McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2020; results cover the three and nine months ended December 31. Amounts are in U.S. dollars unless noted.
Business context and results
McKesson distributes pharmaceuticals and medical-surgical products and provides specialty-care, pharmacy, and healthcare technology services. The company reorganized its reporting into U.S. Pharmaceutical, International, Medical-Surgical Solutions, and Prescription Technology Solutions (RxTS); prior-period segment results were recast.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $62.6 billion | $59.2 billion | $179.1 billion | $172.5 billion |
| Gross profit | $3.151 billion | $3.033 billion | $8.851 billion | $8.687 billion |
| Gross margin | 5.03% | 5.13% | 4.94% | 5.04% |
| Operating income (loss) | $(7.362) billion | $360 million | $(6.050) billion | $1.620 billion |
| Net income (loss) attributable to McKesson | $(6.226) billion | $186 million | $(5.205) billion | $(121) million |
| Diluted EPS | $(39.03) | $1.03 | $(32.29) | $(0.66) |
Financial position, cash flow, and capital
- Nine-month operating cash flow was $1.172 billion, versus cash used of $280 million a year earlier. Investing activities used $210 million; property, plant, and equipment plus capitalized software expenditures totaled $427 million.
- At December 31, cash and cash equivalents were $3.577 billion, including $155 million of restricted cash reported separately; total cash, cash equivalents, and restricted cash were $3.732 billion.
- Total debt was $7.244 billion, including $152 million of commercial paper; long-term debt was $6.467 billion and its current portion was $777 million. The company issued $500 million of 0.90% notes due 2025 and repaid or retired approximately $1.0 billion of notes during the period.
- Working capital was $438 million, compared with a deficit of $402 million at March 31, 2020. McKesson stockholders’ equity was a deficit of $477 million, versus positive equity of $5.092 billion at March 31; the opioid charge was the primary driver of the year-to-date loss and decline in equity. Reported debt-to-capital was 87.8%, up from 52.1%.
- The company returned $709 million to shareholders during the nine months through $500 million of repurchases and $209 million of dividends. The quarterly dividend rose to $0.42 per share. The board authorized an additional $2 billion of repurchases in January 2021.
Material changes and operating drivers
- Revenue grew 6% in the quarter and 4% year to date, principally on U.S. Pharmaceutical market growth. Gross profit rose 4% and 2%, respectively, while gross margin declined 10 basis points in both comparisons.
- U.S. Pharmaceutical revenue increased 7% in the quarter and 5% year to date. Segment operating profit declined 6% in the quarter, partly due to lower LIFO credits.
- Medical-Surgical Solutions revenue rose 43% in the quarter and 21% year to date, driven by COVID-19 test, PPE, and vaccine-supply-kit activity. Segment operating profit increased to $260 million from $124 million in the quarter. PPE and related inventory impairments and excess inventory charges were $35 million for the quarter and $49 million year to date.
- International revenue fell 6% in the quarter and 4% year to date, reflecting the German wholesale business contribution to a joint venture, customer exits in Canada, and pandemic-related volume effects. McKesson recorded $115 million of long-lived asset impairments and a $69 million goodwill impairment year to date.
- RxTS revenue increased 9% in the quarter and 7% year to date, supported by CoverMyMeds customer and volume growth.
- The German pharmaceutical wholesale business was contributed to a Walgreens Boots Alliance joint venture on November 1, 2020; McKesson retained a 30% interest. The contribution generated a $47 million quarterly fair-value remeasurement loss.
Outlook, risks, contingencies, and unusual items
- Opioid claims: McKesson recorded an $8.067 billion charge, approximately $6.7 billion after tax, for its estimated share of a potential governmental-entity settlement framework and certain other opioid claims. The framework contemplated up to approximately $8 billion from McKesson over 18 years as part of up to $21 billion from three distributors. Terms and participation remained uncertain; the eventual loss could differ materially from the accrual. Other private-party and Canadian claims were not included, and their possible loss was not reasonably estimable. The company said it would continue negotiating and prepare to defend the cases.
- Other legal exposure: McKesson accrued $50 million for its estimated share of New York’s Opioid Stewardship Act surcharge for 2017 and 2018 after an appellate ruling reversed the earlier procedural outcome. The company also disclosed a federal request alleging controlled-substance reporting and documentation deficiencies at a former facility and its Memphis distribution center.
- COVID-19: Distribution volumes and patient visits weakened early in the pandemic and improved in the second and third quarters. COVID-19 tests and vaccine ancillary kits benefited Medical-Surgical Solutions; vaccine distribution’s financial impact was not material in the reported quarter. Future effects depend on the pandemic, vaccine activity, customer demand, supply availability, and related government actions. PPE pricing and inventory conditions could result in further write-downs.
- Management said available cash, operating cash flow, credit facilities, and commercial paper access were expected to support funding needs and described liquidity as strong. The $4 billion revolving facility had no borrowings at quarter-end. McKesson reported covenant compliance; a February 2021 amendment excluded specified non-cash litigation charges over $1 billion from the facility’s net-worth calculation.
- No quantitative earnings or revenue guidance was provided in the supplied filing text. Management noted that results could be affected by opioid-resolution outcomes, COVID-19, foreign exchange, working-capital volatility, restructuring, and potential impairment charges.
- Restructuring and related programs were expected to incur total charges of approximately $515 million to $565 million, with $442 million recorded to date; completion dates vary by initiative, with some programs extending into 2022.
Key facts investors should verify
- Whether the proposed opioid framework is finalized, which governmental entities participate, how payment timing and anti-diversion requirements are set, and whether the recorded liability proves adequate.
- Cash-flow and working-capital trends, including inventory, receivables, and payable movements, and the company’s capacity to meet litigation-related cash obligations.
- The effect of ongoing COVID-19 vaccine and test activity, pharmaceutical volumes, PPE demand and pricing, and any additional inventory or asset impairments.
- Progress and costs of the German joint venture transition, international restructuring, and the new segment structure’s effect on comparability.
- The amended credit-facility covenant terms, debt levels, repurchase pace, and dividend decisions given the reported stockholders’ deficit.