McKesson Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020. Although the request metadata says “2019 Q4,” this filing reports FY2020 results, including the fourth quarter.
Business context
McKesson distributes pharmaceuticals and medical-surgical products and provides specialty-care, retail-pharmacy, logistics and healthcare technology services. Its reportable segments are U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions, and Medical-Surgical Solutions; Other primarily includes McKesson Canada, prescription technology and, until its separation, Change Healthcare.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $231.1 billion | $214.3 billion |
| Gross profit | $12.0 billion | $11.8 billion |
| Gross margin | 5.20% | 5.48% |
| Operating income | $2.5 billion | $886 million |
| Income from continuing operations before tax | $1.14 billion | $610 million |
| Net income attributable to McKesson | $900 million | $34 million |
| Diluted EPS, continuing operations | $4.99 | $0.17 |
| Cash from operating activities | $4.37 billion | $4.04 billion |
| Cash, cash equivalents and restricted cash at year-end | $4.02 billion | $2.98 billion |
| Total debt, including finance leases | $7.39 billion | $7.60 billion |
Revenue rose 7.8%, driven mainly by U.S. pharmaceutical market growth, branded-drug price increases and higher retail national-account volumes. Gross profit increased 2.3%, but margin fell 28 basis points. Working capital was negative $402 million, compared with positive $839 million a year earlier, primarily reflecting higher payables and more current debt. Debt-to-capital increased to 52.1% from 43.3%, as equity declined following the Change Healthcare separation and share repurchases. The company reported access to a $4 billion revolving credit facility, with no borrowings outstanding at year-end, and said it remained in compliance with credit covenants.
Segments and material changes
- U.S. Pharmaceutical and Specialty Solutions: Revenue increased 9% to $183.3 billion; operating profit rose 3% to $2.77 billion.
- European Pharmaceutical Solutions: Revenue increased 1% to $27.4 billion; operating loss was $261 million, improved from a $1.98 billion loss in FY2019, which included $1.8 billion of goodwill impairments.
- Medical-Surgical Solutions: Revenue increased 9% to $8.3 billion and operating profit rose 10% to $499 million, supported by primary-care market growth.
- Change Healthcare separation: McKesson completed the split-off on March 10, 2020 and no longer held an ownership interest. FY2020 included a $1.2 billion impairment charge, a $246 million dilution loss and an estimated $414 million separation gain.
- German wholesale business: McKesson planned to contribute most of the business to a joint venture and retain a noncontrolling interest. It recorded a $275 million remeasurement charge; closing was subject to regulatory approval and expected in the second half of 2021.
Outlook, risks and unusual items
- Management said COVID-19 had a limited net effect on FY2020 results because the outbreak affected operations late in the year. Higher March pharmaceutical volumes were partly offset by lower specialty-drug and primary-care medical-surgical demand. Added labor, safety and transport costs largely offset favorable effects; operating margins were compressed. The future effects remained uncertain, and the filing provides no specific FY2021 guidance figures; it refers readers to a May 20, 2020 Form 8-K.
- McKesson was a defendant in more than 3,000 opioid-related proceedings. It had paid $82 million to settle claims by two Ohio counties, but had not accrued a liability for broader claims because management said loss was not probable and could not be reasonably estimated. A proposed framework discussed in 2019 contemplated up to approximately $6.9 billion from McKesson over 18 years, subject to extensive conditions; it was not a finalized settlement.
- Other significant FY2020 items included a $122 million pension settlement charge, $232 million of opioid-related expenses, $82 million of long-lived-asset impairments in Europe, and a $30 million Rexall impairment. FY2020’s 1.6% effective tax rate was affected by the intended tax-free Change split-off and other items.
- Key ongoing risks include healthcare pricing and reimbursement changes, customer and supplier concentration, legal and regulatory proceedings, product availability, cybersecurity, foreign exchange and possible goodwill or asset impairments. CVS accounted for about 20% of revenue; the ten largest customers represented about 51%.
Most important facts for investors to verify
- Reconcile reported earnings with the material Change Healthcare, German-business, pension and other unusual charges and gains.
- Track opioid litigation developments, including whether a broad settlement is reached and its potential financial terms; the filing states the possible loss was not estimable.
- Confirm the German wholesale joint venture’s regulatory approvals, expected completion and final financial impact.
- Review subsequent COVID-19 effects on demand, costs, supply availability, customer collections and margins, alongside the FY2021 outlook disclosed separately in the referenced Form 8-K.
- Monitor liquidity and refinancing needs, particularly the $1.05 billion current portion of long-term debt and scheduled debt maturities, as well as negative working capital.
- Consider that the auditor issued unqualified opinions on the financial statements and internal control; opioid litigation, goodwill valuation and the tax treatment of the Change separation were identified as critical audit matters.