McKesson Corporation — Form 10-Q Summary
Business context and reporting period. McKesson is a healthcare distribution, services, and technology company. This report covers the three and six months ended September 30, 2020—McKesson’s fiscal second quarter and first half of fiscal 2021. All amounts below are U.S. dollars.
Key financial results
| Metric | Three months ended September 30, 2020 | Six months ended September 30, 2020 |
|---|---|---|
| Revenue | $60.8 billion, up 6% | $116.5 billion, up 3% |
| Gross profit / margin | $3.0 billion / 4.93%, versus 4.98% | $5.7 billion / 4.89%, versus 4.99% |
| Operating income | $634 million, versus $626 million | $1.31 billion, versus $1.26 billion |
| Net income attributable to McKesson | $577 million, versus a $730 million loss | $1.02 billion, versus a $307 million loss |
| Diluted EPS from continuing operations | $3.54, versus a $3.99 loss | $6.26, versus a $1.62 loss |
| Cash from operating activities | Use of $41 million for the six months, versus use of $159 million |
Quarterly operating margin was approximately 1.04%, compared with 1.09% a year earlier; first-half operating margin was approximately 1.13%, compared with 1.11%. Results include a $69 million goodwill impairment and $60 million of restructuring and related charges in the quarter. First-half results also include a $131 million net insurance-related gain and $59 million of gains on equity investments.
Material changes and segment performance
- U.S. Pharmaceutical revenue rose 5% in the quarter and 4% for the half year. Quarterly segment operating profit was $623 million, down 3%; first-half profit was $1.24 billion, up 2%. The quarter included a $50 million New York opioid-law accrual.
- International revenue rose 2% in the quarter but fell 3% for the half year. The segment reported operating losses of $45 million for the quarter and $42 million for the half year, including the $69 million goodwill impairment and U.K. restructuring costs.
- Medical-Surgical Solutions revenue increased 23% in the quarter and 9% for the half year, supported by COVID-19 test and protective-equipment sales. Segment operating profit increased 45% and 9%, respectively.
- Prescription Technology Solutions revenue increased 7% in the quarter and 5% for the half year. Operating profit declined 10% and 21%, respectively, as higher growth-related expenses and mix pressured margins.
- Reported earnings comparisons were strongly affected by the prior-year period’s $1.2 billion impairment and $246 million dilution loss related to Change Healthcare. McKesson completed its separation from the joint venture in March 2020.
Financial position, liquidity, and outlook
- At September 30, 2020, cash and cash equivalents were $3.09 billion, total debt was $7.61 billion, and current debt was $1.76 billion. Debt to capital was 50.4%, down from 52.1% at March 31, 2020. The $4 billion revolving credit facility had no borrowings, and the company reported compliance with its covenants.
- Cash, cash equivalents, and restricted cash declined $783 million in the first half. Investing activities used $278 million; financing activities used $401 million. Working capital was negative $379 million. Operating cash use reflected, among other factors, a $1.40 billion inventory increase and a $1.31 billion decrease in drafts and accounts payable.
- Management said liquidity remained strong and expected operating cash flow, cash, credit facilities, and commercial paper access to cover anticipated requirements. No quantified earnings guidance was provided in the filing.
- COVID-19 reduced distribution volumes, patient visits, and demand in parts of the business, particularly earlier in the half year; conditions improved in the second quarter. Test and protective-equipment sales supported results, while supplier price increases on protective equipment pressured margins. Future effects, including possible inventory write-downs, remained uncertain.
- McKesson was preparing to distribute COVID-19 vaccines and ancillary supplies under government arrangements. The financial impact was not yet estimable, and the company identified execution, regulatory, funding, supply-chain, and reputational risks. The German pharmaceutical wholesale business was contributed to a Walgreens Boots Alliance joint venture on November 1, 2020, after the reporting date.
Risks, contingencies, and unusual items
- McKesson faced thousands of opioid-related legal proceedings. A proposed framework discussed in October 2020 could involve up to approximately $8 billion from McKesson over 18 years as part of up to $21 billion for the three largest distributors. The proposal was not a final settlement; the company had not accrued a liability for it and said potential losses could not be reasonably estimated.
- The company accrued $50 million for its estimated share of New York’s Opioid Stewardship Act surcharge for 2017 and 2018 following an appellate ruling. The outcome remained subject to legal developments.
- Other notable items include the $105 million discrete tax benefit from an intercompany intellectual-property transfer, which lowered the reported tax rate, and the $131 million net gain from insurance proceeds related to a shareholder derivative action.
- Restructuring programs were expected to incur total charges of approximately $490 million to $565 million; $402 million had been recorded to date. Management cited COVID-19 uncertainty, possible future goodwill impairment, foreign-exchange exposure, and legal and regulatory matters as risks.
Important facts for investors to verify
- Whether reported earnings and margins remain representative after adjusting for unusual tax, insurance, investment, impairment, restructuring, and opioid-related items.
- Whether working-capital movements, especially inventory and supplier-payment timing, convert into sustained operating cash flow.
- Progress and financial terms of the vaccine-distribution arrangements and the German joint venture.
- Developments in opioid litigation and New York’s surcharge, including any settlement terms, participation, or additional accruals.
- Whether International segment performance and goodwill impairment risks improve, and whether protective-equipment pricing or COVID-19 demand changes affect margins.