McKesson Corporation — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2023; fiscal year ends March 31. Unless noted, amounts are U.S. dollars. The filing is unaudited.
Financial results
| Metric | Three months ended September 30, 2023 | Six months ended September 30, 2023 |
|---|---|---|
| Revenue | $77.215 billion, up 10% | $151.698 billion, up 10% |
| Gross profit / margin | $3.069 billion / 3.97%, down 1% in profit and 44 basis points in margin | $6.091 billion / 4.02%, profit approximately flat and margin down 44 basis points |
| Operating income | $951 million, versus $1.124 billion | $2.051 billion, versus $2.160 billion |
| Net income attributable to McKesson | $664 million, down 28% | $1.622 billion, down 4% |
| Diluted continuing-operations EPS | $4.92, down 24% | $11.95, up 2% |
| Operating cash flow | Not separately reported for the quarter | Used $87 million, versus $166 million provided |
Quarterly revenue growth was led by U.S. Pharmaceutical, while gross profit was pressured by the European divestiture and foreign exchange. Results also reflected a $210 million Rite Aid bad-debt provision, lower other income, and higher interest expense. For the six months, EPS growth despite lower net income reflected fewer weighted-average diluted shares and a $147 million discrete tax benefit.
Segments
- U.S. Pharmaceutical: Q2 revenue rose 16% to $69.766 billion, while operating profit fell 34% to $593 million. YTD revenue rose 17% to $136.926 billion; operating profit fell 11% to $1.420 billion. Rite Aid’s $210 million provision, higher LIFO costs, and higher operating expenses weighed on profit; specialty growth and antitrust settlement proceeds partially offset these effects.
- Prescription Technology Solutions: Q2 revenue increased 12% to $1.140 billion and operating profit nearly doubled to $238 million. YTD revenue rose 14% to $2.384 billion and operating profit increased 78% to $469 million. Results included Rx Savings Solutions contingent-consideration remeasurement gains of $48 million in Q2 and $76 million YTD.
- Medical-Surgical Solutions: Q2 revenue was $2.834 billion, approximately flat, and operating profit fell 18% to $244 million. YTD revenue was $5.445 billion, approximately flat, and operating profit fell 15% to $471 million. Lower COVID-related activity affected results.
- International: Q2 revenue declined 44% to $3.475 billion; operating profit was $66 million versus a prior-year loss. YTD revenue declined 46% to $6.943 billion; operating profit was $123 million versus a prior-year loss. Revenue comparisons were substantially affected by the completed E.U. business divestiture.
Liquidity, debt and capital allocation
- At September 30, 2023, cash and cash equivalents were $2.524 billion, down from $4.678 billion at March 31. Total debt was $5.584 billion; $49 million was classified as current. The reported debt-to-capital ratio was 120.3%.
- Working capital was negative $3.616 billion. Current liabilities of $51.147 billion exceeded current assets of $47.531 billion, largely reflecting drafts and accounts payable typical of the business model.
- Six-month operating cash use was $87 million, with working-capital increases in receivables ($3.207 billion) and inventory ($2.349 billion) partly offset by higher payables ($4.307 billion). Investing activities used $315 million; financing activities used $1.752 billion.
- The company issued $1.0 billion of notes at 4.90% due 2028 and 5.10% due 2033. It tendered for $271 million principal of 2024 notes and deposited U.S. government obligations to satisfy and discharge the remaining $647 million principal. It reported a $9 million gain on the debt extinguishments.
- No amounts were outstanding under the $4.0 billion revolving credit facility at quarter-end; the company reported covenant compliance and stated that available cash, operating cash flow and financing sources should meet foreseeable requirements.
- McKesson returned $1.7 billion to shareholders during the first half through $1.5 billion of share repurchases and $149 million of dividends. The quarterly dividend increased to $0.62 per share; remaining repurchase authorization was $8.1 billion.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management expects COVID-19 vaccine, test and related-supply demand reductions to continue through fiscal 2024; transition of vaccine distribution to commercial channels began in Q2. The reported impact for the quarter and half-year was not material.
- Rite Aid bankruptcy: Rite Aid filed for Chapter 11 in October 2023. McKesson recorded a $210 million provision for receivables outstanding at September 30 and expects a further $511 million provision in Q3 FY2024 for October sales. Management considers the recorded reserves appropriate but says it will reassess them as circumstances warrant.
- Opioid-related settlements and claims: Estimated accrued liability was $6.644 billion at September 30, including $516 million current and $6.128 billion long-term. McKesson paid $529 million during the first half. Settlement payments to participating governmental entities extend through 2038, with separate Alabama, West Virginia and tribal settlements. For other opioid matters, the company says it cannot conclude a loss is probable or reasonably estimate a range; an adverse outcome could materially affect results, cash flows or liquidity.
- Tax dispute: The IRS proposed adjustments that could increase federal tax liability by $600–$700 million for fiscal 2018 and 2019. McKesson disputes the adjustments, has filed a protest, and expects no final resolution before fiscal 2026 or later. It believes its tax positions have merit and are adequately reserved, but an IRS victory could materially affect future financial position, results and cash flows.
- Restructuring: The company anticipates approximately $125 million in charges for efficiency initiatives; $99 million had been recorded cumulatively through September 30. The program is expected to be substantially complete by the end of fiscal 2024.
- Other notable comparisons: Q2 other income fell to $26 million from $175 million, largely because the prior-year period included a $142 million investment-exit gain. The six-month effective tax rate fell to 15.3%, principally reflecting the $147 million discrete benefit from an intellectual-property transfer. The 2023 first-half LIFO charge was $87 million, versus a $36 million credit in the prior-year period.
Important facts for investors to verify
- Whether Rite Aid collections, bankruptcy proceedings and the expected $511 million Q3 provision differ from management’s current estimates.
- Future opioid settlement payments, remaining litigation exposure and the adequacy of the $6.644 billion accrued liability.
- Progress and outcome of the IRS dispute, including potential tax, interest and cash-flow consequences.
- Underlying segment profitability and margins after adjusting for divestitures, antitrust settlement receipts, LIFO effects, contingent-consideration gains and other unusual items.
- Working-capital cash needs, debt refinancing and capital returns alongside the company’s substantial long-term litigation obligations.