McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2014, and nine months ended December 31, 2014. The company’s fiscal year ends March 31. Unless indicated otherwise, financial figures below are in U.S. dollars and millions.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $47,005; up 37% year over year | $135,821; up 36% |
| Gross profit | $2,942; gross margin 6.26%, versus 5.39% | $8,662; gross margin 6.38%, versus 5.83% |
| Operating income | $780, versus $493 | $2,256, versus $1,834 |
| Income from continuing operations | $513, versus $164 | $1,429, versus $1,015 |
| Net income attributable to McKesson | $472, versus $65 | $1,344, versus $893 |
| Diluted EPS attributable to McKesson | $2.00, versus $0.28 | $5.72, versus $3.83 |
| Operating cash flow | $1,229 for nine months, versus $472 |
Balance sheet and liquidity at December 31, 2014: Cash and cash equivalents were $4,587; working capital was $4,363. Total debt was approximately $10.4 billion and debt net of cash was $5,807, down from $6,526 at March 31, 2014. The reported debt-to-capital ratio was 53.4%, versus 55.7%; net debt to net capital employed was 39.0%, versus 43.4%. Current assets were $37,141 and current liabilities $32,778.
Material changes and drivers
- Revenue growth primarily reflected the February 2014 acquisition of Celesio, market growth and business mix. Celesio contributed $7,288 of quarterly and $22,207 of nine-month international distribution revenue; it was not included in the comparable prior-year periods.
- North American distribution benefited from market growth and recently launched hepatitis C drugs, partly offset by price deflation from brand-to-generic conversions. Management noted that the hepatitis C products carried lower margins.
- Technology Solutions revenue declined 7% in both the quarter and nine-month period, reflecting lower software and service revenue, a planned product-line exit and the expected transition of a U.K. workforce business.
- Operating cash flow improved, but working-capital movements were substantial: receivables used $2,832 and inventories used $2,654, partly offset by a $4,164 source from accounts payable.
- Interest expense rose to $97 for the quarter and $297 for nine months, mainly reflecting debt issued to fund Celesio and Celesio’s debt.
Outlook, risks and unusual items
- Management expected cash generated from operations, existing credit facilities, the receivables facility and commercial paper access to be sufficient for foreseeable funding needs. No specific earnings or revenue guidance was provided.
- The Celesio domination and profit-and-loss transfer agreement became effective December 2, 2014. It provides noncontrolling shareholders a put right and compensation arrangements; the balance sheet included $1,461 of redeemable noncontrolling interests. Shareholders initiated appraisal proceedings challenging the compensation and/or put amounts, which could lead to additional payments. The timing and amount of future put-related cash payments are uncertain.
- McKesson recorded a $50 guaranteed dividend obligation to Celesio noncontrolling shareholders; recurring compensation of €0.83 per eligible share began January 1, 2015.
- Investigations by the U.S. Department of Justice and other authorities concern distribution of controlled substances. The company said resolution could be significant and might require changes to distribution procedures; it could not estimate a loss range for the unresolved matters.
- Tax exposures include Canadian transfer-pricing reassessments and $612 of unrecognized tax benefits. The company said up to $169 could potentially be reduced over the next 12 months, subject to audits and statutes of limitation.
- Other notable items included $95 of quarterly and $287 of nine-month LIFO inventory charges; $51 and $162 of acquisition-related expenses; and a $34 noncash charge relating to a workforce business reclassified back to continuing operations. Prior-year results included Canadian tax litigation expense, AWP litigation charges, technology restructuring charges and an $80 impairment of International Technology operations.
- Foreign-currency translation losses were $416 for the quarter and $995 for nine months, reducing accumulated other comprehensive income. About $2.2 billion of cash was held outside the United States; repatriation could incur U.S. taxes.
Important facts for investors to verify
- How much reported growth and profit improvement is attributable to Celesio versus underlying and comparable-business performance, including integration costs and acquired-intangible amortization.
- Whether working-capital cash use, especially receivables and inventory, remains manageable as sales volumes and seasonal purchasing change.
- The eventual outcome and cash implications of Celesio appraisal proceedings and the noncontrolling shareholders’ put rights.
- Developments, potential penalties or operating restrictions arising from controlled-substance investigations and Canadian tax disputes.
- Future LIFO expense, foreign-exchange effects and Technology Solutions performance, including the planned 2016 workforce-business transition.