McKesson Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (fiscal Q2 and first half of fiscal 2018). Dollar amounts are in millions unless stated otherwise.
Business context and results
McKesson distributes pharmaceuticals and medical-surgical products and provides healthcare technology services. Results reflect acquisitions, the March 2017 contribution of most of McKesson Technology Solutions to Change Healthcare, and significant charges tied to McKesson Europe’s U.K. retail business.
| Metric | Quarter ended Sep. 30, 2017 | Prior-year quarter | Six months ended Sep. 30, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $52,061 | $49,957 | $103,112 | $99,690 |
| Gross profit | $2,834 | $2,756 | $5,394 | $5,663 |
| Gross margin | 5.44% | 5.52% | 5.23% | 5.68% |
| Operating income | $239 | $580 | $872 | $1,552 |
| Net income attributable to McKesson | $1 | $307 | $310 | $849 |
| Diluted EPS attributable to McKesson | $0.01 | $1.34 | $1.47 | $3.72 |
| Operating cash flow | Not presented by quarter | $1,339 | $2,928 |
Financial position and liquidity
- At September 30, 2017, cash and equivalents were $2,563; working capital was $2,029, up from $1,336 at March 31, 2017.
- Total debt was approximately $8,321: $8,015 of long-term debt, including its current portion, and $306 of short-term borrowings. The debt-to-capital ratio was 39.3%, versus 39.2% at March 31.
- Six-month operating cash flow fell to $1,339 from $2,928. The filing cites working-capital movements, including increased receivables and inventories, partly offset by higher accounts payable. Investing used $396, including acquisition spending; financing used $1,272, including $701 of share repurchases and $121 of dividends.
- Management said cash generation, credit facilities and the commercial paper program should be sufficient for expected requirements, while cautioning that capital-market disruption could impair liquidity or raise borrowing costs. The $3.5 billion revolving facility was undrawn and covenants were met.
Material changes and unusual items
- Revenue increased 4% for the quarter and 3% for the half, driven primarily by North American pharmaceutical distribution growth, acquisitions and expanded customer business. Gross profit rose 3% quarterly but fell 5% for the half; the prior-year half included $142 of antitrust settlement proceeds.
- McKesson recorded a $350 noncash goodwill impairment for McKesson Europe and $236 of restructuring and asset impairment charges, including $189 for U.K. retail assets and $47 primarily for severance. The goodwill impairment was not tax deductible. These charges materially reduced operating income and contributed to the quarter’s nearly break-even attributable earnings.
- McKesson expects approximately $650–$750 of fiscal 2018 pre-tax impairment and restructuring charges for McKesson Europe; $586, including the goodwill impairment, had been recorded by the quarter’s end. Further impairment is possible if projected cash flows weaken.
- McKesson recorded a $61 quarterly and $181 half-year equity-method loss from its 70% investment in Change Healthcare, including fair-value-basis amortization and the joint venture’s transaction and integration costs.
- On October 2, 2017, after quarter-end, McKesson completed the agreed sale of its EIS business for $185, subject to adjustments, and expected to recognize a gain in fiscal Q3.
- The $1.47 half-year diluted EPS compares with $3.72 a year earlier; the prior-year period included a $113 after-tax loss from the sale of the Brazilian business. Share repurchases reduced weighted-average diluted shares to 211 million from 228 million.
Outlook, risks and contingencies
- No specific revenue, earnings or EPS guidance is provided in the filing. Management cited growth in drug utilization, price increases and new products, partly offset by brand-to-generic price deflation, competitive distribution pricing, weaker manufacturer pricing trends and U.K. reimbursement reductions.
- Risks include further U.K. reimbursement cuts or operational weakness, impairment of goodwill or other assets, Change Healthcare underperformance, acquisition and divestiture execution, foreign exchange movements, customer or supplier disruption, regulatory changes, cybersecurity events and capital-market volatility.
- The filing describes numerous opioid-related lawsuits and government inquiries concerning controlled-substance distribution, as well as shareholder derivative litigation relating to the company’s previously disclosed settlement with U.S. authorities. McKesson generally could not estimate reasonably possible losses for the unresolved proceedings.
- Unrecognized tax benefits were $564; up to $70 could potentially be reduced through audit resolutions over the next 12 months, though the amount could change. Future dividends remain at the board’s discretion; the quarterly dividend was raised to $0.34 per share.
Important facts for investors to verify
- Whether McKesson Europe’s U.K. business stabilizes and whether total fiscal 2018 charges remain within the $650–$750 estimate.
- Underlying operating performance excluding impairment, restructuring, acquisition-related and other unusual items; the reported quarter’s attributable earnings were only $1.
- Cash conversion and working-capital trends, particularly receivables, inventory and supplier-payment movements.
- Change Healthcare’s operating results and the valuation assumptions underlying McKesson’s $3,795 carrying value for its investment.
- Developments, potential costs and any eventual loss estimates related to opioid litigation and government investigations.
- Final proceeds and gain from the EIS sale, and the effect of continuing share repurchases and dividends on liquidity and capital allocation.