McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and financial performance
McKesson distributes pharmaceuticals and medical-surgical products and provides prescription technology and related healthcare services. Its reportable segments are U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International.
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $70.2 billion, up 5% | $137.3 billion, up 6% |
| Gross profit / margin | $3.10 billion / 4.41%; prior year $3.35 billion / 5.03% | $6.12 billion / 4.46%; prior year $6.38 billion / 4.94% |
| Operating income | $1.12 billion; prior year $539 million | $2.16 billion; prior year $1.11 billion |
| Net income attributable to McKesson | $926 million; prior year $267 million | $1.69 billion; prior year $753 million |
| Diluted EPS from continuing operations | $6.46; prior year $1.71 | $11.71; prior year $4.82 |
| Operating cash flow | Not presented for the quarter | $166 million; prior year $170 million |
Material changes and segment results
- U.S. Pharmaceutical revenue rose 12% in the quarter and 13% year to date, mainly from market growth, specialty drug volumes, and branded-drug price increases. Segment operating profit was $896 million for the quarter, up 18%.
- RxTS revenue grew 9% in the quarter and 15% year to date. Quarterly operating profit declined 6% to $120 million, while the six-month result increased 14% to $264 million.
- Medical-Surgical Solutions revenue fell 9% in the quarter and 4% year to date, primarily due to lower COVID-19 test and vaccine-kit activity. Six-month operating profit increased to $555 million from $371 million, partly because the prior-year period included $164 million of inventory charges.
- International revenue fell 32% in the quarter and 30% year to date, reflecting European divestitures and unfavorable currency movements. The segment reported operating losses of $37 million and $43 million, respectively.
- Reported earnings benefited from significant comparison effects and unusual items, including favorable year-over-year European disposal-group remeasurement impacts, a $142 million gain on an investment exit, lower prior-year opioid litigation charges, and the absence of the prior-year $191 million debt-extinguishment loss. Share repurchases reduced diluted weighted-average shares by 8% year over year.
Cash flow, debt, and liquidity
- For the six months, operating cash flow was $166 million. Receivables increased $1.9 billion and inventories $1.5 billion, largely reflecting higher volumes and timing; payables increased $2.3 billion. Opioid-related payments contributed to a $915 million decline in litigation liabilities.
- Investing activities provided $116 million, including $496 million of proceeds from business and investment sales. Financing activities used $1.75 billion, including $1.5 billion for share repurchases and $139 million for dividends.
- At September 30, cash and cash equivalents were $2.92 billion; total debt was $5.61 billion, including $800 million current. The $4.0 billion revolving credit facility had no borrowings, and the company reported covenant compliance.
- Working capital was negative $1.91 billion. Management said cash generation, short-term investments, credit facilities, and commercial paper access were expected to cover near- and long-term requirements. The company had $5.8 billion of remaining share-repurchase authorization.
Outlook, risks, and significant events
- The filing provides no quantified earnings or revenue guidance. Management reported stable U.S. prescription volumes and primary-care patient visits, but lower COVID-19 test and vaccine-related activity. It said inflation, labor and transportation costs, and supply-chain disruption had not materially affected results for the reported periods, while noting these remain uncertainties.
- The company’s estimated opioid-related governmental-claims liability was $7.35 billion at September 30, including $703 million current. The distributor settlement covers up to approximately $7.4 billion of McKesson payments over 18 years. Private-party and certain other claims are outside the settlement; the company said their ultimate possible loss could not be reasonably estimated and an adverse outcome could materially affect results, cash flows, or liquidity.
- McKesson completed the sale of its U.K. businesses in April and its E.U. disposal group on October 31, 2022, receiving $892 million net proceeds. Also after quarter-end, it acquired Rx Savings Solutions for approximately $600 million upfront plus up to $275 million contingent consideration, and formed a 51%-owned oncology research venture with HCA, paying $173 million in cash.
- Management preliminarily did not expect the Inflation Reduction Act to materially affect results, financial position, or cash flows in the foreseeable future. It will continue assessing the law’s effects.
- Other reported matters include a $141 million securities-class-action settlement accrual fully offset by an estimated insurance recovery, subject to court approval, and a $129 million antitrust settlement receipt expected to be recognized as a gain in the following quarter.
Important facts for investors to verify
- How much earnings growth reflects recurring segment performance versus European disposal accounting effects, the investment gain, lower litigation charges, and reduced share count.
- Whether working-capital movements and opioid settlement payments continue to constrain operating cash flow, and the timing of future settlement installments.
- The final accounting and financial contribution of the post-quarter acquisitions and oncology venture, including Rx Savings Solutions’ contingent consideration.
- Progress on the remaining European divestiture impacts, foreign-exchange exposure, and risks from unresolved opioid and other legal claims.
- Future cash allocation among repurchases, dividends, acquisitions, and debt obligations, given negative working capital and the large repurchase authorization.