McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2022; fiscal year ends March 31. Financial amounts are in U.S. dollars.
Business context
McKesson distributes pharmaceuticals and medical-surgical supplies and provides prescription technology and healthcare services. Its reportable segments are U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. During the period, it completed the sale of its U.K. businesses (April 2022) and certain E.U. businesses (October 2022), and formed a majority-owned oncology research business with HCA Healthcare.
Financial performance
| Metric | Three months ended Dec. 31, 2022 | Year-over-year | Nine months ended Dec. 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Revenue | $70.49 billion | +3% | $207.80 billion | +5% |
| Gross profit | $3.17 billion | −7% | $9.29 billion | −5% |
| Gross margin | 4.50% | −50 bps | 4.47% | −49 bps |
| Operating income | $1.24 billion | Compared with $298 million | $3.40 billion | Compared with $1.41 billion |
| Net income attributable to McKesson | $1.08 billion | Compared with a $7 million loss | $2.77 billion | Compared with $746 million |
| Diluted EPS | $7.66 | Compared with $(0.04) | $19.30 | Compared with $4.79 |
Revenue growth was led by U.S. Pharmaceutical market growth, including higher drug utilization, pricing, and new products. Gross profit was pressured mainly by the exit of European businesses and foreign-exchange effects, partly offset by specialty pharmaceutical growth. International revenue fell 53% in the quarter and 38% year to date, substantially reflecting divestitures and currency movements.
Segment operating profit for the quarter was $850 million in U.S. Pharmaceutical, $136 million in RxTS, $328 million in Medical-Surgical Solutions, and $136 million in International. U.S. Pharmaceutical and RxTS benefited from business growth; Medical-Surgical results reflected underlying business performance amid lower COVID-related activity. International’s comparison improved substantially from prior-year divestiture remeasurement charges.
Cash flow, debt, and liquidity
- For the first nine months, operating cash flow was $1.83 billion, investing cash outflow was $298 million, and financing cash outflow was $3.18 billion. Cash and cash equivalents ended at $2.77 billion, down from $3.53 billion at March 31, 2022.
- Operating cash flow included working-capital movements: receivables and inventory each used about $2.2 billion, while drafts and accounts payable provided $3.5 billion. Opioid-settlement payments reduced litigation liabilities by about $1.0 billion.
- Debt was $5.86 billion, plus $617 million of commercial paper borrowings. The company also drew a $500 million term loan in December. The debt-to-capital ratio was 131.6%, compared with 114.5% at March 31; working capital was negative $3.35 billion.
- McKesson entered a new $4.0 billion revolving credit facility maturing in November 2027; there were no borrowings under it at quarter-end. Management said expected operating cash flow, cash, and available credit should fund foreseeable requirements. The company reported compliance with debt covenants.
- Share repurchases totaled $3.5 billion and dividends paid were $216 million during the nine months. The quarterly dividend was increased to $0.54 per share. Remaining repurchase authorization was $3.8 billion.
Material changes, unusual items, and outlook
- Reported earnings comparisons benefited materially from the prior year’s large U.K. and E.U. disposal-group remeasurement charges. The current-period results also included a $129 million antitrust settlement gain in cost of sales, a $126 million gain from termination of a tax receivable agreement, and a $97 million gain on termination of interest-rate swaps. Year-to-date other income also included a $142 million gain from exiting an investment.
- The E.U. divestiture generated $892 million of cash proceeds before cash transferred with the disposal group; the company reported $573 million of net cash proceeds from that sale in investing activities. It recognized a $66 million net gain on E.U. disposal-group remeasurement for the nine-month period.
- COVID-related sales and contributions declined. In Medical-Surgical Solutions, COVID tests and vaccine-kit activity contributed $211 million of revenue and $72 million of operating profit in the quarter, versus $544 million and $118 million, respectively, a year earlier. Management said lower COVID demand weighed on year-over-year results.
- The estimated opioid-related governmental-claims liability was $7.24 billion at December 31, including $598 million expected to be paid within 12 months. The distributor settlement covers participating governmental entities, but private claims and certain other matters remain outside it. McKesson said losses on remaining litigation cannot be reasonably estimated and an adverse outcome could materially affect results, cash flow, or liquidity.
- Management reported no material effect from inflation, supply-chain disruption, or broader global events in the reported periods, but identified these as continuing uncertainties. It did not provide specific earnings or revenue guidance in the supplied filing text. Management’s preliminary assessment was that the Inflation Reduction Act was not expected to have a material near-term effect.
Investor facts to verify
- How much of the earnings increase reflects recurring segment performance versus disposal-related comparisons and the $129 million, $126 million, $97 million, and $142 million gains.
- The cash-flow and working-capital effects of receivables, inventory, payables, and ongoing opioid-settlement payments.
- The status and potential additional cost of opioid-related private, governmental, and other claims not resolved by existing settlements.
- How European divestitures, foreign exchange, and lower COVID-related activity affect continuing segment revenue and margins.
- The final share count and average price for the December $972 million accelerated share repurchase, and the effect of continued buybacks and dividends on leverage and liquidity.