McKesson Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended March 31, 2022. The filing is an annual report, not a standalone 2021 fourth-quarter report; comparisons below are FY2022 versus FY2021.
Business context
McKesson is a healthcare distributor and services company operating through U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. Its businesses distribute pharmaceuticals and medical-surgical products and provide pharmacy, technology, specialty-care, and related services. In FY2022, the company advanced its plan to exit most European operations.
Key financial results
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Revenue | $263.966 billion | $238.228 billion | Up 11% |
| Gross profit | $13.130 billion | $12.148 billion | Up 8% |
| Gross margin | 4.97% | 5.10% | Down 13 basis points |
| Operating income (loss) | $2.038 billion | $(5.040) billion | FY2021 included an $8.1 billion opioid-related charge |
| Income (loss) from continuing operations attributable to McKesson | $1.119 billion | $(4.538) billion | Before discontinued operations |
| Net income (loss) attributable to McKesson | $1.114 billion | $(4.539) billion | FY2022 diluted EPS was $7.23 versus $(28.26) |
| Cash from operating activities | $4.434 billion | $4.542 billion | Down $108 million |
| Capital expenditures and capitalized software | $535 million | $641 million | Investing cash flow also included $578 million net proceeds from business and investment sales |
| Cash and cash equivalents at year-end | $3.532 billion | $6.278 billion | Cash, cash equivalents, and restricted cash totaled $3.935 billion |
| Total debt | $5.879 billion | $7.148 billion | Down $1.269 billion |
| Working capital | $(2.235) billion | $1.279 billion | Declined amid lower cash and changes in current liabilities |
Segment performance
| Segment | FY2022 revenue | Revenue change | FY2022 operating profit (loss) | Profit change |
|---|---|---|---|---|
| U.S. Pharmaceutical | $212.149 billion | +12% | $2.879 billion | +4% |
| RxTS | $3.864 billion | +34% | $500 million | +27% |
| Medical-Surgical Solutions | $11.608 billion | +15% | $959 million | +36% |
| International | $36.345 billion | +1% | $(968) million | Loss widened, primarily due to European divestiture charges |
Material changes and unusual items
- Revenue and gross profit rose with U.S. pharmaceutical market growth, recovering prescription volumes and patient visits, specialty-drug growth, RxTS customer volume, and COVID-19 vaccine-related distribution and supply-kit activity. Gross margin nevertheless declined.
- European divestiture remeasurement and related charges totaled approximately $1.6 billion in FY2022, including $1.2 billion for the U.K. disposal group and $438 million for the E.U. disposal group and related software impairment. McKesson sold its Austrian business in January 2022 and completed the U.K. sale on April 6, 2022. The E.U. transaction was expected to close in the second half of FY2023, subject to conditions and approvals.
- The company recorded an additional $274 million opioid-related charge in FY2022. It had accrued approximately $8.3 billion for governmental opioid claims at year-end, including $1.0 billion estimated payable before March 31, 2023. A settlement covering a substantial majority of governmental claims became effective April 2, 2022; McKesson’s stated share could be up to approximately $7.4 billion over 18 years, subject to settlement conditions. Private claims and other matters are not included in that settlement accrual, and the company said their possible loss range could not be reasonably estimated.
- Medical-Surgical recorded $164 million of charges on PPE and related inventory, including a $147 million write-down of excess inventory management did not intend to sell.
- McKesson paid $3.5 billion for share repurchases and $277 million in dividends, and spent $1.0 billion buying McKesson Europe shares from minority holders. The quarterly dividend increased from $0.42 to $0.47 per share in July 2021.
- A $191 million debt-extinguishment loss arose from a tender offer that paid $1.1 billion to retire $922 million principal amount of notes. Year-end debt was lower, while the debt-to-capital ratio rose to 114.5%, chiefly reflecting stockholders’ deficit and substantial repurchases.
Liquidity, outlook, and risks
Management said operating cash flow, cash and short-term investments, commercial paper, and a $4.0 billion revolving credit facility were expected to fund requirements. McKesson reported compliance with debt covenants at March 31, 2022 and no outstanding commercial paper at year-end. Cash from operations was nearly unchanged year over year, but year-end cash was lower and working capital turned negative. The company also cited substantial purchase obligations and the long-term cash demands of opioid settlements.
The 10-K does not provide the company’s numerical FY2023 outlook; it directs readers to the May 5, 2022 earnings release furnished with an 8-K. Management cited inflation, labor and transportation costs, supply-chain disruption, foreign exchange, COVID-19 uncertainty, and the changing scale of vaccine-related activity as uncertainties. Other key risks include opioid and other litigation, healthcare regulation and reimbursement changes, customer concentration, cybersecurity and privacy, supplier availability, and the execution and timing of European divestitures. CVS represented approximately 21% of FY2022 revenue and 28% of trade receivables.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The auditor identified opioid contingencies and the McKesson Canada goodwill valuation as critical audit matters.
Important facts for investors to verify
- Review the May 5, 2022 8-K earnings release for FY2023 guidance and compare it with subsequent results.
- Track settlement approvals, payment timing, escrow releases, and any additional opioid-related claims or insurance recoveries; the recorded accrual does not cover all private claims.
- Confirm final proceeds, closing adjustments, and remaining obligations from the U.K. and E.U. exits, including the timing and performance of the E.U. transaction.
- Assess whether the company can sustain operating cash generation while meeting settlement payments, purchase commitments, debt maturities, and shareholder distributions.
- Monitor the recovery or further impairment risk in International and the sensitivity of McKesson Canada goodwill to forecasts and discount-rate assumptions.
- Evaluate the effect of customer concentration, gross-margin trends, inventory exposure, and lower or changing COVID-19-related demand on normalized earnings.