McKesson Corporation — Form 10-Q Summary
Business context and period. McKesson reported its fiscal first quarter ended June 30, 2019 (fiscal year 2020; comparative quarter ended June 30, 2018). Its businesses include U.S. pharmaceutical and specialty distribution, European pharmaceutical solutions, and medical-surgical distribution. All amounts below are in U.S. dollars.
Financial results and position
| Metric | Quarter ended June 30, 2019 | Prior-year quarter |
|---|---|---|
| Revenue | $55.728 billion | $52.607 billion; up 6% |
| Gross profit / margin | $2.787 billion / 5.00% | $2.779 billion / 5.28% |
| Operating income | $634 million | $83 million |
| Income from continuing operations | $483 million | Loss of $81 million |
| Net income attributable to McKesson | $423 million | Loss of $138 million |
| Diluted EPS | $2.24 | Loss per share of $0.68 |
| Cash used in operating activities | $51 million | $1.061 billion |
Revenue growth reflected market growth and expanded business with existing customers. Gross profit was nearly flat and margin declined 28 basis points, which management attributed to business mix, lower U.K. government reimbursements, lower LIFO credits, and foreign exchange effects. Operating results improved substantially from the prior-year quarter, which included $570 million of European goodwill impairment charges. The prior-year comparison also included a $97 million escrow settlement gain and $35 million of antitrust settlement proceeds; these items make the comparison less representative of underlying performance.
Segments: U.S. Pharmaceutical and Specialty Solutions revenue was $44.165 billion, up 8%, with operating profit of $579 million, up 7%. European Pharmaceutical Solutions revenue was $6.710 billion, down 3% (including a 6% unfavorable currency effect); operating profit was $5 million versus a prior-year loss of $560 million, which included the goodwill impairment. Medical-Surgical Solutions revenue was $1.903 billion, up 12%, and operating profit was $125 million, up 34%. Other revenue was $2.950 billion, down 1%; operating profit was $141 million.
Cash, cash equivalents and restricted cash were $1.947 billion at June 30, versus $2.981 billion at March 31. Working capital was $476 million, down from $839 million. Total debt was $7.692 billion, including $310 million current; the reported debt-to-capital ratio was 44.3%, compared with 43.3% at March 31. The company reported $3.5 billion of revolving credit capacity and no outstanding commercial paper at quarter-end; it was in compliance with facility covenants. The cash decline included $872 million of cash used in financing, including $701 million of share repurchases and $75 million of dividends. Operating cash use was primarily affected by receivables growth.
McKesson adopted lease accounting during the quarter, recognizing $2.178 billion of operating lease liabilities and $2.031 billion of right-of-use assets. This adoption increased reported assets and liabilities; the filing says it did not materially affect operating results or cash flows.
Material changes, outlook and risks
- Change Healthcare: McKesson’s ownership in the joint venture fell from approximately 70% to 58.5% following Change Healthcare Inc.’s IPO, completed July 1, 2019. McKesson expected to record an approximately $246 million pretax dilution loss in the next quarter. The IPO-related market indication was below the investment’s carrying value, but McKesson concluded no other-than-temporary impairment had occurred as of June 30 or the filing date; future impairment remains possible.
- Restructuring: The company expected total pretax charges of approximately $520 million to $660 million across restructuring and optimization initiatives, with $354 million recorded to date. Initiatives include workforce reductions, centralization, outsourcing, facility and European pharmacy closures, and the headquarters relocation to Irving, Texas. Programs were expected to be substantially completed by the end of 2021; headquarters relocation was expected to be completed by January 2021.
- Legal and regulatory exposure: McKesson faces extensive opioid-related litigation, including approximately 2,000 cases in federal multidistrict litigation and more than 245 similar state cases. The filing says it generally cannot reasonably estimate losses or a range of losses for these matters. Opioid-related expenses were $36 million for the quarter, primarily litigation costs. Potential state taxes or assessments on opioid distribution are also a risk.
- Other notable items: A $17 million pretax pension settlement charge was recorded; transfer of remaining pension liabilities to an insurer was expected to result in an additional charge. The company raised its quarterly dividend from $0.39 to $0.41 per share for dividends declared from July 2019. No specific full-year earnings guidance is provided in the supplied filing text.
- Principal risks: Foreign exchange and changing government reimbursement, especially in the U.K.; opioid litigation and regulation; possible impairment of goodwill, long-lived assets, or the Change Healthcare investment; execution of restructuring and outsourcing plans; customer concentration and credit risk; and access to capital markets.
Important facts for investors to verify
- Whether subsequent Change Healthcare results and trading prices support the carrying value of McKesson’s investment, and the timing and tax consequences of its planned exit.
- The realized dilution loss and McKesson’s reduced share of future Change Healthcare earnings after the IPO.
- Progress against the $520 million–$660 million restructuring charge estimate, including remaining cash costs and expected savings.
- Developments in opioid litigation, including trial outcomes, settlements, and any reasonably estimable exposure.
- Whether operating cash flow and working capital improve, given the quarter’s cash use and receivables growth.
- The impact of continuing U.K. reimbursement pressure, currency movements, and potential asset impairment on European operations.
- That the filing compares fiscal Q1 2020 with fiscal Q1 2019; its quarter labels and narrative refer to fiscal years, not calendar-year quarters.