McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2019, ended September 30, 2018; comparative periods ended September 30, 2017. Amounts are in U.S. dollars unless noted.
Business context and results
McKesson distributes pharmaceuticals and medical-surgical products and provides related services. Its reportable segments are U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions, and Medical-Surgical Solutions; remaining activities are reported in Other.
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $53.075B, up 2% | $105.682B, up 2% |
| Gross profit / margin | $2.804B / 5.28%, versus $2.834B / 5.44% | $5.583B / 5.28%, versus $5.394B / 5.23% |
| Operating income | $689M, versus $239M | $772M, versus $872M |
| Income from continuing operations | $552M, versus $56M | $471M, versus $419M |
| Net income attributable to McKesson | $499M, versus $1M | $361M, versus $310M |
| Diluted EPS attributable to McKesson | $2.51, versus $0.01 | $1.80, versus $1.47 |
Quarterly EPS improved sharply from a very low prior-year comparison. First-half operating income declined despite higher revenue; results include significant impairment and other unusual items. The filing reports no standalone adjusted earnings measure in the financial statements summarized here.
Cash flow, debt, and liquidity
For the first six months, operating cash flow was $318M, down from $1.339B. Investing used $983M, including $840M net cash paid for acquisitions; financing provided $198M. Cash, cash equivalents, and restricted cash declined $554M to $2.118B.
At September 30, total debt was $7.694B, including $1.394B of short-term borrowings/commercial paper; long-term debt was $6.568B and the current portion of long-term debt was $1.126B. Working capital was negative $319M, compared with positive $451M at March 31. The debt-to-capital ratio was 45.0%, versus 40.6%. McKesson said operating cash generation, credit facilities, and its commercial paper program should be sufficient for expected needs; it also cautioned that capital-market disruption could impair liquidity or increase borrowing costs.
Material changes and unusual items
- Revenue growth reflected market growth and acquisitions, partly offset by lost U.S. customers. U.S. Pharmaceutical and Specialty Solutions revenue rose 2%; Medical-Surgical Solutions rose 17% in the quarter, largely reflecting the MSD acquisition. European Pharmaceutical Solutions revenue fell 2% in the quarter.
- Quarterly gross profit declined, with margin down 16 basis points. Management cited customer losses, mix, timing of branded price increases, lower generics volume, U.K. reimbursement reductions, and competition in France. First-half gross profit benefited from higher LIFO credits and $35M of antitrust settlement receipts.
- The first half included $570M of noncash goodwill impairment charges in European Pharmaceutical Solutions, with no tax benefit. The comparable prior-year period included a $350M noncash goodwill impairment charge. Management cited U.K. reimbursement reductions and warned further reductions or other changes in forecasts could cause additional impairments.
- Restructuring and asset impairment charges were $82M for the quarter and $178M for the first half, versus $236M in each prior-year comparable period. A multi-year strategic growth initiative is intended to optimize the operating model and cost structure and is expected to be substantially implemented by the end of 2019. Management estimated total fiscal 2019 after-tax charges of approximately $150M–$210M.
- Quarterly results included a $90M pretax ($66M after-tax) credit from extinguishing a tax receivable agreement liability, and first-half results included a $97M escrow settlement gain relating to the Rexall Health acquisition. The first half also included higher restructuring, acquisition-related, and opioid-related costs.
- McKesson acquired Medical Specialties Distributors for $784M in June 2018, funded from cash on hand. It repurchased $888M of shares and paid $139M of dividends in the first half. The quarterly dividend was raised from $0.34 to $0.39 per share in July.
Outlook, risks, and contingencies
No specific revenue or EPS guidance is provided in the supplied filing text. Management expects available cash, operating cash flow, credit facilities, and commercial paper to support short- and long-term funding requirements. The company anticipates continuing quarterly cash dividends, subject to Board discretion.
Key exposures include more than 1,000 U.S. and Puerto Rico lawsuits alleging claims related to controlled-substance distribution, as well as a British Columbia action. The company generally could not estimate a reasonably possible loss range for unresolved proceedings. McKesson recorded a liability for its estimated share of New York’s opioid surcharge, but said the final amount was uncertain; the law is being challenged. Additional state opioid assessments are also possible.
Other notable risks include further U.K. reimbursement reductions, competitive pressure in France, customer losses, foreign-exchange movements, acquisition integration, and potential additional goodwill impairment. A German court decision increased the McKesson Europe minority-shareholder put amount by €0.51 per share to €23.50; shareholders appealed, and a further upward adjustment could require additional payments. The filing also notes that accounting for certain effects of the 2017 U.S. tax legislation remained incomplete.
Investor facts to verify
- How much of earnings improvement reflects recurring operations versus the $90M TRA credit, prior-year impairments, and other special items.
- Whether operating cash flow rebounds, given the $1.021B year-over-year first-half decline and working-capital outflows.
- Developments in opioid litigation and the ultimate cost of the New York surcharge and any other state assessments.
- Whether U.K. reimbursement pressure, European competition, or further forecast changes lead to additional impairments.
- Integration and returns from MSD and other acquisitions, alongside the cost and expected benefits of the restructuring initiative.
- Debt, commercial-paper usage, and liquidity trends, including the effects of share repurchases and dividends.