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McKesson Reports Fiscal 2019 Third-Quarter Results

SAN FRANCISCO--(BUSINESS WIRE)--

  • Revenues of $56.2 billion for the third quarter, up 5% year over year.
  • Third-quarter GAAP earnings per diluted share from continuing operations of $2.41.
  • Third-quarter Adjusted Earnings per diluted share of $3.40, flat year over year.
  • Fiscal 2019 Outlook: Adjusted Earnings of $13.45 to $13.65 per diluted share.

McKesson Corporation (MCK) today reported that revenues for the third quarter ended December 31, 2018, were $56.2 billion, up 5% compared to $53.6 billion a year ago, and also up 5% on a constant currency basis. On the basis of U.S. generally accepted accounting principles (“GAAP”), third-quarter earnings per diluted share from continuing operations was $2.41, compared to earnings per diluted share of $4.32 a year ago. Prior year GAAP earnings per diluted share included a net tax benefit of approximately $1.78 per diluted share driven by the Tax Cuts and Jobs Act of 2017.

Third-quarter Adjusted Earnings per diluted share was $3.40, flat compared to $3.41 a year ago, primarily driven by a lower share count and growth in our Medical-Surgical business, offset by a higher tax rate and lower profit contribution from our U.S. Pharmaceutical business, which includes a $60 million, or approximately $0.23 cents per diluted share, charge related to a customer bankruptcy and previously announced customer losses.

For the first nine months of the fiscal year, McKesson generated cash from operations of $141 million, and invested $405 million internally, resulting in negative free cash flow of $264 million, which was in line with the company’s expectations. During the first nine months of the fiscal year, McKesson also paid $866 million for acquisitions, repurchased approximately $1.4 billion of its common stock, paid $216 million in dividends and the company ended the quarter with cash and cash equivalents of $1.8 billion.

“Our third-quarter results reflect solid adjusted operating profit performance, particularly in our Medical-Surgical and McKesson Prescription Technology Solutions businesses, and we are pleased with the progress we are seeing in our U.S. Pharmaceutical and Canadian businesses as we work to offset headwinds we discussed when providing our fiscal year outlook in May,” said John H. Hammergren, chairman and chief executive officer, McKesson Corporation. “Our year-to-date results provide momentum heading into our fiscal fourth quarter, positioning the company well as Brian Tyler assumes the role of chief executive officer on April 1, 2019.”

Segment Results

U.S. Pharmaceutical and Specialty Solutions revenues were $44.3 billion for the quarter, up 6%, driven primarily by market growth and acquisitions, partially offset by previously announced customer losses and branded to generic conversions. Segment GAAP operating profit was $671 million and GAAP operating margin was 1.52%. Segment adjusted operating profit was $593 million and adjusted operating margin was 1.34%.

European Pharmaceutical Solutions revenues were $6.9 billion for the quarter, down 1% on a reported basis and up 2% on a constant currency basis, driven primarily by market growth, partially offset by the previously disclosed reduction in owned retail pharmacies and a challenging operating environment in the U.K. Segment GAAP operating profit was $26 million and GAAP operating margin was 0.38%. Segment adjusted operating profit was $69 million and adjusted operating margin was 1.00%. On a constant currency basis, adjusted operating profit was $71 million and adjusted operating margin was 0.99%.

Medical-Surgical Solutions revenues were $2.0 billion for the quarter, up 19%, driven primarily by an acquisition and market growth. Segment GAAP operating profit was $136 million and GAAP operating margin was 6.76%. Segment adjusted operating profit was $170 million and adjusted operating margin was 8.45%.

Revenues included in Other were $3.0 billion for the quarter, up 1% on a reported basis and up 5% on a constant currency basis, driven primarily by market growth. Other GAAP operating profit was $74 million and adjusted operating profit was $224 million. On a constant currency basis, adjusted operating profit was $226 million.

Fiscal Year 2019 Outlook

McKesson now expects Adjusted Earnings per diluted share of $13.45 to $13.65 for the fiscal year ending March 31, 2019, from the previous range of $13.20 to $13.80 per diluted share.

McKesson does not provide forward-looking guidance on a GAAP basis as the company 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, as items are inherently uncertain and depend on various factors, many of which are beyond the company’s control.

Dividend Declaration

The company’s Board of Directors yesterday declared a regular dividend of thirty-nine cents per share of common stock. The dividend will be payable on April 1, 2019, to stockholders of record on March 1, 2019.

Conference Call Details

The company has scheduled a conference call for today, Thursday, January 31st, at 5:00 PM ET. The dial-in number for individuals wishing to participate on the call is 323-794-2588. Craig Mercer, senior vice president, Investor Relations, is the leader of the call, and the password to join the call 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 9871695. 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:

  • 8th Annual Leerink Partners Global Healthcare Conference, February 28, 2019, New York, NY.

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, acquisition-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.

Constant Currency

McKesson also presents its financial results on a constant currency 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. Constant currency 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 constant currency 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 property acquisitions and capitalized software expenditures, as outlined in the company’s condensed consolidated statements of cash flows.

Risk Factors

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, as amended, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking 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 or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, the most significant of these risks and uncertainties are described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and 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 performance of the company’s investment in Change Healthcare; the company’s ability to manage and complete divestitures; 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 or intangible assets; 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. 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 release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Shareholders are encouraged to review the company’s filings with the Securities and Exchange Commission.

About McKesson Corporation

McKesson Corporation, currently ranked 6th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information technology. McKesson partners with pharmaceutical manufacturers, providers, pharmacies, governments and other organizations in healthcare 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 that make our customers and partners more successful — all for the better health of patients. McKesson has been named the “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.

 

Schedule 1

McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - GAAP
(unaudited)
(in millions, except per share amounts)
 
  Quarter Ended December 31,   Nine Months Ended December 31,
2018   2017   Change 2018   2017   Change

 

Revenues $ 56,208 $ 53,617 5 % $ 161,890 $ 156,729 3 %
Cost of sales (1)   (53,238 )   (50,902 ) 5   (153,337 )   (148,620 ) 3
Gross profit 2,970 2,715 9 8,553 8,109 5
Operating expenses (2) (3) (4) (2,156 ) (1,984 ) 9 (6,219 ) (5,920 ) 5
Goodwill impairment charges (5) (21 ) - NM (591 ) (350 ) 69
Restructuring and asset impairment charges (6) (110 ) (6 ) NM (288 ) (242 ) 19
Gain from sale of business (7)   -     109   (100 )   -     109   (100 )
Total operating expenses   (2,287 )   (1,881 ) 22   (7,098 )   (6,403 ) 11
Operating income 683 834 (18 ) 1,455 1,706 (15 )
Other income, net (8) 84 20 320 144 102 41
Loss from equity method investment in Change Healthcare (9) (50 ) (90 ) (44 ) (162 ) (271 ) (40 )
Interest expense   (67 )   (67 ) -   (194 )   (204 ) (5 )
Income from continuing operations before income taxes 650 697 (7 )

 

1,243 1,333 (7 )
Income tax (expense) benefit (10)   (123 )   263   (147 )   (245 )   46   (633 )
Income from continuing operations after tax 527 960 (45 ) 998 1,379 (28 )
Income (Loss) from discontinued operations, net of tax (1 )   1   (200 )   1     3   (67 )
Net income 526 961 (45 ) 999 1,382 (28 )
Net income attributable to noncontrolling interests   (57 )   (58 ) (2 )   (169 )   (169 ) -
Net income attributable to McKesson Corporation $ 469   $ 903   (48 ) % $ 830   $ 1,213   (32 ) %
 
Earnings per common share attributable to

McKesson Corporation (a)

Diluted
Continuing operations $ 2.41 $ 4.32 (44 ) % $ 4.17 $ 5.75 (27 ) %
Discontinued operations   (0.01 )   0.01   (200 )   0.01     0.01   -
Total $ 2.40   $ 4.33   (45 ) % $ 4.18   $ 5.76   (27 ) %
 
Basic
Continuing operations $ 2.42 $ 4.34 (44 ) % $ 4.19 $ 5.78 (28 ) %

Discontinued operations

  (0.01 )   0.01   (200 )   -     0.02   (100 )

Total

$ 2.41   $ 4.35   (45 ) % $ 4.19   $ 5.80   (28 ) %
 
Dividends declared per common share $ 0.39   $ 0.34   $ 1.12   $ 0.96  
 
Weighted average common shares
Diluted 195 208 (6 ) % 199 210 (5 ) %
Basic 194 207 (6 ) 198 209 (5 )
 

(a)

      Certain computations may reflect rounding adjustments.

NM

Computation not meaningful.
 
Refer to the section entitled "Financial Statement Notes" at the end of this release.
   
Refer to our applicable filings with the SEC for additional disclosures including our Quarterly Reports on Form 10-Q for the third quarters of fiscal 2019 and 2018 as well as our Annual Report on Form 10-K for fiscal 2018.
 
 

Schedule 2A

McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions, except per share amounts)
   

Change

Quarter Ended December 31, 2018 Vs. Prior Quarter
 

Amortization

  Acquisition-       Restructuring      

 

of Acquisition-

Related LIFO Inventory Gains from and Asset Other Adjusted Adjusted
As Reported

Related

Expenses and -Related Antitrust Legal Impairment Adjustments, Earnings As Reported Earnings
(GAAP)   Intangibles   Adjustments   Adjustments   Settlements   Charges, Net   Net   (Non-GAAP) (GAAP)   (Non-GAAP)
 
Gross profit (1) $ 2,970 $ - $ - $ (21 ) $ (104 ) $ - $ - $ 2,845 9 % 5 %
 
Operating expenses (6) $ (2,287 ) $ 122 $ 27 $ - $ - $ 110 $ 21 $ (2,007 ) 22 % 8 %
 
Other income, net (8) $ 84 $ - $ - $ - $ - $ - $ (56 ) $ 28 320 % 27 %
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (50 ) $ 75 $ 25 $ - $ - $ - $ 2 $ 52 (44 ) % (5 ) %
 

Income from continuing operations before income taxes

$ 650 $ 197 $ 52 $ (21 ) $ (104 ) $ 110 $ (33 ) $ 851 (7 ) % (2 ) %
 
Income tax expense (10) $ (123 ) $ (50 ) $ (13 ) $ 6 $ 27 $ (18 ) $ 41 $ (130 ) (147 ) % 30 %
 

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 470 $ 147 $ 39 $ (15 ) $ (77 ) $ 92 $ 8 $ 664 (48 ) % (7 ) %

 

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (a)

$ 2.41       $ 0.76       $ 0.20       $ (0.08 )     $ (0.39 )     $ 0.47       $ 0.03       $

3.40(b)

 

 

(44 ) % - %
 
Diluted weighted average common shares   195         195  

 

    195         195         195         195         195         195     (6 ) % (6 ) %
 
Quarter Ended December 31, 2017
Amortization Acquisition- Restructuring
of Acquisition- Related LIFO Inventory- Gains from and Asset Other Adjusted
As Reported Related Expenses and Related Antitrust Legal Impairment Adjustments, Earnings
(GAAP)   Intangibles   Adjustments   Adjustments   Settlements   Charges, Net   Net   (Non-GAAP)
 
Gross profit (1) $ 2,715 $ - $ 6 $ (2 ) $ - $ (1 ) $ - $ 2,718
 
Operating expenses (4) (7) $ (1,881 ) $ 123 $ 24 $ - $ - $ 33 $ (157 ) $ (1,858 )
 
Other income, net $ 20 $ - $ 1 $ - $ - $ - $ 1 $ 22
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (90 ) $ 70 $ 63 $ - $ - $ - $ 12 $ 55
 

Income from continuing operations before income taxes

$ 697 $ 193 $ 94 $ (2 ) $ - $ 32 $ (144 ) $ 870
 
Income tax benefit (expense) (10) $ 263 $ (53 ) $ (27 ) $ 1 $ - $ (4 ) $ (280 ) $ (100 )
 

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 902 $ 140 $ 67 $ (1 ) $ - $ 28 $ (424 ) $ 712
 
 

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (a)

$ 4.32       $ 0.67       $ 0.32       $ (0.01 )     $ -       $ 0.14       $ (2.03 )     $ 3.41    
 
Diluted weighted average common shares   208         208         208         208         208         208         208         208    
 
(a)   Certain computations may reflect rounding adjustments.
(b)

Adjusted Earnings per share on a Constant Currency basis for third quarter of fiscal 2019 was $3.41 per diluted share, which excludes the foreign currency exchange effect of $0.01 per diluted share.

 
Refer to the section entitled "Financial Statement Notes" at the end of this release.
 
For more information relating to the Adjusted Earnings (Non-GAAP) and Constant Currency (Non-GAAP) definitions, refer to the section entitled “Supplemental Non-GAAP Financial Information” of this release.
 
 

Schedule 2B

McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions, except per share amounts)
 
  Change
  Nine Months Ended December 31, 2018 Vs. Prior Period
  Amortization   Acquisition-       Restructuring      

 

of Acquisition- Related LIFO Inventory- Gains from and Asset Other Adjusted Adjusted

As Reported

Related Expenses and Related Antitrust Legal Impairment Adjustments, Earnings As Reported Earnings
(GAAP)   Intangibles  

Adjustments

  Adjustments   Settlements   Charges, Net   Net   (Non-GAAP) (GAAP)   (Non-GAAP)
 

Gross profit (1)

$ 8,553 $ - $ 1 $ (64 ) $ (139 ) $ - $ - $ 8,351 5 % 3 %
 
Operating expenses (3) (5) (6) $ (7,098 ) $ 364 $ 84 $ - $ - $ 288 $ 508 $ (5,854 ) 11 % 6 %
 
Other income, net (8) $ 144 $ 1 $ - $ - $ - $ - $ (56 ) $ 89 41 % 44 %
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (162 ) $ 229 $ 99 $ - $ - $ - $ 6 $ 172 (40 ) % (14 ) %
 

Income from continuing operations before income taxes

$ 1,243 $ 594 $ 184 $ (64 ) $ (139 ) $ 288 $ 458 $ 2,564 (7 ) % (3 ) %
 
Income tax expense (10) $ (245 ) $ (148 ) $ (46 ) $ 17 $ 36 $ (44 ) $ 2 $ (428 ) (633 ) % (21 ) %
 

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 829 $ 446 $ 138 $ (47 ) $ (103 ) $ 244 $ 460 $ 1,967 (31 ) % 2 %
 

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (a)

$ 4.17       $ 2.24       $ 0.69       $ (0.24 )     $ (0.52 )     $ 1.23       $ 2.32       $

9.89(b)

 

 

(27 ) % 8 %
 
Diluted weighted average common shares   199         199         199         199         199         199         199         199     (5 ) % (5 ) %
 
Nine Months Ended December 31, 2017
Amortization Acquisition- Restructuring
of Acquisition- Related LIFO Inventory- Gains from and Asset Other Adjusted
As Reported Related Expenses and

Related

Antitrust Legal Impairment Adjustments, Earnings
(GAAP)   Intangibles   Adjustments   Adjustments   Settlements   Charges, Net   Net   (Non-GAAP)
 
Gross profit (1) $ 8,109 $ - $ 12 $ (5 ) $ - $ (1 ) $ - $ 8,115
 
Operating expenses (2) (4) (5) (6) (7) $ (6,403 ) $ 369 $ 19 $ - $ - $ 293 $ 182 $ (5,540 )
 

Other income, net (8)

$ 102 $ 1 $ 1 $ - $ - $ - $ (42 ) $ 62
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (271 ) $ 214 $ 245 $ - $ - $ - $ 12 $ 200
 

Income from continuing operations before income taxes

$ 1,333 $ 584 $ 277 $ (5 ) $ -...