McKesson Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019. McKesson’s fiscal year runs April 1 through March 31, so this is fiscal Q2 2020. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Business context
McKesson is a healthcare supply-chain, pharmaceutical distribution, retail pharmacy, medical-surgical, and healthcare technology company. Its reportable segments are U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions, and Medical-Surgical Solutions; “Other” includes Canadian operations, prescription technology businesses, and its Change Healthcare joint-venture investment.
Key financial results
| Metric | Quarter ended September 30, 2019 | Six months ended September 30, 2019 |
|---|---|---|
| Revenue | $57.616 billion, up 9% | $113.344 billion, up 7% |
| Gross profit / margin | $2.867 billion / 4.98% (5.28% prior year) | $5.654 billion / 4.99% (5.28% prior year) |
| Operating income | $626 million | $1.260 billion |
| Net income (loss) attributable to McKesson | $(730) million | $(307) million |
| Diluted EPS | $(3.99) | $(1.65) |
| Operating cash flow | Not separately presented for the quarter | $(159) million, versus $318 million generated in prior year |
Revenue growth reflected market growth and expanded business with existing customers. Gross margin declined year over year, primarily due to business mix. Quarterly results included $33 million of LIFO inventory credits; the comparable quarter included $22 million.
The reported loss was chiefly driven by a $1.157 billion pre-tax impairment of the Change Healthcare joint-venture investment and a $246 million pre-tax dilution loss following Change Healthcare’s IPO. Operating results also reflected pension settlement charges and an $82 million charge related to an agreement in principle to settle claims by two Ohio counties. The quarter’s income tax benefit was $294 million.
Balance sheet, liquidity, and debt
- Cash and cash equivalents were $1.356 billion at September 30, down from $2.981 billion at March 31, 2019. Working capital was $208 million, compared with $839 million.
- Long-term debt, including its current portion, was $7.644 billion; commercial paper outstanding was $549 million. The debt-to-capital ratio was 50.0%, up from 43.3% at fiscal year-end. The company reported compliance with its credit-facility covenant.
- Operating lease liabilities were $2.125 billion following adoption of the new lease accounting guidance. Adoption also added $2.002 billion of operating lease right-of-use assets to the balance sheet.
- Six-month investing cash outflow was $285 million, compared with $983 million in the prior year, which included substantial acquisition spending. Financing cash outflow was $1.203 billion, including $1.452 billion of share repurchases and $148 million of dividends paid.
Management said operating cash flow, existing cash, credit facilities, and the commercial paper program should be sufficient for expected short- and long-term requirements, while noting that market disruption could impair liquidity or raise borrowing costs.
Material changes versus prior year
- Revenue rose 9% for the quarter and 7% for the half year, led by U.S. Pharmaceutical and Specialty Solutions, whose revenue increased 10% and 9%, respectively.
- McKesson reported a quarterly loss versus $499 million of attributable net income a year earlier; six-month attributable net income shifted from $361 million to a $307 million loss. The Change Healthcare impairment and dilution loss were the principal unusual drivers.
- U.S. Pharmaceutical operating profit increased 5% for the quarter and 6% for the half year. Medical-Surgical operating profit increased 23% and 28%, respectively. European Pharmaceutical quarterly operating profit fell to $1 million from $10 million; foreign exchange, store closures, and higher U.K. retail pharmacy costs were factors.
- Operating cash flow changed from a $318 million inflow to a $159 million outflow, affected by working-capital movements, including receivables and payables timing.
- The prior-year comparison included a $570 million European goodwill impairment in the first half, a $97 million Rexall escrow settlement gain, and a $90 million Change Healthcare-related credit. These items affect year-over-year comparisons.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects liquidity sources to fund operating and capital needs.
- Restructuring and optimization initiatives, including headquarters relocation and facility, pharmacy, and workforce actions, are expected to be substantially completed by 2021. Total expected pre-tax charges are approximately $520 million to $660 million; $397 million had been recorded to date.
- McKesson expects to exit its Change Healthcare JV investment within six to twelve months, and described a proposed tax-efficient exit structure. The planned transaction and future value of the investment remain important uncertainties.
- The company faces more than 2,500 opioid-related cases. It recorded an $82 million charge for an agreement in principle with two Ohio counties, but said it could not estimate a reasonably possible loss range for remaining claims. Adverse resolutions could materially affect financial position, cash flows, liquidity, or results.
- Other disclosed matters include government inquiries concerning controlled-substance distribution and anti-diversion practices, and legal proceedings involving antitrust and other claims. Foreign exchange, healthcare regulation, customer concentration, cybersecurity, restructuring execution, and potential asset impairments are also identified risks.
- The company increased its quarterly dividend from $0.39 to $0.41 per share. Future dividends remain subject to board discretion and financial conditions.
Important facts for investors to verify
- Whether the Change Healthcare impairment, dilution effects, and anticipated exit proceeds or tax consequences develop as expected.
- Potential financial exposure and timing from opioid litigation and related government investigations; the filing does not provide a clear loss estimate for the remaining cases.
- Working-capital trends and the sustainability of operating cash generation, given the first-half cash outflow and lower cash balance.
- Progress and remaining costs for restructuring and headquarters relocation against the stated $520 million to $660 million charge estimate.
- How margin pressure, foreign currency movements, U.K. pharmacy performance, and the business mix affect future segment results.