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McKesson Reports Fiscal 2020 First-Quarter Results

McKesson Corporation (NYSE:MCK) has reported that revenues for the first quarter ended June 30, 2019, were $55.7 billion compared to $52.6 billion a year ago, an increase of 6% on a reported basis and an increase of 7% on an FX-adjusted basis.

On the basis of U.S. generally accepted accounting principles (“GAAP”), first-quarter earnings per diluted share from continuing operations was $2.27, compared to a loss per diluted share of $(0.69) a year ago.

First-quarter Adjusted Earnings per diluted share was $3.31, an increase of 14% compared to $2.90 a year ago, primarily driven by growth in the U.S. Pharmaceutical and Specialty Solutions segment and a lower share count, partially offset by a higher tax rate.

“McKesson is off to a strong start in fiscal 2020, and our first-quarter earnings performance exceeded our expectations,” said Brian Tyler, chief executive officer. “Based on the momentum from our first-quarter results and our confidence in the full year outlook, we are raising our previous guidance range for fiscal 2020 and now expect Adjusted Earnings per diluted share of $14.00 to $14.60.”

For the first quarter, McKesson used cash from operations of $51 million, and invested $111 million internally, resulting in negative free cash flow of $162 million. During the quarter, McKesson paid $46 million for acquisitions, and returned $759 million of cash to shareholders via $684 million of common stock repurchases and $75 million of dividend payments. The Board of Directors also approved a 5% increase in the quarterly dividend to $0.41 per share. The company ended the quarter with cash and cash equivalents of $1.9 billion.

U.S. Pharmaceutical and Specialty Solutions Segment

  • First-quarter revenues were $44.2 billion, up 8%, driven primarily by market growth, partially offset by branded to generic conversions. GAAP operating profit was $579 million and GAAP operating margin was 1.31%. Adjusted operating profit was $600 million, up 11%, and adjusted operating margin was 1.36%.

European Pharmaceutical Solutions Segment

  • First-quarter revenues were $6.7 billion, down 3% on a reported basis and up 3% on an FX-adjusted basis, driven primarily by market growth in the pharmaceutical distribution business. GAAP operating profit was $5 million and GAAP operating margin was 0.07%. Adjusted operating profit was $35 million, down 53%, and adjusted operating margin was 0.52%. On an FX-adjusted basis, adjusted operating profit was $37 million, down 50%, and adjusted operating margin was 0.52%, driven by the weak retail pharmacy environment in the U.K.

Medical-Surgical Solutions Segment

  • First-quarter revenues were $1.9 billion, up 12%, driven by an acquisition and growth in the Primary Care and Extended Care businesses. The aforementioned acquisition closed in the prior fiscal year on June 1, 2018, and has now been fully lapped. GAAP operating profit was $125 million and GAAP operating margin was 6.57%. Adjusted operating profit was $159 million, up 27%, and adjusted operating margin was 8.36%.

Other remaining businesses (primarily including McKesson Canada, McKesson Prescription Technology Solutions (MRxTS) and the equity method investment in the Change Healthcare Joint Venture (Change Healthcare))

  • First-quarter revenues were $3.0 billion, down 1% on a reported basis and up 2% on an FX-adjusted basis, driven primarily by growth in our MRxTS business. GAAP operating profit was $141 million and adjusted operating profit was $276 million, up 30%. On an FX-adjusted basis, adjusted operating profit was $279 million, up 31%.

Company Updates

  • Change Healthcare, Inc., a leading independent healthcare technology company, began trading on the Nasdaq Global Select Market under the trading symbol “CHNG” on June 27, 2019.
  • For the fourth year in a row, McKesson was named a ‘Best Place to Work’ for Disability Inclusion. McKesson earned a top-ranking score of 100 on the 2019 Disability Equality Index® (DEI), a joint initiative of the American Association of People with Disabilities (AAPD) and Disability:IN.
  • Dr. Ken Washington joined McKesson’s Board of Directors as a new independent director effective July 1, 2019.

Fiscal 2020 Outlook and Change Healthcare Update

McKesson raised fiscal 2020 Adjusted Earnings per diluted share guidance to $14.00 - $14.60 from a range of $13.85 - $14.45.

Following the completion of the Change Healthcare, Inc. IPO, McKesson owns approximately 58.5% of Change Healthcare, reduced from 70%. McKesson will continue to report the equity income from its interest in Change Healthcare based on its revised equity ownership percentage and with a one-month lag.

McKesson reaffirmed the guidance range for adjusted equity earnings from Change Healthcare of approximately $250 million to $270 million in fiscal 2020. This range reflects McKesson’s revised equity ownership, and includes the expected benefit of lower interest expense for Change Healthcare driven by its repayment of long-term debt.

Dividend Declaration

The company’s Board of Directors yesterday declared a 5% increase in the regular quarterly dividend to 41 cents per share of common stock. The dividend will be payable on October 1, 2019, to stockholders of record on September 3, 2019.

Conference Call Details

The company has scheduled a conference call for today, Wednesday, July 31st, at 5:00 PM ET to discuss the company’s financial performance. A live audio webcast of the conference call will be available on McKesson’s Investor Relations website at http://investor.mckesson.com. The conference call can also be accessed by dialing 323-994-2093. The password is ‘McKesson’. A telephonic replay of this conference call will be available for five calendar days. For individuals wishing to listen to the replay, the dial-in number is 719-457-0820 and the pass code is 5579684. An archive of the conference call will also be available on the company’s Investor Relations website at http://investor.mckesson.com.

Upcoming Investor Events

McKesson management will be participating in the following investor conference:

  • Morgan Stanley 17th Annual Global Healthcare Conference, September 9-11, 2019, in New York, New York.

Audio webcasts will be available live and archived on the company’s Investor Relations website at http://investor.mckesson.com. A complete listing of upcoming events for the investment community is available on the company’s Investor Relations website.

Adjusted Earnings

McKesson separately reports financial results on the basis of Adjusted Earnings. Adjusted Earnings is a non-GAAP financial measure defined as GAAP income from continuing operations, excluding amortization of acquisition-related intangible assets, transaction-related expenses and adjustments, LIFO inventory-related adjustments, gains from antitrust legal settlements, restructuring and asset impairment charges, and other adjustments. A reconciliation of McKesson’s GAAP financial results to Adjusted Earnings is provided in Schedules 2 and 3 of the financial statement tables included with this release.

The company does not provide forward-looking guidance on a GAAP basis prospectively as McKesson is unable to provide a quantitative reconciliation of this forward-looking non-GAAP measure to the most directly comparable forward-looking GAAP measure, without unreasonable effort, because McKesson cannot reliably forecast LIFO inventory-related adjustments, gains from antitrust legal settlements, restructuring and asset impairment charges, and other adjustments, which are difficult to predict and estimate. These items are inherently uncertain and depend on various factors, many of which are beyond the company’s control, and as such, any associated estimate and its impact on GAAP performance could vary materially.

FX-Adjusted

McKesson also presents its financial results on an FX-adjusted basis. The company conducts business worldwide in local currencies, including the Euro, British pound and Canadian dollar. As a result, the comparability of the financial results reported in U.S. dollars can be affected by changes in foreign currency exchange rates. FX-adjusted information is presented to provide a framework for assessing how the company’s business performed excluding the effect of foreign currency exchange rate fluctuations. The supplemental FX-adjusted information of the company’s GAAP financial results and Adjusted Earnings (Non-GAAP) is provided in Schedule 3 of the financial statement tables included with this release.

Free Cash Flow

McKesson also provides free cash flow, a non-GAAP measure. Free cash flow is defined as net cash provided by operating activities less payments for property, plant and equipment and capitalized software expenditures, as outlined in the company’s condensed consolidated statements of cash flows.

Cautionary Statements

Except for historical information contained in this press release, matters discussed may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties that could cause actual results to differ materially from those in those statements. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are first made. Except to the extent required by law, the company undertakes no obligation to publicly update forward-looking statements. Forward-looking statements may be identified by their use of terminology such as “believes”, “expects”, “anticipates”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans, assumptions or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties. We encourage investors to read the important risk factors described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission. These risk factors include, but are not limited to: changes in the U.S. healthcare industry and regulatory environment; managing foreign expansion, including the related operating, economic, political and regulatory risks; changes in the Canadian healthcare industry and regulatory environment; exposure to European economic conditions, including recent austerity measures taken by certain European governments; changes in the European regulatory environment with respect to privacy and data protection regulations; fluctuations in foreign currency exchange rates; the company’s ability to successfully identify, consummate, finance and integrate acquisitions; the company’s results of operations impacted by the Change Healthcare joint venture; the company’s ability to manage and complete divestitures and distributions; material adverse resolution of pending legal proceedings; competition and industry consolidation; substantial defaults in payment or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization; the loss of government contracts as a result of compliance or funding challenges; public health issues in the U.S. or abroad; cyberattack, natural disaster, or malfunction of sophisticated internal computer systems to perform as designed; the adequacy of insurance to cover property loss or liability claims; the company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others; system errors or failure of our technology products or services to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; changes in circumstances that could impair our goodwill, intangible and other long-lived assets or investments; new or revised tax legislation or challenges to our tax positions; general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the company, its customers or suppliers; changes in accounting principles generally accepted in the United States of America; withdrawal from participation in multiemployer pension plans or if such plans are reported to have underfunded liabilities; inability to realize the expected benefits from the company’s restructuring and business process initiatives; difficulties with outsourcing and similar third party relationships; risks associated with the company’s retail expansion; and the company’s inability to keep existing retail store locations or open new retail locations in desirable places.

About McKesson Corporation

McKesson Corporation, currently ranked 7th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. United by our ICARE shared principles, our employees work every day to innovate and deliver opportunities to improve patient care in every setting — one product, one partner, one patient at a time. McKesson has been named a “Most Admired Company” in the healthcare wholesaler category by FORTUNE, a “Best Place to Work” by the Human Rights Campaign Foundation, and a top military-friendly company by Military Friendly. For more information, visit www.mckesson.com.

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