317 1,639 1,748 1,790 1,832 1,876 2,113
Depreciation 391 398 413 425 435 445 456 513
Capital investment (195) (356) (370) (387) (405) (423) (441) (549)
Working capital investment 97 663 (762) (17) (14) (23) (27) (36)
Free cash flow 1,603 2,022 921 1,768 1,805 1,832 1,863 2,042

Economic Profit
Operating Capital 8271 7566 8284 8264 8248 8249 8262 8499
WACC (rough estimate) 7.5% 8.6% 8.6% 8.7% 8.8% 8.9% 9.0% 9.0%
Capital Charge 617 647 714 717 726 736 747 768
NOPAT (adjusted for leases, R&D) 1310 1317 1639 1748 1790 1832 1876 2113
Economic Profit 693 670 926 1031 1064 1097 1130 1344
EP as % of Operating Capital 8.4% 8.9% 11.2% 12.5% 12.9% 13.3% 13.7% 15.8%

Adjusted Present Value


Unlevered equity discount rate 8.7% 8.7% 8.7% 9.2% 9.2% 9.2% 9.7%
Tax shield discount rate 6.0% 6.0% 6.0% 6.3% 6.3% 6.3% 6.5%
Terminal growth rate 1.5% 2.0% 2.5% 1.5% 2.0% 2.5% 1.5%
Current Value 87 91 95 81 84 88 77
+12 Months Value 94 98 103 89 92 96 84
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 19
Scenario +2
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2020
Balance Sheet
Cash 2,109 3,720 4,264 5,676 6,941 8,268 9,662 19,689
Accounts Receivable 6,741 7,838 8,189 8,253 8,368 8,526 8,708 9,781
Inventory 8,527 8,598 8,982 9,053 9,179 9,352 9,553 10,729
Other Current Assets 1,294 279 291 294 298 303 310 348
Total Current Assets 18,671 20,435 21,726 23,275 24,786 26,450 28,233 40,547

Gross PP&E 1,723 2,079 2,448 2,836 3,240 3,663 4,104 6,624
Net PP&E 796 754 711 673 643 621 606 677
Other Fixed Assets 5,800 5,800 5,800 5,800 5,800 5,800 5,800 5,800
Total Fixed Assets 6,596 6,554 6,511 6,473 6,443 6,421 6,406 6,477

Total Assets 25,267 26,989 28,237 29,749 31,229 32,871 34,640 47,025

Accounts Payable 11739 12688 12677 12771 12951 13198 13481 15142
Other NIB Current Liabilities 3648 3515 3512 3538 3588 3656 3735 4195
Total NIB Current Liabilities 15387 16203 16189 16309 16539 16854 17216 19337

Total Debt 2,509 2,290 2,081 1,871 1,447 1,023 599 599
Capital Leases - - - - - - - -
Minority Interest - - - - - - - -
Shareholder Equity 6,193 7,318 8,790 10,391 12,065 13,816 15,647 25,910
Total Capital 8,702 9,608 10,870 12,262 13,512 14,839 16,246 26,509

Other Non Current Liabilities 1,178 1,178 1,178 1,178 1,178 1,178 1,178 1,178
Total Liabilities and SE 25,267 26,989 28,237 29,749 31,229 32,871 34,640 47,025

Working Capital
Current Assets Less Cash 16562 16715 17462 17600 17844 18182 18571 20859
Current Liabilities Less Debt 15387 16203 16189 16309 16539 16854 17216 19337
Net Working Capital 1175 512 1274 1291 1305 1328 1355 1521
NWC as a % of Sales 1.1% 0.5% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%
Working Capital Turnover 90.8 128.5 126.2 90.3 91.4 92.2 92.7 93.1

Cash Cycle
Days Inventory in Stock 31 30 30 30 30 29 29 29
Days Sales Outstanding 23 25 26 26 26 25 25 25
Days Payables Outstanding 42 43 43 42 42 42 41 41
Cash Cycle 12 12 13 14 13 13 13 13

Operating Efficiency
NI / Sales 1.1% 1.2% 1.4% 1.5% 1.5% 1.6% 1.6% 1.7%
Sales / Operating Assets 1289% 1433% 1360% 1401% 1437% 1472% 1505% 1647%
Operating Assets / Equity 1.3 1.0 0.9 0.8 0.7 0.6 0.5 0.3
Operating ROE 19.7% 17.2% 18.2% 16.7% 15.0% 13.6% 12.5% 9.0%

Accounting Efficiency
(EBITDA - Capex) / Net Interest 16.7 21.9 44.5 111.5 NMF NMF NMF NMF
Debt/Equity 41% 36% 27% 21% 15% 10% 6% 2%
Debt/Total Capital 29% 26% 21% 17% 13% 9% 5% 2%

NI / Sales 1.1% 1.2% 1.4% 1.5% 1.5% 1.6% 1.6% 1.7%


Sales / Assets 422.0% 415.0% 408.0% 399.4% 388.9% 378.8% 368.3% 306.3%
Assets / Equity 4.1 4.2 3.8 3.3 2.9 2.7 2.4 1.9
ROE 19.7% 20.3% 21.9% 19.7% 17.4% 15.6% 14.2% 9.8%

ROA 4.8% 4.8% 5.8% 6.0% 5.9% 5.9% 5.8% 5.1%


ROI (Earnings / TotalCap) 14.1% 13.7% 15.6% 15.0% 14.0% 13.3% 12.6% 9.2%
ROIC (RetainEarn / TotalCap) 12.7% 12.3% 14.4% 13.8% 13.0% 12.4% 11.8% 8.7%
ROIC (Noplat / Operating Assets) 15.8% 17.4% 19.8% 21.1% 21.7% 22.2% 22.7% 24.9%
EBIT / Capital 19.5% 21.5% 24.3% 22.9% 21.0% 19.6% 18.3% 12.6%
EBITDA / Capital 24.0% 25.8% 28.3% 26.6% 24.4% 22.7% 21.2% 14.6%
Book value per share $ 22 $ 27 $ 32 $ 38 $ 44 $ 51 $ 58 $ 95
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 20
Scenario +2

Stock price 59.48


Shares outstanding 268.0 274.5
Market value 15,940

Cash (3,215)
Non operating assets -
Debt market value 2,511
Preferred stock market value -
Minority interest -
Other non operating liabilities -
Enterprise Value 15,236

Unlevered Cost of Equity 9.2%


Pretax Cost of Debt 6.25%
Terminal growth rate 2.0%
Current WACC* 8.5%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm

Period - 1 2 3 4 5 6 7 8 9 10
Adjusted Present Value FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Sales 106,632 108,427 112,661 115,788 118,567 121,412 124,326 127,310 130,366 133,494 136,698 139,979
EBIT 1,694 1,966 2,484 2,648 2,711 2,776 2,843 2,911 2,981 3,053 3,126 3,201

Tax rate 23% 33% 34% 34% 34% 34% 34% 34% 34% 34% 34% 34%
Cash income taxes 384 649 845 900 922 944 967 990 1,014 1,038 1,063 1,088
EBIAT 1,310 1,317 1,639 1,748 1,790 1,832 1,876 1,921 1,968 2,015 2,063 2,113

Depreciation 391 398 413 425 435 445 456 467 478 489 501 513
Capital Spending, recurring (195) (356) (370) (387) (405) (423) (441) (461) (482) (503) (525) (549)
Working Capital Investment 97 663 (762) (17) (14) (23) (27) (30) (32) (33) (35) (36)
Free cash flow to the entity 1,603 2,022 921 1,768 1,805 1,832 1,863 1,897 1,932 1,968 2,004 2,042
Residual value of free cash flows 28,873
Free cash flow plus residual value 2,022 921 1,768 1,805 1,832 1,863 1,897 1,932 1,968 2,004 30,914

Present value of future cash flows - 844 1,482 1,386 1,288 1,199 1,118 1,042 972 907 12,806

Value of unlevered firm 23,045

Discount interest tax shields at cost of debt to determine value of interest tax shields

- 1 2 3 4 5 6 7 8 9 10
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Debt $ 2,509 $ 2,290 $ 2,081 $ 1,871 $ 1,447 $ 1,023 $ 599 $ 599 $ 599 $ 599 $ 599 $ 599
Cash interest expense as % of Debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Cash interest expense 157 150 137 123 104 77 51 37 37 37 37 37
Interest tax shield 49 46 42 35 26 17 13 13 13 13 13
Residual value of interest tax shields 305
Interest tax shields plus residual value 49 46 42 35 26 17 13 13 13 13 318

Cost of debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Present value of future cash flows - 44 37 29 21 13 9 8 8 7 174

Value of interest tax shields 350

Cost of Potential Bankruptcy


Probability of bankruptcy 4.0%
Negative impact to PV 100.0%
Unlevered firm value 23,045
Expected bankruptcy costs (922)

Valuation
Value of unlelvered firm 23,045
Value of interest tax shields 350
Expected bankruptcy costs (922) Current Value
Enterprise value 22,473 Terminal Growth
Equity 1.5% 2.0% 2.5% Tax shield
Cash 3,215 Current ValueScenario
8.7% +20.0871276506826462
$ 87.10 $ 90.65 $ 94.79 6.0%
Other non-operating assets - Current ValueScenario
9.2% +20.0921276506826462
$ 81.46 $ 84.43 $ 87.85 6.3%
Debt (2,511) Current ValueScenario
9.7% +20.0971276506826462
$ 76.51 $ 79.02 $ 81.88 6.5%
Preferred -
Minority Interest -
Other non operating liabilities - Value 12+ months
Value of equity 23,177 Terminal Growth
Equity 1.5% 2.0% 2.5% Tax shield
Value 12+ monthsScenario
8.7% $ +20.0871276506826462
94.45 $ 98.31 $ 102.80 6.0%
Shares outstanding 274.5 274.5 Value 12+ monthsScenario
9.2% $ +20.0921276506826462
88.71 $ 91.95 $ 95.69 6.3%
Value per share 84.43 Value 12+ monthsScenario
9.7% $ +20.0971276506826462
83.67 $ 86.42 $ 89.55 6.5%
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 21
Consensus Quarterly Estimates
and Implied Estimates

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 22
Days in Period Dep CY2004 92 91 90 92 92 91 91 92 92
Period Date 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008 6/30/2008 3/31/2008 12/31/2007 9/30/2007
Period +5Q +4Q +3Q +2Q +1Q Last QTR QTR-1 QTR-2 QTR -3 QTR -4 QTR -5 QTR -6 QTR -7 QTR -8
Average Consensus Estimates - - - o
Revenue 28,614 28,160 27,593 27,016 27,725 107,141 27,130 26,657 26,224 27,130 26,574 26,704 26,231 26,494 24,450
Gross Profit 1,551 1,506 1,503 1,505 1,516 1,335 1,303 1,470 1,343 1,302 1,268 1,451 1,207 1,181
SG&A 937 922 903 884 907 888 844 603 904 921 897 640 901 827
R&D 97 95 93 91 94 91 91 91 87 87 87 87 71 71
EBITDA 634 604 620 643 629 560 570 564 551 493 477 564 399 443
Depreciation 116 115 114 113 114 113 111 61 112 112 106 100 93 89
EBIT (or EBT) 517 489 489 530 515 447 459 503 439 381 371 464 306 354
Income (recurring earnings) 319 299 299 327 321 253 263 291 264 222 224 279 188 221
Income (reported) 320 298 299 327 318 301 288 281 (20) 327 235 307 201 247

# of Consensus Estimates
Revenue 8 9 9 14 14
Gross Profit - - - - -
SG&A - - - - -
EBITDA 4 4 5 6 6
Depreciation - - - - -
EBIT (or EBT) 7 7 7 13 13
Income (recurring earnings) 7 7 7 13 13
Income (reported) 5 5 5 9 9
NOPLAT - - - - -
EP - - - - -
Free Cash Flow - - - - -

Margins 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 Trend 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008
Revenue growth 3.2% 3.8% 3.5% 3.0% 2.2% 1 2.1% -0.2% 0.0% 2.4% 8.7% 8.9% 8.5% 14.6% 9.2%
Gross margin 5.4% 5.3% 5.4% 5.6% 5.5% 1 4.9% 4.9% 5.6% 5.0% 4.9% 4.7% 5.5% 4.6% 4.8%
SG&A margin 3.3% 3.3% 3.3% 3.3% 3.3% 2 3.3% 3.2% 2.3% 3.3% 3.5% 3.4% 2.4% 3.4% 3.4%
R&D margin 0.3% 0.3% 0.3% 0.3% 0.3% (2) 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
EBITDA margin 2.2% 2.1% 2.2% 2.4% 2.3% (2) 2.1% 2.1% 2.2% 2.0% 1.9% 1.8% 2.2% 1.5% 1.8%
Depreciation margin 0.4% 0.4% 0.4% 0.4% 0.4% 2 0.4% 0.4% 0.2% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%
EBIT margin (or EBT) 1.8% 1.7% 1.8% 2.0% 1.9% (2) 1.6% 1.7% 1.9% 1.6% 1.4% 1.4% 1.8% 1.2% 1.4%
Income (recurring earnings) 1.1% 1.1% 1.1% 1.2% 1.2% (2) 0.9% 1.0% 1.1% 1.0% 0.8% 0.8% 1.1% 0.7% 0.9%
Income (reported) 1.1% 1.1% 1.1% 1.2% 1.1% 3 1.1% 1.1% 1.1% -0.1% 1.2% 0.9% 1.2% 0.8% 1.0%
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 23
Economic Profit Model
(Consensus Estimates)

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 24
ECONOMIC PROFIT MODEL

McKesson Corporation
NYSE:MCK
8.5%
Economic Profit Model 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008 6/30/2008 3/31/2008 12/31/2007 9/30/2007
Adjusted Working Capital 1,117 1,109 1,098 1,089 1,081 1,075 1,254 1,735 1,700 1,824 1,673 1,612 2,076 1,317
Net PP&E 652 689 730 777 806 836 814 796 788 777 779 775 747 714
Other fixed assets 7,627 7,627 7,627 7,627 7,627 7,627 7,664 7,333 7,807 7,983 8,032 7,498 7,363 6,977
Operating Capital (McKinsey) 9,397 9,425 9,455 9,493 9,514 9,538 9,732 9,864 10,295 10,584 10,483 9,886 10,187 9,008

Cost of Debt 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.4% 5.6% 5.7% 5.6% 5.6% 7.9% 8.1%
Cost of Equity 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 7.6% 11.4% 6.4% 7.9% 8.1% 7.5% 8.1% 8.7%
WACC* 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.6% 6.9% 6.2% 7.7% 7.8% 7.3% 8.1% 8.6%
Economic Charge 700 702 704 707 708 710 741 685 641 810 818 723 826 775

EBIT 2,025 2,022 1,980 1,950 1,924 1,848 1,782 1,694 1,655 1,522 1,495 1,466 1,385 1,397
Interest on Operating Leases 29 30 30 31 32 34 36 37 28 28 28 27 35 33
R&D Expenditure 376 373 369 367 367 360 356 351 347 331 316 300 284 269
R&D Amortization (255) (244) (233) (222) (212) (203) (194) (184) (175) (167) (158) (149) (141) (134)
Goodwill Amortization 253 253 253 253 253 253 258 258 220 215 207 203 233 216
Adjustment for Provisions and Extraordinary Items (300) (300) (300) (300) (300) (300) (300) (528) (517) (491) 6 - 30 7 47
Adjusted EBITA 2,128 2,135 2,100 2,079 2,064 1,992 1,710 1,638 1,584 1,936 1,887 1,877 1,803 1,828

Operating tax rate 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 13.7% 14.3% 0.0% 0.0% 0.0% -3.5% 1.5% 1.5%
Taxes on EBITA (251) (252) (248) (245) (243) (235) (235) (235) - - - 66 (27) (27)
Increase in deferred taxes (smoothed) - - - - - - - - - - - - - -
NOPLAT 1,878 1,883 1,853 1,834 1,821 1,757 1,475 1,403 1,584 1,936 1,887 1,943 1,776 1,801

NYSE:MCK 12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008
NOPLAT 1,878 1,883 1,853 1,834 1,821 1,757 1,475 1,403 1,584 1,936 1,887 1,943 1,776 1,801
Economic Charge 700 702 704 707 708 710 741 685 641 810 818 723 826 775
Economic Profit 1,178 1,182 1,149 1,127 1,112 1,047 734 719 943 1,125 1,069 1,220 950 1,026
Sequential growth 0% 3% 2% 1% 6% 43% 2% -24% -16% 5% -12% 28% -7% 16%

NOPLAT 1,878 1,883 1,853 1,834 1,821 1,757 1,475 1,403 1,584 1,936 1,887 1,943 1,776 1,801
Operating Capital 9,397 9,425 9,455 9,493 9,514 9,538 9,732 9,864 10,295 10,584 10,483 9,886 10,187 9,008
ROIC (NOPLAT / Operating Capital) 19.9% 19.9% 19.4% 19.0% 18.6% 17.6% 14.5% 13.7% 15.4% 19.3% 19.3% 20.6% 19.9% 21.9%
Sequential growth 0% 2% 2% 2% 6% 21% 5% -11% -20% 0% -6% 3% -9% -1%

ECONOMIC PROFIT MODEL, SUPPORTING CALCULATIONS

12/31/10 9/30/10 6/30/10 3/31/10 12/31/09 9/30/2009 6/30/2009 3/31/2009 12/31/2008 9/30/2008 6/30/2008 3/31/2008 12/31/2007 9/30/2007
Other Long-term Assets 1,452 1,452 1,452 1,452 1,452 1,452 1,432 915 1,766 1,813 1,851 1,379 1,703 1,713
Total Other Fixed Assets 7,321 7,380 7,439 7,501 7,566 7,627 7,664 7,333 7,807 7,983 8,032 7,498 7,363 6,977
$ 1,499

Total Current Assets 21,106 20,859 20,606 20,359 20,125 19,930 19,062 18,671 18,372 17,538 17,931 17,786 18,684 18,789
less Cash and Short Term Equivalents (3,729) (3,621) (3,529) (3,428) (3,318) (3,215) (2,644) (2,109) (1,175) (1,123) (1,187) (1,362) (1,436) (2,518)
plus Estimated Cash Required for WC 585 581 575 570 566 563 560 560 560 557 546 534 523 506
Adjusted Current Assets 17,962 17,819 17,653 17,502 17,374 17,278 16,978 17,122 17,757 16,972 17,290 16,958 17,771 16,777

Total Current Liabilities 16,420 16,420 16,420 16,420 16,420 16,420 15,941 15,606 16,057 15,148 15,617 15,348 15,847 15,612
less Current Portion of Cap. Leases - - - - - - - - - - - - - -
less Current Portion of LT Debt 217 217 217 217 217 217 217 219 - - - 2 152 152
Short-term Borrowings - - - - - - - - - - - - - -
Finance Div. Debt Current - - - - - - - - - - - - - -
Short-term Finance Div. Loans and Leases - - - - - - - - - - - - - -
Adjusted Current Liabilities 16,203 16,203 16,203 16,203 16,203 16,203 15,724 15,387 16,057 15,148 15,617 15,346 15,695 15,460

Adjusted Net Working Capital 1,759 1,616 1,450 1,299 1,171 1,075 1,254 1,735 1,700 1,824 1,673 1,612 2,076 1,317

Capitalized R&D, Beginning Balance 1,055 1,099 1,144 1,191 1,240 1,290 1,343 1,032 1,076 1,120 1,164 861 896 931
R&D Expenditure 376 373 369 367 367 360 356 351 347 331 316 300 284 269
Annual Amortization (10yr life) (255) (244) (233) (222) (212) (203) (194) (184) (175) (167) (158) (149) (141) (134)
Capitalized R&D, Ending Balance 1,176 1,228 1,280 1,335 1,394 1,447 1,505 1,199 1,248 1,284 1,321 1,011 1,039 1,066

Total Current Assets less Cash & ST Invest 17,377 17,238 17,077 16,931 16,808 16,715 16,418 16,562 17,197 16,415 16,744 16,424 17,248 16,271
Current Liabilities less Interest Bearing Debt 16,203 16,203 16,203 16,203 16,203 16,203 15,724 15,387 16,057 15,148 15,617 15,346 15,695 15,460
Cash Shortfall -- Required for Working Capital - - - - - - - - - - - - - - -
Cash -- 3-month Cushion 585 581 575 570 566 563 560 560 560 557 546 534 523 506
Total Cash Required for Working Capital 585 581 575 570 566 563 560 560 560 557 546 534 523 506

Excess Cash (above WC Requirements) 3,144 3,040 2,954 2,858 2,751 2,652 2,084 1,549 615 566 641 828 913 2,012
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 25
Charts and Other

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 26
McKesson Corporation Price 59.52
MCK NTM EPS $ 4.68
Healthcare NTM PE 12.7
Healthcare Distributors R/R 0.5 to 1

Price / Earnings (NTM) vs. Stock Price


35.0 $80

$70
30.0

$60
25.0

$50
P
P 20.0 r
/ $40
i
15.0
E $30
c
10.0
e
$20

5.0
$10

0.0 $-
O-00

O-01

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O-09
A-00

A-01

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A-08

A-09
J-00

J-00

J-01

J-01

J-02

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J-10
P/E Average +1 St. Dev. -1 St. Dev. Stock Price

Max up to ten years Three years One year One year historically implied target range

01/26/00 to 01/27/10 01/31/07 to 01/27/10 01/28/09 to 01/27/10 NTM EPS Target $ 59.52
Max PE 30.3 11/15/00 Max PE 30.3 11/15/00 Max PE 14.2 10/14/09 Max EPS $ 5.03 $ 71 20%
Average PE 17.1 Average PE 17.1 Average PE 11.7 Average EPS $ 4.68 $ 55 -8%
Min PE 8.0 11/19/08 Min PE 8.0 11/19/08 Min PE 8.3 04/08/09 Min EPS $ 4.45 $ 37 -38%

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 27
MCK ## 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 1/27/2010 Last 5 years

TEV / NTM Total Revenue Average 0.2x 0.2x 0.2x 0.2x 0.1x 0.1x 0.1x
High 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x
Low 0.1x 0.1x 0.1x 0.1x 0.1x 0.1x 0.1x
Close 0.1x 0.2x 0.1x 0.2x 0.1x 0.1x 0.1x

TEV / NTM EBITDA Average 7.1x 8.0x 9.1x 9.1x 7.1x 5.7x 7.8x
High 8.5x 9.6x 10.6x 9.9x 9.7x 6.9x 10.6x
Low 5.4x 6.5x 7.4x 8.1x 3.8x 4.4x 3.8x
Close 6.8x 9.5x 7.9x 9.3x 5.0x 6.4x 6.4x

TEV / NTM EBIT Average 8.4x 10.3x 10.7x 10.9x 9.0x 7.3x 9.6x
High 9.4x 11.6x 12.1x 12.1x 11.9x 8.8x 12.1x
Low 7.0x 9.0x 9.2x 9.9x 4.8x 5.7x 4.8x
Close 9.3x 11.4x 9.9x 11.5x 6.7x 8.0x 8.0x

Price / NTM EPS Average 13.5x 18.1x 19.0x 18.2x 13.5x 11.7x 16.0x
High 16.3x 21.5x 22.1x 19.7x 19.4x 14.3x 22.1x
Low 11.1x 14.2x 16.4x 16.1x 7.2x 8.3x 7.2x
Close 14.6x 21.1x 17.3x 18.7x 9.8x 13.4x 13.4x

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano Ascendere Associates LLC


steve@ascenderellc.com Page 28

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