McKesson Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2021 (McKesson fiscal 2022 first quarter); comparable period ended June 30, 2020. McKesson is a healthcare distribution and services company reporting four segments: U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International.
Financial performance
| Metric | Quarter ended June 30, 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $62.674 billion | $55.679 billion | +13% |
| Gross profit / margin | $3.032 billion / 4.84% | $2.700 billion / 4.85% | Profit +12%; margin down 1 bp |
| Operating income | $568 million | $678 million | Down $110 million |
| Income from continuing operations | $536 million | $495 million | +8% |
| Net income attributable to McKesson | $486 million | $444 million | +9% |
| Diluted EPS, continuing operations | $3.09 | $2.72 | +14% |
| Operating cash flow | $(1.622) billion | $(1.062) billion | Cash use increased |
| Capital expenditures and capitalized software | $159 million | $117 million | — |
Quarterly operating expenses rose 22% to $2.464 billion, including $158 million of restructuring and impairment charges and $74 million of opioid-related claims charges. The prior-year quarter included a $131 million net insurance-related gain, making the operating-income comparison less favorable. The reported tax rate was 4.6%, versus 23.3%, reflecting a $97 million discrete tax benefit, primarily from statute-of-limitations expirations. Share repurchases reduced diluted weighted-average shares to 158.1 million from 163.2 million.
Segments and material changes
- U.S. Pharmaceutical: Revenue $50.019 billion, up 12%; operating profit $682 million, up 11%. Growth reflected market expansion, recovering prescription volumes, specialty pharmaceuticals, and COVID-19 vaccine distribution; lower LIFO credits and strategic growth costs partly offset gains.
- RxTS: Revenue $881 million, up 34%; operating profit $104 million, up 53%, supported by customer and prescription-volume growth.
- Medical-Surgical Solutions: Revenue $2.528 billion, up 40%; operating profit $75 million, down 16%. Recovery in primary-care activity, COVID-19 tests, and vaccine-kit distribution was offset by $164 million of PPE and related inventory charges, primarily for excess inventory designated for donation.
- International: Revenue $9.246 billion, up 8% (down 3% excluding favorable foreign exchange); operating profit $53 million versus $3 million. Recovery trends and foreign exchange helped; the prior contribution of the German wholesale business to a joint venture affected comparability.
The company adopted a new four-segment reporting structure and recast prior-period segment data. COVID-19 recovery and vaccine-related activity supported year-over-year results, but management described volume recovery as uneven and dependent on patient mobility and pandemic developments.
Cash, debt, and liquidity
- Cash and cash equivalents were $2.423 billion at June 30, 2021, down from $6.278 billion at March 31; cash, cash equivalents, and restricted cash totaled $2.535 billion.
- Operating cash use of $1.622 billion primarily reflected increases in receivables ($1.045 billion) and inventory ($901 million), partly associated with timing and higher revenue. Financing activities used $2.151 billion, including the $1.0 billion share repurchase and $1.031 billion paid for McKesson Europe shares under the minority-holder put right.
- Total debt was $7.176 billion, including $752 million current; the $4.0 billion revolving credit facility had no borrowings. McKesson reported compliance with debt covenants and said it expected cash generation and available facilities to meet funding needs.
- Working capital was negative $485 million, compared with positive $1.279 billion at March 31, 2021. The company’s debt-to-capital ratio was 86.7%. McKesson stockholders’ deficit was $529 million; total equity deficit was $45 million.
Outlook, risks, contingencies, and unusual items
- Opioid litigation: McKesson recorded an $8.1 billion opioid-related liability at March 31, 2021 and added $74 million of charges in the quarter. At June 30, recorded litigation liabilities totaled $8.141 billion, including $545 million classified as current. After quarter-end, McKesson and two other distributors announced a proposed settlement of governmental claims, with McKesson’s potential share up to approximately $7.9 billion over 18 years, subject to participation and other conditions. A separate New York settlement was also announced. Private claims and other matters are not covered by the proposed framework; McKesson said it could not estimate the ultimate possible loss for all opioid litigation, and an adverse outcome could materially affect results, cash flows, or liquidity.
- European business sale: On July 5, 2021, McKesson agreed to sell certain European businesses to PHOENIX Group for €1.2 billion (approximately $1.5 billion), subject to adjustments and closing conditions. The transaction was anticipated to close in 2023. The company estimated a $500–$700 million charge upon subsequent held-for-sale accounting, primarily from accumulated currency-translation balances and software impairment.
- Debt actions after quarter-end: McKesson redeemed approximately $709 million of Euro notes on July 17, 2021. On July 23 it paid $1.1 billion to retire $922 million principal of other notes; a debt-extinguishment loss was expected in the following fiscal quarter.
- Capital returns: The company spent $1.0 billion under an accelerated share repurchase program and paid $69 million in dividends during the quarter. On July 23, it raised the quarterly dividend from $0.42 to $0.47 per share. Future dividends remain at the Board’s discretion.
- Other risks and plans: A North American partial-remote-work initiative is expected to incur $180–$280 million of total charges, with $95 million recorded in the quarter. COVID-19 uncertainty, potential further PPE inventory write-downs, foreign-exchange exposure, regulatory matters, and litigation remain relevant risks. Management provided no specific consolidated earnings or revenue guidance in the supplied filing text.
Important facts for investors to verify
- Progress, participation thresholds, timing, and final payment terms for the proposed opioid settlements, and whether additional liabilities arise from excluded claims.
- Actual proceeds, closing conditions, timing, and final impairment or disposal charges for the European business sale.
- Whether working-capital cash use and the negative working-capital position reverse, and how cash availability changes after the share repurchase and debt redemptions.
- Whether COVID-19 recovery, vaccine and testing activity, and further PPE inventory adjustments materially change segment profitability.
- Final settlement of the accelerated share repurchase, the announced dividend increase, and compliance with debt covenants.