McKesson Corporation — Form 10-Q summary
Business and period: McKesson distributes pharmaceuticals and medical-surgical products and provides pharmacy technology, specialty-care, and healthcare services. This fiscal third-quarter report covers the three and nine months ended December 31, 2021; comparisons are with the same periods a year earlier unless stated otherwise. Amounts are in U.S. dollars.
Financial results
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $68.614 billion, up 10% | $197.864 billion, up 10% |
| Gross profit / margin | $3.428 billion / 5.00% (prior: $3.151 billion / 5.03%) | $9.812 billion / 4.96% (prior: $8.851 billion / 4.94%) |
| Operating income (loss) | $298 million (prior: loss of $7.362 billion) | $1.405 billion (prior: loss of $6.050 billion) |
| Net income (loss) attributable to McKesson | Loss of $7 million (prior: loss of $6.226 billion) | $746 million (prior: loss of $5.205 billion) |
| Diluted EPS attributable to McKesson | $(0.04) (prior: $(39.03)) | $4.79 (prior: $(32.29)) |
The prior-year losses largely reflected an $8.1 billion opioid-related litigation charge. Current-period results also include substantial European divestiture remeasurement charges. Nine-month results included a $191 million loss on debt extinguishment and $104 million of net gains on equity investments.
Cash flow and liquidity: Nine-month operating cash flow was $1.547 billion, versus $1.172 billion. Investing activities used $272 million and financing activities used $4.332 billion. Cash and cash equivalents were $2.754 billion at December 31, 2021; cash, cash equivalents, and restricted cash totaled $3.159 billion, down from $6.396 billion at March 31, 2021.
Balance sheet and capital: Total debt was $5.956 billion, plus $372 million of short-term borrowings. The debt-to-capital ratio was 94.3%, compared with 83.1% at March 31, 2021. Working capital was negative $954 million, versus positive $1.279 billion. Stockholders’ deficit was $1.274 billion; total equity deficit was $787 million.
Changes and operating drivers
- Revenue growth was led by U.S. Pharmaceutical, up 11% in both periods, reflecting market growth, higher volumes, price increases, specialty pharmaceuticals, and recovery from pandemic-related disruption.
- Prescription Technology Solutions revenue rose 33% for the quarter and 35% for nine months. Medical-Surgical Solutions revenue increased 1% and 18%, respectively; the nine-month comparison benefited from patient-visit recovery and COVID-19 test and vaccine-kit activity.
- International revenue rose 2% in both periods, but the segment recorded operating losses of $668 million for the quarter and $761 million for nine months, mainly due to divestiture-related charges. International divestitures also drove $879 million of charges in the quarter and approximately $1.4 billion for nine months.
- McKesson recorded $164 million of nine-month PPE and related inventory charges, largely because excess inventory was designated for charitable donation. Share repurchases totaled approximately $2.0 billion and dividends paid were $206 million during the nine months.
Outlook, risks, and contingencies
- Management said operating cash flow, cash and investments, credit facilities, and commercial paper access are expected to fund near- and longer-term requirements. The company reported compliance with debt covenants. No specific consolidated earnings or revenue guidance is provided in the filing.
- McKesson agreed to sell certain E.U. businesses for €1.2 billion, with closing anticipated in the first half of fiscal 2023 subject to customary conditions, including applicable regulatory approvals. The U.K. businesses were agreed to be sold for £325 million, with closing expected in the fourth quarter of 2022. The Austrian sale, for €226 million, closed January 31, 2022.
- The proposed opioid settlement could require McKesson to pay up to approximately $7.9 billion over 18 years, subject to participation and other conditions. The company had accrued $8.213 billion for governmental opioid claims at December 31, 2021, including $1.060 billion classified as current. It cautioned that the ultimate loss could differ materially and that other private and unresolved claims are not included in the proposed framework.
- COVID-19, changing vaccine and testing demand, supply-chain availability and costs, foreign-exchange movements, and potential asset impairments remain uncertainties. A third-party payroll timekeeping vendor cybersecurity incident caused operational inconvenience but had an immaterial impact, according to the company.
- A North American partial-remote-work and office rationalization initiative is expected to incur total charges of approximately $140 million to $180 million; $115 million had been recorded by the reporting date.
Investor verification priorities
- Track participation, final terms, timing, and cash requirements for the opioid settlement, and assess exposure to claims outside its scope.
- Verify completion proceeds, closing conditions, and remaining impairment or currency effects from the European divestitures.
- Review working-capital movements, the high reported debt-to-capital ratio, and the impact of buybacks and litigation payments on liquidity.
- Assess how much segment earnings depend on COVID-19 vaccine distribution, testing, and related kits, and whether demand and supply conditions persist.