On November 3, 2020 McKesson Corporation (NYSE:MCK) reported results for the second quarter ended September 30, 2020 (Press release, McKesson, NOV 3, 2020, View Source [SID1234569751]).
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Fiscal 2021 Second-Quarter Result Summary
"The dedication and execution of our teams continue to deliver outstanding results, responding to the evolving needs of our customers," said Brian Tyler, chief executive officer. "Our strong second-quarter earnings results reflect the breadth of McKesson’s differentiated portfolio and further improvement in volumes across the business. At the same time, we continue to invest into the business to support our long-term growth strategies. Based on our year-to-date performance, we are raising our guidance range for fiscal 2021 and now expect Adjusted Earnings per diluted share of $16.00 to $16.50. With our steadfast commitment to our communities and those in need, we will continue to play a critical role in the fight against the global COVID-19 pandemic."
Second-quarter revenues were $60.8 billion, up 6% from a year ago, driven by growth in the U.S. Pharmaceutical segment, largely due to market growth and higher volumes from retail national account customers, partially offset by branded to generic conversions.
Second-quarter Earnings per diluted share of $3.54 included a GAAP-only pre- and post-tax goodwill impairment charge of $69 million recorded in connection with the segment realignment and a GAAP-only after-tax charge of $37 million for an estimated liability related to the New York State Opioid Stewardship Act. Second-quarter Adjusted Earnings per diluted share does not include these charges.
Second-quarter Adjusted Earnings per diluted share was $4.80 compared to $3.60 a year ago, an increase of 33%, driven by a lower share count, a lower tax rate and growth in the Medical-Surgical Solutions segment, partially offset by the lapping of the prior year contribution from the company’s now separated investment in Change Healthcare LLC ("Change Healthcare"). Second-quarter Adjusted Earnings per diluted share also includes pre-tax net gains of approximately $49 million, or $0.22 per diluted share, associated with McKesson Ventures’ equity investments.
For the first six months of the fiscal year, McKesson returned $388 million of cash to shareholders via $248 million of common stock repurchases and $140 million of dividend payments. During the first six months of the fiscal year, McKesson used cash from operations of $41 million, and invested $265 million internally, resulting in negative Free Cash Flow of $306 million.
U.S. Pharmaceutical Segment
Second-quarter revenues were $48.1 billion, up 5%, driven by market growth and higher volumes from retail national account customers, partially offset by branded to generic conversions.
Second-quarter Segment Operating Profit was $623 million and operating margin was 1.30%, and included a GAAP-only pre-tax charge of $50 million for an estimated liability related to the New York State Opioid Stewardship Act. Adjusted Segment Operating Profit was $658 million, up 3% from a year ago, driven by growth in specialty, partially offset by higher operating expenses in support of the company’s strategic growth initiatives. Adjusted operating margin was 1.37%, down 3 basis points.
International Segment
Second-quarter revenues were $9.5 billion, up 2% on a reported basis and down 1% on an FX-Adjusted basis, primarily driven by lower volumes in the Canadian pharmaceutical distribution business due to the exit of an unprofitable customer at the onset of fiscal 2021, partially offset by higher volumes in the European business.
Second-quarter Segment Operating Loss was ($45) million and operating margin was (0.47%), driven by a GAAP-only goodwill impairment charge of $69 million recorded in connection with the segment realignment that commenced in the second quarter of fiscal 2021. Adjusted Segment Operating Profit was $116 million, up 20%. On an FX-Adjusted basis, Adjusted Segment Operating Profit was $115 million, up 19%, driven by lower operating expenses in the European business. Adjusted operating margin was 1.22%, up 18 basis points. On an FX-Adjusted basis, adjusted operating margin was 1.24%, up 20 basis points.
Medical-Surgical Solutions Segment
Second-quarter revenues were $2.5 billion, up 23%, driven by demand for COVID-19 tests and personal protective equipment in the Primary Care and Extended Care businesses.
Second-quarter Segment Operating Profit was $187 million and operating margin was 7.38%. Adjusted Segment Operating Profit was $210 million, up 27%, driven by demand for COVID-19 tests and organic growth in the segment. Adjusted operating margin was 8.29%, up 22 basis points.
Prescription Technology Solutions Segment
Second-quarter revenues were $668 million, up 7%, driven by new brand support programs, partially offset by the impact of lower prescription volume trends.
Second-quarter Segment Operating Profit was $88 million and operating margin was 13.17%. Adjusted Segment Operating Profit was $104 million, down 10%, driven by higher operating expenses in support of the company’s strategic growth initiatives. Adjusted operating margin was 15.57%, down from 18.37% in the prior year.
Other remaining businesses
As a result of the segment realignment effective in the second quarter of fiscal 2021, Other reflects equity earnings and charges for retrospective periods for the company’s previous investment in Change Healthcare, which was separated from the company during the fourth quarter of 2020. Operating loss for the second quarter of fiscal 2020 included GAAP-only pre-tax charges of approximately $1.4 billion, primarily related to an impairment in connection with this planned exit.
Company Updates
On August 14, 2020, McKesson announced the expansion of its existing partnership with the Centers for Disease Control to support the U.S. government’s Operation Warp Speed team as a centralized distributor of future COVID-19 vaccines and ancillary supplies needed to administer vaccinations. McKesson will leverage the strength of its experience, expertise, and commitment to health care delivery and access to make a difference in the fight against the COVID-19 pandemic.
Linda Mantia joined McKesson’s Board of Directors as a new independent director effective
October 19, 2020.
On November 1, 2020, McKesson completed the contribution of its German wholesale business to a joint venture with Walgreens Boots Alliance (WBA). WBA holds a 70% controlling equity interest in the joint venture and McKesson holds the remaining 30%.
McKesson was named to the Diversity Best Practices (DBP) fourth annual Inclusion Index. McKesson was among the 98 organizations that earned a top score.
Fiscal 2021 Outlook
McKesson raised fiscal 2021 Adjusted Earnings per diluted share guidance to $16.00 to $16.50 from the previous range of $14.70 to $15.50 to reflect strong execution and earlier improvement in volumes relative to expectations through the first half of fiscal 2021. Fiscal 2021 guidance assumes approximately $0.15 to $0.20 of Adjusted Earnings per diluted share related to the kitting and storage of ancillary supplies for future COVID-19 vaccines.
Fiscal 2021 guidance assumes that a full recovery of pharmaceutical prescription volumes and patient visits is not likely to occur this fiscal year.
Conference Call Details
The company has scheduled a conference call for today, Tuesday, November 3rd at 8:00 AM ET to discuss the company’s financial results. A live audio webcast of the conference call will be available on McKesson’s Investor Relations website at View Source An archive of the conference call will also be available on the company’s Investor Relations website at View Source
Upcoming Investor Events
McKesson management will be participating in the following investor conferences:
2nd Annual Wolfe Research Virtual Healthcare Conference, November 18, 2020
39th Annual J.P. Morgan Healthcare Conference, January 11-14, 2021
Webcasts will be available live and archived on the company’s Investor Relations website at View Source A complete listing of upcoming events for the investment community, including details and updates, will be available on the company’s Investor Relations website.
Non-GAAP Financial Measures
GAAP refers to the U.S. generally accepted accounting principles. This press release includes GAAP financial measures as well as Non-GAAP financial measures, including Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Other Income, Adjusted Equity Income from Change Healthcare, Adjusted Income Tax Expense, Adjusted Earnings, Adjusted Earnings per Diluted Share, Adjusted Segment Operating Profit, Adjusted Segment Operating Profit Margin, Adjusted Corporate Expenses, Adjusted Operating Profit, FX-Adjusted results and Free Cash Flow which are financial measures not calculated in accordance with GAAP. Refer to the "Supplemental Non-GAAP Financial Information" section of the accompanying financial statement tables for the definitions and usefulness of the Company’s Non-GAAP financial measures and the attached schedules for reconciliations of the differences between the Non-GAAP financial measures and their most directly comparable GAAP financial measures.
The Company does not provide forward-looking guidance on a GAAP basis 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, impairment and related 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.
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. It is not possible to identify all such risks and uncertainties. The reader should not place undue reliance on forward-looking statements, such as financial performance forecasts, 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. 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: we experience costly and disruptive legal disputes, including regarding our role in distributing controlled substances such as opioids; we might experience losses not covered by insurance; we might record significant charges from impairment to goodwill, intangibles and other assets or investments; we may be unsuccessful in retail pharmacy profitability; we might be harmed by large customer purchase reductions, payment defaults or contract non-renewal; our contracts with government entities involve future funding and compliance risks; we might be harmed by changes in our relationships or contracts with suppliers; we might be adversely impacted by healthcare reform such as changes in pricing and reimbursement models; we might be adversely impacted by changes or disruptions in product supply and we have experienced and may experience difficulties in sourcing products due to the effects of the COVID-19 pandemic on supply chains; we might be adversely impacted as a result of our distribution of generic pharmaceuticals; we might be adversely impacted by an economic slowdown (including the effects we have experienced from the COVID-19 pandemic) or recession and by disruption in capital and credit markets that might impede our access credit, increase our borrowing costs and impair the financial soundness of our customers and suppliers; we might be adversely impacted by fluctuations in foreign currency exchange rates; we might be adversely impacted by events outside of our control, such as widespread public health issues (including the effects we have experienced from the COVID-19 pandemic), natural disasters, political events and other catastrophic events; and we face uncertainties and risks related to vaccination distribution programs.