McKesson Reports Fiscal 2019 Second-Quarter Results

McKesson Reports Fiscal 2019 Second-Quarter Results

• Revenues of $53.1 billion for the second quarter, up 2% year over year.
• Second-quarter GAAP earnings per diluted share from continuing operations of $2.51.
• Second-quarter Adjusted Earnings per diluted share of $3.60, up 10% year over year.
• Fiscal 2019 Outlook: Adjusted Earnings of $13.20 to $13.80 per diluted share.
• Previously announced multi-year strategic growth initiative operating model optimization anticipated to drive approximately $300 million to $400 million in annual savings by end of Fiscal 2021.

McKesson Corporation (NYSE:MCK) today reported that revenues for the second quarter ended September 30, 2018, were $53.1 billion, up 2% compared to $52.1 billion a year ago, and also up 2% on a constant currency basis. On the basis of U.S. generally accepted accounting principles (“GAAP”), second-quarter earnings per diluted share from continuing operations was $2.51, compared to earnings per diluted share of $0.01 a year ago. GAAP earnings per diluted share included a pre-tax benefit of $90 million, or $0.33 per diluted share, related to a reversal of a contractual liability associated with McKesson’s equity investment in Change Healthcare. Prior year GAAP earnings per diluted share included $2.60 per diluted share of non-cash goodwill and other long-lived asset impairment charges, and restructuring charges.

Second-quarter Adjusted Earnings per diluted share was $3.60, up 10% compared to $3.28 a year ago, primarily driven by a lower tax rate, including a discrete tax benefit of $42 million, or $0.21 per diluted share, and the aforementioned reversal of a contractual liability, partially offset by the previously announced customer losses in our U.S. Pharmaceutical business, incremental challenges in our businesses in the U.K. and France, and increased litigation expenses related to opioids.

“While our operational performance reflects anticipated challenges coming into the fiscal year, our second quarter results were primarily affected by the incremental headwinds we are facing in the U.K. and French markets, driving underperformance versus our expectations. We continue to have conversations with the U.K. government to discuss the patient-care services that pharmacies provide and how this low-cost setting of care is vital to the healthcare system, while also working to accelerate efficiency and growth opportunities across all of our businesses,” said John H. Hammergren, chairman and chief executive officer.

For the first half of the fiscal year, McKesson generated cash from operations of $318 million, and invested $248 million internally, resulting in free cash flow of $70 million, which was ahead of the company’s expectations. During the first half of the fiscal year, McKesson also paid $840 million for acquisitions, repurchased $877 million of its common stock, paid $139 million in dividends and the company ended the quarter with cash and cash equivalents of $2.1 billion.

“We are pleased with the contribution of our recent acquisitions, including MSD and RxCrossroads, which aligns with our stated multi-year strategic growth initiative. And we also continue to return capital to our shareholders through share repurchases and dividends,” concluded Hammergren.

Multi-Year Strategic Growth Initiative Update

As previously announced on April 25, 2018, McKesson launched a multi-year strategic growth initiative, inclusive of plans to optimize the company’s operating and cost structures. The company expects these cost actions will strengthen McKesson’s ability to focus resources, reduce complexity and improve efficiency and cost-competitiveness, enhancing and optimizing operations. McKesson expects these initiatives and actions will generate approximately $300 million to $400 million in annual pre-tax gross savings that will be substantially realized by the end of Fiscal 2021.

“We’ve prioritized growth opportunities, which include our manufacturer value proposition, services to support specialty pharmaceuticals and the future of retail pharmacy, all supported by data and analytics. Our cost reductions and operating model optimization will drive significant savings to support these priority growth areas,” said Brian S. Tyler, president and chief operating officer. “And as we move forward, the savings generated will make McKesson a more streamlined and efficient operation, complementing our investments and improving operating profit growth for the organization.”

Segment Results

U.S. Pharmaceutical and Specialty Solutions revenues were $41.6 billion for the quarter, up 2%, driven primarily by market growth and acquisitions, partially offset by previously announced customer losses and branded to generic conversions. Segment GAAP operating profit was $610 million and GAAP operating margin was 1.47%. Segment adjusted operating profit was $635 million and adjusted operating margin was 1.53%.

European Pharmaceutical Solutions revenues were $6.6 billion for the quarter, down 2% on a reported basis and down 1% on a constant currency basis, driven primarily by the previously disclosed reduction in owned retail pharmacies and a challenging operating environment in the U.K. and increased competition in France versus the prior year, partially offset by market growth in other countries. Segment GAAP operating profit was $10 million and GAAP operating margin was 0.15%. Segment adjusted operating profit was $53 million and adjusted operating margin was 0.80%. On a constant currency basis, adjusted operating profit was $54 million and adjusted operating margin was 0.81%.

Medical-Surgical Solutions revenues were $1.9 billion for the quarter, up 17%, driven primarily by an acquisition and market growth. Segment GAAP operating profit was $105 million and GAAP operating margin was 5.39%. Segment adjusted operating profit was $138 million and adjusted operating margin was 7.08%.

Revenues included in Other were $2.9 billion for the quarter, down 5% on a reported basis and down 1% on a constant currency basis, driven primarily by the prior year sale of the Enterprise Information Solutions business, partially offset by market growth and acquisitions. Other GAAP operating profit was $95 million and adjusted operating profit was $300 million. On a constant currency basis, adjusted operating profit was $310 million.

Fiscal Year 2019 Outlook

McKesson now expects Adjusted Earnings per diluted share of $13.20 to $13.80 for the fiscal year ending March 31, 2019, from the previous range of $13.00 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 January 2, 2019, to stockholders of record on December 3, 2018.

Conference Call Details

The company has scheduled a conference call for today, Thursday, October 25^th, at 8:00 AM ET. The dial-in number for individuals wishing to participate on the call is 323-794-2599. 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 5906405. 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 conferences:

• 27^th Annual Credit Suisse Healthcare Conference, November 12-15, 2018, Scottsdale, AZ;
• Evercore ISI HealthCONx Conference, November 27-29, 2018, Boston, MA; and
• 37^th Annual J.P. Morgan Healthcare Conference, January 7-10, 2019, in San Francisco, CA.

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 6^th 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.