McKesson Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers McKesson’s fiscal first quarter of 2018, the three months ended June 30, 2017, compared with the quarter ended June 30, 2016. McKesson operates Distribution Solutions and Technology Solutions. The results reflect acquisitions and the March 2017 contribution of most McKesson Technology Solutions businesses to Change Healthcare, in which McKesson retained a 70% equity-method interest.
Key financial results
| Metric | Quarter ended June 30, 2017 | Quarter ended June 30, 2016 | Change / context |
|---|---|---|---|
| Revenue | $51.051 billion | $49.733 billion | Up 3% |
| Gross profit / gross margin | $2.560 billion / 5.01% | $2.907 billion / 5.85% | Profit down 12%; margin down 84 basis points |
| Operating income | $633 million | $972 million | Down 35% |
| Continuing operations income | $363 million | $673 million | Down 46% |
| Net income attributable to McKesson | $309 million | $542 million | Down 43% |
| Diluted EPS | $1.45 | $2.38 | Continuing-operations EPS was $1.44 vs. $2.88 |
| Operating cash flow | $741 million | $1.859 billion | Lower, including less favorable working-capital timing |
| Cash and cash equivalents | $2.339 billion | — | $2.783 billion at March 31, 2017 |
| Total debt | $7.949 billion | — | $8.362 billion at March 31, 2017 |
| Working capital / debt-to-capital ratio | $1.898 billion / 37.5% | — | $1.336 billion / 39.2% at March 31, 2017 |
Cash used in investing activities was $129 million, including $1.485 billion of acquisition payments and release of $1.469 billion in restricted acquisition cash. Cash used in financing was $1.131 billion, including $300 million of share repurchases, $62 million of dividends paid, and net repayments of short-term borrowings. Capital expenditures and capitalized software spending totaled $118 million. The quarterly dividend was $0.28 per share during the period.
Material changes versus the prior period
- Revenue growth was driven mainly by market growth, acquisitions, and expanded North American customer business. Distribution Solutions revenue rose 4% to $50.931 billion.
- Gross profit and margin declined amid competitive sell-side pricing, weaker manufacturer pricing trends, and business mix. The prior-year quarter included $142 million of antitrust settlement receipts, which further affected the comparison.
- McKesson recorded a $120 million equity-method loss from Change Healthcare, including transaction and integration costs and amortization of equity-method intangible assets. A $37 million gain from final net-working-capital and other adjustments partially offset expenses.
- Technology Solutions revenue fell to $120 million from $724 million, primarily because most of the Core MTS business was deconsolidated and RelayHealth Pharmacy moved to Distribution Solutions. Technology Solutions reported a $78 million operating loss, versus $168 million operating profit.
- The prior-year quarter included a $113 million after-tax loss on the sale of the Brazilian distribution business. Diluted weighted-average shares fell to 213 million from 228 million, primarily reflecting repurchases.
Outlook, management commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance in the supplied filing text. It expects operating cash generation, cash balances, credit facilities, and commercial paper capacity to meet foreseeable funding needs; it cautioned that capital-market disruption could impair liquidity or raise borrowing costs.
- Management cited competitive pricing, manufacturer pricing trends, product mix, acquisition integration, and Change Healthcare’s performance as important factors. It also warned that lower expected cash flows, a higher discount rate, or lower terminal growth could trigger goodwill impairment in the reporting unit containing its U.K. retail business.
- McKesson’s $3.5 billion revolving credit facility and $3.5 billion commercial paper program had no borrowings outstanding at June 30, 2017; the company reported compliance with credit-facility covenants. About $1.7 billion of cash was held outside the U.S., primarily intended for foreign operations; repatriation could incur U.S. taxes.
- Acquisitions included CoverMyMeds for $1.3 billion, funded from cash on hand, with up to $0.2 billion of additional contingent consideration. The company also continued integration and measurement-period accounting for earlier acquisitions. A cost-alignment plan is expected to total $250–$270 million in pretax charges; $246 million had been recorded to date, with implementation expected substantially before the end of 2019.
- McKesson disclosed opioid-related lawsuits, including claims by West Virginia local governments and municipalities in California, Ohio, and New York, among other legal and regulatory matters. It generally could not estimate reasonably possible losses for unresolved proceedings and warned that adverse outcomes could be material.
- On July 26, 2017, after quarter-end, the board raised the quarterly dividend from $0.28 to $0.34 per share for dividends declared thereafter. The board retains discretion over future dividends.
Important facts for investors to verify
- Whether Distribution Solutions can sustain growth while stabilizing gross margins amid pricing competition and changing drug-price trends.
- Change Healthcare’s operating performance, McKesson’s equity-method losses, and the expected path and timing of any IPO or eventual exit from the investment.
- Acquisition integration and returns, including CoverMyMeds contingent consideration, and the outlook for potential U.K. retail goodwill impairment.
- Cash-flow conversion and working-capital volatility, including acquisition funding, offshore cash, debt maturities, and capital returns through repurchases and dividends.
- Developments in opioid litigation and other investigations, for which the filing does not provide a clear estimate of potential losses.