McKesson Corporation — FY2023 Form 10-K
Period: Fiscal year ended March 31, 2023. Although the request metadata says “2022 Q4,” this filing reports full-year FY2023 results, with comparisons to FY2022; it is not a standalone quarterly report.
Business context and reporting period
McKesson is a healthcare services and distribution company operating through U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. Its business is predominantly pharmaceutical and medical-product distribution; approximately 99% of FY2023 revenue came from distribution and retail sales, and approximately 1% from services.
The company completed its U.K. divestiture in April 2022 and sales of European Union businesses in October 2022; its remaining European operations are primarily in Norway. It acquired prescription affordability company Rx Savings Solutions for $600 million cash, with up to $275 million of contingent consideration, and formed SCRI Oncology with HCA, retaining a 51% controlling interest.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $276.7 billion | $264.0 billion |
| Gross profit / gross margin | $12.36 billion / 4.47% | $13.13 billion / 4.97% |
| Operating income | $4.38 billion | $2.04 billion |
| Income from continuing operations | $3.73 billion | $1.29 billion |
| Net income attributable to McKesson | $3.56 billion | $1.11 billion |
| Diluted EPS from continuing operations | $25.05 | $7.26 |
| Cash provided by operating activities | $5.16 billion | $4.43 billion |
| Cash and cash equivalents at year-end | $4.68 billion | $3.53 billion |
| Total debt at year-end | $5.59 billion | $5.88 billion |
Revenue increased 5%, driven largely by U.S. Pharmaceutical market growth; gross profit fell 6% and gross margin declined 50 basis points. Net income and EPS rose sharply, principally because prior-year results included substantial European disposal-group remeasurement charges. FY2023 also benefited from discrete gains and settlements, including a $142 million investment-exit gain, $126 million from termination of a tax receivable agreement, $97 million from terminating interest-rate swaps, and $129 million of antitrust settlement proceeds. These items make the earnings comparison less representative of underlying operating trends.
Operating cash flow increased $725 million year over year. Cash used in investing was $542 million, including acquisition payments and capital expenditures; cash used in financing was $4.37 billion, including $3.64 billion of share repurchases and $292 million of dividends. Working capital was negative $3.67 billion, compared with negative $2.24 billion, reflecting the distribution model and higher accounts payable. The debt-to-capital ratio rose to 120.5% from 114.5%, partly due to repurchases. The company reported compliance with debt covenants and access to a $4.0 billion unsecured revolving facility maturing in November 2027; no amount was outstanding under it at year-end.
Segments and material changes
- U.S. Pharmaceutical: Revenue rose 13% to $240.6 billion; operating profit increased 11% to $3.21 billion. Growth reflected drug utilization, branded price increases, specialty pharmaceuticals, and generics contributions; lower COVID-19 vaccine distribution partly offset growth.
- RxTS: Revenue increased 14% to $4.39 billion; operating profit rose 13% to $566 million, supported by customer growth and third-party logistics and technology services.
- Medical-Surgical Solutions: Revenue declined 4% to $11.11 billion, primarily due to lower COVID-19 test and vaccine-kit activity. Operating profit rose 16% to $1.12 billion, partly reflecting the absence of prior-year inventory charges and strength in core primary care.
- International: Revenue fell 43% to $20.60 billion, primarily due to European divestitures and currency effects. Operating profit was $136 million versus a $968 million loss, largely because FY2022 had major disposal-related charges.
FY2023 U.S. Pharmaceutical revenue concentration remained high: CVS represented approximately 27% of consolidated revenue and 21% of trade receivables; the ten largest customers represented approximately 68% of revenue. The CVS distribution partnership was extended through June 2027.
Outlook, risks, contingencies, and unusual items
- Guidance: The 10-K does not provide specific FY2024 guidance figures. It directs readers to the separate May 8, 2023 earnings release furnished with an 8-K.
- Opioid litigation: Accrued liability for U.S. governmental claims, including participating Native American tribes, was $7.17 billion at March 31, 2023, including $548 million expected to be paid within twelve months. The multiyear settlement provides for payments through 2038. Private-party and certain other claims are outside the settlement and are not included in the accrual; the company says their possible loss range cannot be reasonably estimated.
- Other legal and regulatory exposure: Risks include controlled-substance oversight, healthcare fraud-and-abuse laws, privacy and cybersecurity requirements, environmental remediation, and disputes over insurance coverage for opioid claims. The company accrued $24 million for specified environmental remediation matters.
- Tax uncertainty: The IRS proposed adjustments that would increase federal tax liability by $600–$700 million for FY2018 and FY2019. McKesson disputes the proposed adjustments, expects resolution may take years, and says it believes its tax positions are adequately reserved. The filing also reports $1.4 billion of unrecognized tax benefits.
- Business and market risks: Management cites customer and supplier concentration, drug pricing and reimbursement changes (including implementation of the Inflation Reduction Act), generic-drug supply and pricing, inflation, labor and transportation costs, foreign exchange, cyber incidents, and competitive consolidation.
- COVID-19 normalization: Pandemic-related contributions declined year over year. Medical-Surgical reported $765 million of COVID-19 test and ancillary-kit revenue and $216 million of segment operating profit from the cited COVID-related activities in FY2023; company contracts with the CDC and HHS were scheduled to continue into July 2023.
- Restructuring: A new efficiency program recorded $60 million of charges in FY2023, with approximately $125 million of total charges anticipated and substantial completion expected by the end of FY2024.
Most important facts for investors to verify
- Review the May 8, 2023 earnings release for FY2024 guidance, which is not quantified in this 10-K.
- Track opioid settlement payments, the remaining $7.17 billion liability, and developments in claims excluded from the settlement.
- Assess whether earnings growth persists excluding disposal-related comparisons and FY2023 investment, tax-agreement, swap-termination, and antitrust gains.
- Monitor gross-margin trends, customer concentration, and the effect of drug pricing reforms, supplier terms, and generic-drug availability.
- Check progress on the European exit, FY2024 restructuring costs, and performance of RxSS and SCRI Oncology.
- Follow the IRS dispute and any changes to tax reserves, as well as debt, repurchases, and liquidity needs.
Audit and controls: Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective internal controls as of March 31, 2023.