McKesson Corporation — Form 10-Q Summary
Business context and period: This filing covers the quarter ended June 30, 2015, McKesson’s first quarter of fiscal 2016 (fiscal year ending March 31). McKesson operates Distribution Solutions and Technology Solutions; pharmaceutical distribution generated about 98% of quarterly revenue. Amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended June 30, 2015 | Prior-year quarter |
|---|---|---|
| Revenue | $47.546 billion | $43.476 billion |
| Gross profit | $2.848 billion | $2.732 billion |
| Gross margin | 5.99% | 6.28% |
| Operating income | $931 million | $681 million |
| Income from continuing operations | $599 million | $419 million |
| Net income attributable to McKesson | $576 million | $403 million |
| Diluted EPS | $2.45 total; $2.50 continuing operations | $1.72 total; $1.76 continuing operations |
| Cash from operations | $454 million | $182 million |
- Revenue rose 9%; excluding approximately 4% adverse foreign-exchange effects, it increased 13%, mainly from market growth and business mix. North American pharmaceutical distribution revenue increased 15%; international pharmaceutical distribution revenue fell 17% reported but was flat excluding currency effects.
- Gross profit increased 4% reported, or 9% excluding approximately 5% currency effects. Gross margin declined 29 basis points, principally reflecting lower Distribution Solutions sell margin and other mix, currency, and generic-drug pricing effects.
- Operating expenses declined 7% to $1.917 billion. Income before tax increased 42% to $855 million. The reported improvement included unusual items noted below.
- Operating cash flow improved year over year. Receivables and inventory uses of cash were $749 million and $635 million, respectively, partly offset by a $1.003 billion increase in accounts payable.
Financial position and liquidity
- At June 30, 2015, cash and cash equivalents were $5.635 billion, working capital was $3.898 billion, and debt net of cash was $4.161 billion. The company reported a 52.5% debt-to-capital ratio and 32.0% net-debt-to-net-capital-employed ratio.
- Balance-sheet debt comprised $8.142 billion of long-term debt, $1.510 billion of current long-term debt, and $144 million of short-term borrowings. Management said cash generation and existing credit sources were expected to fund foreseeable requirements.
- Investing activities used $17 million, including $84 million of net proceeds from the nurse triage business sale. Financing activities used $203 million, including $105 million for repurchases and $59 million of dividends paid.
- About $1.9 billion of cash was held outside the United States, primarily for foreign operations and certain research and development; repatriation could create U.S. taxes.
Material changes, unusual items, and outlook
- Quarterly results included $59 million of cash proceeds from McKesson’s share of antitrust settlements, recorded as a reduction to cost of sales, and a $51 million pretax gain on the nurse triage business sale. Technology Solutions also recorded a $20 million severance charge. The prior-year quarter included a $34 million noncash charge related to a workforce business retained from a planned sale.
- The nurse triage divestiture generated $84 million net proceeds. The Brazilian pharmaceutical distribution business and a small Distribution Solutions business remained classified as discontinued operations; discontinued operations reported a $10 million after-tax loss. A prior $241 million pretax impairment had reduced the Brazilian business’s carrying value, and a warehouse fire in April 2015 could affect its fair value despite insurance coverage.
- In July 2015, after quarter-end, the Board raised the quarterly dividend from $0.24 to $0.28 per share. The Board retains discretion over future dividends. A $500 million share-repurchase authorization remained outstanding at June 30.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management cited market growth and customer expansion, partly offset by brand-to-generic price deflation. It warned that working capital and operating cash flow can vary with customer receipts, inventory purchases, and vendor-payment timing.
- Risks include foreign-exchange and international operating exposure, healthcare regulation, competition, customer concentration, cybersecurity and technology risks, acquisitions and divestitures, and legal or regulatory proceedings. The filing said it could not estimate reasonably possible losses for certain unresolved matters; adverse outcomes could be material. Celesio minority shareholders had put rights whose ultimate cash amount and timing were uncertain, and appraisal proceedings could affect compensation or put terms.
Important facts for investors to verify
- How much of the earnings and EPS increase reflects recurring operations versus the $59 million settlement proceeds, $51 million divestiture gain, prior-year charge, and other items.
- Whether Distribution Solutions can sustain growth while managing lower gross margin and generic-drug price deflation.
- The cash-flow and working-capital trajectory, including receivables, inventories, and supplier-payment timing.
- Potential value and timing of Celesio minority-shareholder put rights and related appraisal proceedings.
- Progress and valuation of the Brazilian divestiture, including the effect of the warehouse fire and insurance recovery.
- Developments in pending litigation, tax matters, and other contingencies for which loss estimates were not clear or available.