McKesson Corporation — Form 10-Q summary
Business context and period. McKesson distributes pharmaceuticals and medical-surgical products and provides pharmacy, oncology, and healthcare technology services. This filing covers the three and six months ended September 30, 2021 (fiscal Q2 and first half of fiscal 2022); comparisons are with the same periods in 2020. Amounts below are U.S. dollars.
Key financial results
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $66.576 billion, up 9% | $129.250 billion, up 11% |
| Gross profit / margin | $3.352 billion / 5.03%, versus $3.000 billion / 4.93% | $6.384 billion / 4.94%, versus $5.700 billion / 4.89% |
| Operating income | $539 million, versus $634 million | $1.107 billion, versus $1.312 billion |
| Income from continuing operations | $310 million, versus $627 million | $846 million, versus $1.122 billion |
| Net income attributable to McKesson | $267 million, versus $577 million | $753 million, versus $1.021 billion |
| Diluted EPS attributable to McKesson | $1.71, versus $3.54 | $4.80, versus $6.26 |
- Quarterly pretax income was $442 million, down 33%; first-half pretax income was $1.004 billion, down 23%. Results included a $191 million pretax debt-extinguishment loss in both periods. Quarterly and first-half effective tax rates were 29.9% and 15.7%, respectively.
- Other income was $139 million for the quarter and $182 million for the half, including equity-investment gains of $97 million and $104 million, respectively.
- First-half operating cash flow was $170 million, versus cash use of $41 million in the prior year. Investing used $157 million; financing used $3.894 billion. Cash and cash equivalents were $2.151 billion at September 30, versus $6.278 billion at March 31; cash, cash equivalents, and restricted cash totaled $2.533 billion.
- Total debt was $5.985 billion, down from $7.148 billion at March 31. The company reported a $495 million working-capital deficit, compared with $1.279 billion of positive working capital at March 31. Its $4 billion revolving credit facility had no borrowings, and the company reported compliance with debt covenants.
- McKesson repurchased $1.3 billion of its shares and paid $134 million in dividends in the first half. The quarterly dividend was raised from $0.42 to $0.47 per share.
Material changes and segment performance
- Revenue growth reflected U.S. Pharmaceutical market growth and recovering volumes, as well as increased Prescription Technology Solutions and Medical-Surgical sales. The International segment’s quarterly revenue declined 5%, in part after the German wholesale business moved to a joint venture.
- Segment operating profit increased year over year in U.S. Pharmaceutical, Prescription Technology Solutions, and Medical-Surgical Solutions. International reported an operating loss of $146 million for the quarter, including European divestiture-related charges.
- Operating expenses rose 19% for the quarter and 20% for the first half. They included $491 million of charges to remeasure the E.U. disposal group and impair software, opioid-related charges of $112 million for the quarter and $186 million for the half, and restructuring charges of $32 million and $190 million, respectively.
- Medical-Surgical recorded $164 million of first-half inventory charges, primarily for excess PPE inventory intended for donation. Higher COVID-19 test sales and vaccine-kit distribution contributed to segment revenue and profit.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management said operating cash flow, cash and available credit sources are expected to meet near- and long-term funding needs, while noting uncertainty from COVID-19, market conditions, and litigation obligations.
- McKesson agreed to sell certain E.U. businesses for €1.2 billion, subject to adjustments and closing conditions. The disposal group was classified as held for sale; the company recorded $491 million of related charges. Assets and liabilities held for sale were $3.1 billion and $2.3 billion, respectively.
- After quarter-end, McKesson announced a sale of its U.K. retail and distribution businesses for £325 million. The company estimated a future charge of $700 million to $900 million when the business is classified as held for sale; the transaction was expected to close in Q4 fiscal 2023, subject to conditions.
- Opioid litigation remains a major contingency. The company accrued $8.218 billion for governmental opioid claims, including $1.072 billion estimated payable within one year. A proposed distributor settlement could require McKesson to pay up to approximately $7.9 billion over 18 years, depending on participation and other conditions. McKesson deposited approximately $354 million into escrow. Private claims, tribal claims, and other unresolved matters may remain; the company said it cannot estimate the total possible loss range.
- COVID-19 effects remain difficult to forecast, including vaccine and ancillary-kit activity, changing patient volumes, supply disruptions, and potential PPE inventory write-downs. Management noted supply-chain cost increases but said they did not materially affect results for the reported periods.
- The filing also reports an estimated $50 million liability for New York’s Opioid Stewardship Act for 2017–2018 after the U.S. Supreme Court declined review, and ongoing tax examinations and other legal matters.
Important facts for investors to verify
- Whether the proposed opioid settlement becomes effective, the final participation level and payment terms, and the exposure from claims outside its scope.
- Timing, approvals, net proceeds, and final accounting impacts of the E.U. and U.K. divestitures, including the estimated U.K. charge.
- How much earnings reflect recurring operations versus divestiture and litigation charges, investment gains, COVID-related activity, and PPE inventory charges.
- Working-capital and cash-flow trends, expected opioid payments, and the effects of continued share repurchases, dividends, and debt transactions on liquidity.