Business context and reporting period
McKesson Corporation’s Form 10-Q covers its fiscal first quarter ended June 30, 2023, with comparisons to the quarter ended June 30, 2022. The company operates in U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. Results reflect the prior-year comparison against businesses in Europe that were divested in fiscal 2023.
Financial results and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $74.483 billion | $67.154 billion | +11% |
| Gross profit | $3.022 billion | $3.023 billion | Flat |
| Gross margin | 4.06% | 4.50% | -44 basis points |
| Operating income | $1.100 billion | $1.036 billion | +6% |
| Net income attributable to McKesson | $958 million | $768 million | +25% |
| Diluted EPS from continuing operations | $7.02 | $5.25 | +34% |
| Cash from operating activities | $(1.052) billion | $(941) million | Greater use of cash |
Lower operating expenses and higher other income helped support earnings, while gross profit was essentially unchanged despite revenue growth. The reported effective tax rate fell to 8.6% from 19.8%, principally due to a $147 million discrete tax benefit from an intra-company intellectual-property transfer. Q1 also included $118 million of proceeds from McKesson’s share of antitrust settlements, recorded in U.S. Pharmaceutical cost of sales, and a $28 million RxTS gain from remeasuring acquisition-related contingent consideration.
Operating cash use primarily reflected working-capital movements: receivables rose $2.380 billion and inventory rose $826 million, partly offset by a $1.473 billion increase in payables. Capital expenditures and capitalized software totaled $124 million. Cash and cash equivalents were $2.636 billion at June 30, versus $4.678 billion at March 31; working capital was negative $2.883 billion.
Total debt was $5.661 billion, including $50 million current debt. In June, McKesson issued $1.0 billion of notes due 2028 and 2033, tendered for $271 million of 2024 notes, and deposited U.S. government obligations to satisfy and discharge the remaining $647 million principal due in March 2024. The company reported no outstanding commercial paper or borrowings on its $4.0 billion revolving credit facility and said it was in compliance with debt covenants.
Material changes and segment performance
- U.S. Pharmaceutical: Revenue rose 18% to $67.160 billion; operating profit increased 19% to $827 million. Growth reflected higher retail volumes and specialty pharmaceuticals, with the result including the $118 million antitrust settlement receipt and a $32 million LIFO charge.
- RxTS: Revenue rose 17% to $1.244 billion; operating profit increased 60% to $231 million, supported by customer growth and access solutions. The $28 million contingent-consideration gain contributed to profit.
- Medical-Surgical Solutions: Revenue increased 1% to $2.611 billion, while operating profit fell 11% to $227 million. Lower COVID-19-related sales and higher employee costs weighed on results.
- International: Revenue declined 47% to $3.468 billion, primarily reflecting the E.U. divestiture and foreign exchange; operating profit was $57 million versus a $6 million loss in the prior-year quarter, which included E.U. disposal-related charges.
Corporate expenses, net were $204 million versus $39 million a year earlier, largely because the prior-year period included a $106 million gain related primarily to the E.U. disposal group and the current quarter included higher restructuring costs.
Outlook, risks and unusual items
- Management expects available cash, operating cash flow, credit facilities, commercial paper, and other borrowing sources to meet short- and long-term cash requirements. It cautions that capital-market volatility could impair liquidity or increase borrowing costs. The filing provides no specific earnings guidance.
- Management expects declines in COVID-19 vaccine distribution, COVID-19 tests, and related supply-kit activity to persist through fiscal 2024; these impacts were not material to Q1 results.
- A restructuring program approved in fiscal 2023 is expected to generate approximately $125 million of total charges; $96 million had been recorded by June 30, 2023. It is anticipated to be substantially complete by the end of fiscal 2024.
- Estimated opioid-related liabilities were $7.173 billion, including $545 million expected to be paid within 12 months. McKesson reported approximately $1.0 billion paid under the multi-state settlement by quarter-end and made $529 million of settlement payments in July 2023. Other opioid claims remain, and potential losses are generally not estimable. An adverse outcome could materially affect financial position, cash flows, liquidity, or results.
- The IRS proposed adjustments that would increase federal tax liability by $600 million to $700 million for fiscal 2018 and 2019. McKesson disputes the adjustments and intends to pursue appeals and, if needed, judicial remedies; resolution is not expected before fiscal 2026 or later. The company believes its positions are meritorious and adequately reserved, but an IRS victory could materially affect future results and cash flows.
- McKesson repurchased 1.8 million shares for $673 million in Q1 and paid $74 million in dividends. In July, the board increased repurchase authorization by $6.0 billion and raised the quarterly dividend from $0.54 to $0.62 per share.
Important facts for investors to verify
- How much of EPS growth is attributable to the $147 million discrete tax benefit, antitrust proceeds, contingent-consideration gain, and share-count reduction.
- Whether working-capital cash use reverses in subsequent quarters and how operating cash flow compares with earnings.
- Progress and cash-payment timing for opioid settlements, and exposure to unresolved governmental, private, and Canadian claims.
- Developments in the IRS dispute, including any revised estimate of potential exposure or reserve.
- Execution costs and expected savings from the restructuring program, alongside ongoing COVID-19-related declines and International segment performance.
- Debt issuance and refinancing costs, cash deployment for buybacks and dividends, and the company’s liquidity and covenant position.