On July 26, 2018 McKesson Corporation (NYSE:MCK) reported that revenues for the first quarter ended June 30, 2018, were $52.6 billion, up 3% compared to $51.1 billion a year ago (Press release, McKesson, JUL 26, 2018, View Source [SID1234527910]). On a constant currency basis, revenues increased 2% over the prior year. On the basis of U.S. generally accepted accounting principles ("GAAP"), first-quarter loss per diluted share from continuing operations was $(0.69), compared to earnings per diluted share of $1.44 a year ago. GAAP loss per diluted share included a pre-tax and after-tax non-cash goodwill impairment charge of $570 million, or $2.81 per diluted share, in the European Pharmaceutical Solutions segment, primarily triggered by additional U.K. government reimbursement reductions announced on June 29, 2018, as well as the change to the company’s segment reporting structure.
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First-quarter Adjusted Earnings per diluted share was $2.90, up 18% compared to $2.46 a year ago, driven by a lower tax rate and share count, and growth in the U.S. Pharmaceutical and Specialty Solutions segment.
For the first quarter, McKesson used $1.1 billion in cash from operations, and invested $145 million internally, resulting in negative free cash flow of $1.2 billion, in line with the company’s expectations. During the quarter, McKesson also paid $826 million for acquisitions, repurchased approximately $300 million of its common stock, paid $71 million in dividends and the company ended the quarter with cash and cash equivalents of $2.2 billion.
"McKesson’s first quarter adjusted earnings results were in line with our expectations. We are, however, disappointed by the recent government-initiated reimbursement cuts in the U.K. These incremental cuts create ongoing challenges in our U.K. retail pharmacy business," said John H. Hammergren, chairman and chief executive officer. "During the quarter, we began executing against our multi-year strategic growth initiative, which included our acquisition of Medical Specialties Distributors. And I am pleased with the initial progress made on transforming our operating model, which will allow us to become a more efficient organization, and drive savings that will help fund investments in our priority growth areas."
New Segment Financial Reporting Effective Fiscal Year 2019
As previously disclosed on May 24, 2018, McKesson revised its reportable segments effective with the first quarter of Fiscal 2019. McKesson’s new reportable segments are:
U.S. Pharmaceutical and Specialty Solutions;
European Pharmaceutical Solutions; and
Medical-Surgical Solutions.
All remaining operating segments and business activities are included in Other. Other primarily includes McKesson Canada, McKesson Prescription Technology Solutions (MRxTS) and the company’s equity method investment in Change Healthcare.
Segment Results
U.S. Pharmaceutical and Specialty Solutions revenues were $41.0 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 $543 million and GAAP operating margin was 1.33%. Segment adjusted operating profit was $540 million and adjusted operating margin was 1.32%.
European Pharmaceutical Solutions revenues were $6.9 billion for the quarter, up 9% on a reported basis and 1% on a constant currency basis, driven primarily by market growth and acquisitions, largely offset by the previously disclosed increased competition in France and a reduction in owned retail pharmacies in the U.K. versus the prior year. Segment GAAP operating loss was $560 million and GAAP operating margin was (8.07)%. Segment adjusted operating profit was $74 million and adjusted operating margin was 1.07%. On a constant currency basis, adjusted operating profit was $69 million and adjusted operating margin was 1.07%.
Medical-Surgical Solutions revenues were $1.7 billion for the quarter, up 11%, driven primarily by market growth and an acquisition. Segment GAAP operating profit was $93 million and GAAP operating margin was 5.46%. Segment adjusted operating profit was $125 million and adjusted operating margin was 7.34%.
Other revenues were $3.0 billion for the quarter, up 5% on a reported basis and 1% on a constant currency basis, driven primarily by market growth, mostly offset by the impact of government actions on the McKesson Canada business. Other GAAP operating profit was $114 million and adjusted operating profit was $213 million. On a constant currency basis, adjusted operating profit was $204 million.
Fiscal Year 2019 Outlook
McKesson expects Adjusted Earnings per diluted share of $13.00 to $13.80 for the fiscal year ending March 31, 2019.
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 $0.39 cents per share of common stock, a 15% increase from $0.34 cents per share in the prior quarter. The dividend will be payable on October 1, 2018, to stockholders of record on September 4, 2018.
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.
Conference Call Details
The company has scheduled a conference call for today, Thursday, July 26th, at 8:00 AM ET. The dial-in number for individuals wishing to participate on the call is 323-994-2093. 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. The dial-in number for individuals wishing to listen to the replay is 719-457-0820 and the pass code is 1175861. An archive of the conference call will also be available on the company’s Investor Relations website at View Source
Shareholders are encouraged to review the company’s filings with the Securities and Exchange Commission.