McKesson Corporation — Form 10-Q Summary
Business context and period: McKesson distributes pharmaceuticals and medical-surgical products and provides related services. This filing covers the fiscal third quarter and first nine months ended December 31, 2018 (fiscal 2019), compared with the periods ended December 31, 2017. The company reported under three segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions, and Medical-Surgical Solutions, with remaining activities in Other.
Financial performance
| Metric | Quarter ended Dec. 31, 2018 | Quarter ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $56.208 billion | $53.617 billion | $161.890 billion | $156.729 billion |
| Gross profit / margin | $2.970 billion / 5.28% | $2.715 billion / 5.06% | $8.553 billion / 5.28% | $8.109 billion / 5.17% |
| Operating income | $683 million | $834 million | $1.455 billion | $1.706 billion |
| Net income attributable to McKesson | $469 million | $903 million | $830 million | $1.213 billion |
| Diluted EPS | $2.40 | $4.33 | $4.18 | $5.76 |
| Cash from operating activities | Not separately presented for the quarter | $141 million | $1.321 billion |
- Quarterly revenue increased 5% and gross profit increased 9%, but operating income fell 18% and diluted EPS fell 45%. For the nine months, revenue rose 3%, while operating income declined 15% and diluted EPS declined 27%.
- Quarterly operating expenses were $2.287 billion, including $21 million of goodwill impairment and $110 million of restructuring and asset impairment charges. The prior-year quarter included a $109 million gain from the sale of a business.
- Cash, cash equivalents and restricted cash were $1.849 billion at December 31, 2018, down from $2.672 billion at March 31, 2018. Working capital was $895 million, versus $451 million at March 31. Total debt was $8.736 billion, including $1.048 billion of short-term borrowings, $1.120 billion current long-term debt, and $7.616 billion long-term debt. The debt-to-capital ratio was 47.0%, compared with 40.6% at March 31.
- Segment revenue grew 6% in U.S. Pharmaceutical and Specialty Solutions, 19% in Medical-Surgical Solutions, and 1% in Other; European Pharmaceutical Solutions revenue declined 1% for the quarter. European segment operating profit for the nine months was a loss of $524 million, including $570 million of goodwill impairment charges.
Material changes, outlook and risks
- Management attributed revenue growth mainly to market growth, acquisitions and expanded business with existing customers, partly offset by customer losses. Gross profit benefited from antitrust settlement proceeds and higher LIFO inventory credits; U.K. reimbursement reductions and Canadian generic-price declines were headwinds.
- Nine-month operating cash flow fell sharply year over year, with working-capital movements including increased receivables and inventory among the factors. Investing cash use was $1.151 billion, including $866 million for acquisitions, notably Medical Specialties Distributors. Financing provided $317 million, including $1.099 billion of long-term debt proceeds and substantial short-term borrowing activity.
- Management said operating cash flow, cash, credit facilities and commercial paper access should be sufficient for foreseeable funding needs. No specific earnings guidance is provided in the supplied filing text. The company expects to continue quarterly dividends, subject to Board discretion and business conditions.
- The strategic growth initiative targets efficiency through centralization, outsourcing, workforce reductions, facility consolidation and store closures, substantially by 2020. Management expected $150 million–$210 million in total after-tax charges for the initiative’s preliminary phase. The San Francisco-to-Las Colinas headquarters relocation is expected to be completed by the fourth quarter of 2021; estimated total pre-tax charges are $60 million–$120 million.
- Goodwill and asset impairment risk remains, particularly in European pharmacy operations and Rexall, amid government reimbursement reductions and regulatory uncertainty, including Brexit. Further changes in assumptions could lead to additional impairments.
- McKesson faced more than 1,400 opioid-related complaints and disclosed multiple other legal matters and government inquiries. The filing says reasonably possible losses for unresolved proceedings generally could not be estimated. Opioid-related costs were $20 million for the quarter and $96 million for the nine months, primarily litigation expenses. New York’s opioid surcharge law was enjoined as unconstitutional, but the state appealed and other states were considering assessments.
- Other notable items include $104 million of quarterly cash receipts from antitrust legal settlements, a $60 million customer-bankruptcy charge reported in segment results, and $56 million of quarterly gain on an equity-investment sale. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings and gross-margin performance depended on settlement proceeds, LIFO credits, tax items, asset sales and other nonrecurring adjustments.
- Whether working-capital needs and customer payment timing continue to constrain operating cash flow, and how debt and liquidity evolve.
- The potential financial exposure, timing and insurance coverage for opioid litigation, investigations and other legal proceedings; the filing provides no clear aggregate loss estimate.
- Whether U.K. reimbursement and regulatory conditions, Brexit uncertainty and Canadian generic-price pressure cause further impairment or operating deterioration.
- Progress, remaining costs and realized savings from the growth initiative and headquarters relocation, and the eventual economics of acquisitions and share repurchases.