McKesson Corporation — Form 10-Q Summary
Business context and reporting period. McKesson is a healthcare distribution and services company with four reporting segments: U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. This report covers the first quarter of fiscal 2023, the three months ended June 30, 2022, compared with the three months ended June 30, 2021. Unless indicated otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended June 30, 2022 | Prior-year quarter |
|---|---|---|
| Revenue | $67.154 billion | $62.674 billion |
| Gross profit / margin | $3.023 billion / 4.50% | $3.032 billion / 4.84% |
| Operating income | $1.036 billion | $568 million |
| Income from continuing operations | $807 million | $536 million |
| Net income attributable to McKesson | $768 million | $486 million |
| Diluted EPS from continuing operations | $5.25 | $3.09 |
| Net cash used in operating activities | $941 million | $1.622 billion |
Revenue increased 7%, while gross profit was essentially flat and gross margin declined 34 basis points. Operating expenses fell 19% to $1.987 billion; the operating-expense ratio improved to 2.96% from 3.93%. The effective tax rate was 19.8%, versus 4.6% in the prior-year quarter. Weighted-average diluted shares fell 8% to 145.9 million, helping support EPS growth.
Operating cash outflow reflected working-capital movements, including increases in receivables of $1.584 billion and inventory of $955 million, partly offset by a $1.006 billion increase in accounts payable. Cash and cash equivalents were $2.233 billion at quarter end; cash, cash equivalents, and restricted cash totaled $2.340 billion. Total debt was $5.775 billion, including $799 million current. Working capital was negative $1.818 billion, and the reported debt-to-capital ratio was 122.4%. The $4.0 billion revolving credit facility had no borrowings, and the company reported compliance with its debt covenants.
Changes, segments, and capital allocation
- U.S. Pharmaceutical: Revenue rose 14% to $56.947 billion; operating profit increased 2% to $696 million, primarily on market growth and specialty pharmaceuticals.
- RxTS: Revenue grew 21% to $1.066 billion; operating profit increased 38% to $144 million, supported by customer volumes and technology services.
- Medical-Surgical Solutions: Revenue increased 3% to $2.592 billion; operating profit rose to $256 million from $75 million. The comparison benefited from $164 million of prior-year inventory charges on PPE and related products.
- International: Revenue declined 29% to $6.549 billion, reflecting divestitures and unfavorable foreign exchange. The segment recorded a $6 million operating loss, including $94 million of charges to remeasure the pending E.U. disposal group.
McKesson completed the sale of its U.K. retail and distribution businesses on April 6, 2022, for approximately $144 million, subject to adjustments. The planned sale of specified E.U. businesses to PHOENIX Group for approximately €1.2 billion, subject to adjustments and closing conditions, was expected to close in the second half of fiscal 2023. At June 30, $3.155 billion of assets and $2.324 billion of liabilities were classified as held for sale.
The company spent $1.0 billion on share repurchases and paid $71 million in dividends during the quarter. In July, the board authorized an additional $4.0 billion of repurchases and raised the quarterly dividend from $0.47 to $0.54 per share.
Outlook, commentary, and risks
- The filing provides no specific consolidated earnings or revenue guidance. Management said available cash, operating cash flow, credit facilities, and commercial paper access are expected to fund near- and long-term requirements.
- The opioid settlement with participating governmental entities became effective April 2, 2022. Subject to conditions including court approvals, the distributors would pay up to approximately $19.5 billion over 18 years; McKesson’s stated share is up to approximately $7.4 billion. McKesson’s accrued opioid-related governmental liability was $7.891 billion at June 30, including $759 million current. Payments of $375 million were made during the quarter and a further $470 million in July.
- Private-party and other opioid claims are not included in that settlement or the recorded charge; the company said it cannot reasonably estimate the ultimate loss range for all remaining matters. Adverse outcomes could materially affect financial position, cash flows, liquidity, or results.
- COVID-19 test and ancillary-kit demand declined year over year. These activities contributed approximately $201 million of Medical-Surgical revenue and $49 million of segment operating profit in the quarter. The CDC vaccine-distribution relationship and HHS ancillary-kit contract were renewed or extended in July; future program scope and demand remain uncertain.
- Management said inflation, labor and transportation costs, supply-chain disruption, and the Russia-Ukraine conflict had not materially affected quarterly results, but could affect future costs and operations. McKesson also cited potential future impairment risk, particularly for its McKesson Canada reporting unit.
- Other notable subsequent event: in July, McKesson sold an equity investment for $179 million; it expected to recognize a gain in the next quarter. The investment’s cost basis was $38 million.
Important facts for investors to verify
- Progress and conditions for closing the E.U. divestiture, and the final proceeds and accounting impacts.
- Settlement approvals, payment timing, and potential exposure from opioid claims outside the recorded governmental liability.
- Whether operating cash flow improves as receivables, inventory, and settlement payments affect working capital.
- Future performance and margins by segment, including the sustainability of COVID-related activity and the impact of divestitures and foreign exchange.
- Completion of the $1.0 billion accelerated repurchase and the effect of further buybacks and the higher dividend on liquidity and leverage.