On May 8, 2019 McKesson Corporation (NYSE:MCK) reported that revenues for the fourth quarter ended March 31, 2019, were $52.4 billion compared to $51.6 billion a year ago, an increase of 2% on a reported basis and an increase of 3% on an FX-adjusted basis. For the fiscal year, McKesson had revenues of $214.3 billion, compared to $208.4 billion a year ago, an increase of 3% on a reported and FX-adjusted basis (Press release, McKesson, MAY 8, 2019, View Source [SID1234535958]).
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"McKesson delivered solid adjusted operating results, and we are pleased to conclude fiscal 2019 with adjusted EPS growth of 8%," said Brian Tyler, chief executive officer. "We successfully executed in a challenging environment and took action to address the headwinds in our European business. McKesson exits fiscal 2019 with improving momentum across many of our businesses. Our financial flexibility, reinforced by a strong balance sheet and solid cash flow generation, positions us to continue delivering shareholder value."
On the basis of U.S. generally accepted accounting principles ("GAAP"), fourth-quarter loss per diluted share from continuing operations was $(4.17), compared to loss per diluted share of $(5.58) a year ago. Full-year GAAP earnings per diluted share from continuing operations was $0.17, compared to GAAP earnings per diluted share from continuing operations of $0.30 a year ago. Fourth-quarter GAAP loss per diluted share and full-year GAAP earnings per diluted shared included after-tax net charges totaling approximately $1.5 billion and $2.2 billion, respectively, or $7.63 and $11.00 per diluted share, respectively, reflecting non-cash goodwill and long-lived asset impairment charges, as well as restructuring charges largely in the company’s European businesses.
Fourth-quarter Adjusted Earnings per diluted share was $3.69, an increase of 6% compared to $3.49 a year ago, primarily driven by a lower share count and growth in the Medical-Surgical business, partially offset by weakness in the U.K. retail pharmacy business, including an inventory charge recorded in the fourth quarter, and a higher adjusted tax rate. Full-year Adjusted Earnings per diluted share was $13.57, an increase of 8% compared to $12.62 for the prior year, primarily driven by a lower share count, growth in the McKesson Prescription Technology Solutions (MRxTS) and Medical-Surgical businesses and a lower adjusted tax rate, partially offset by lower profit contribution from the U.S. Pharmaceutical business related to the fourth quarter fiscal 2018 customer losses and weakness in the U.K. retail pharmacy business.
For the full year, McKesson generated cash from operations of $4.0 billion, and invested $557 million internally, resulting in free cash flow of $3.5 billion. During the year, McKesson paid $905 million for acquisitions, repurchased approximately $1.6 billion of its common stock, and paid $292 million in dividends. The company ended the quarter with cash and cash equivalents of $3.0 billion.
U.S. Pharmaceutical and Specialty Solutions Segment
Fourth Quarter: Revenues were $40.9 billion, up 3%, driven primarily by market growth, partially offset by branded to generic conversions and fourth-quarter fiscal 2018 customer losses. GAAP operating profit was $873 million and GAAP operating margin was 2.13%. Adjusted operating profit was $752 million, down 1%, and adjusted operating margin was 1.84%.
Full Year: Revenues were $167.8 billion, up 3%, driven primarily by market growth and acquisitions, partially offset by fourth-quarter fiscal 2018 customer losses and branded to generic conversions. GAAP operating profit was $2.7 billion and GAAP operating margin was 1.61%. Adjusted operating profit was $2.5 billion, down 2%, and adjusted operating margin was 1.50%.
European Pharmaceutical Solutions Segment
Fourth Quarter: Revenues were $6.8 billion, down 6% on a reported basis and up 2% on an FX-adjusted basis, driven primarily by market growth, partially offset by the fiscal 2018 actions to sell or divest owned retail pharmacies and a challenging market environment in the U.K. GAAP operating loss was $(1.5) billion and GAAP operating margin was (21.52)%. The segment recorded non-cash impairment charges of $1.4 billion in the fourth quarter, mainly due to declines in estimated future cash flows primarily attributed to the continued effects of U.K. government reimbursement reductions and competitive pressures in the U.K. Adjusted operating profit was $23 million, down 72%, and adjusted operating margin was 0.34%. On an FX-adjusted basis, adjusted operating profit was $26 million, down 68%, and adjusted operating margin was 0.36%. The segment results include an inventory charge of approximately $20 million in the fourth quarter.
Full Year: Revenues were $27.2 billion, flat on a reported basis and up 1% on an FX-adjusted basis, driven primarily by market growth, partially offset by the fiscal 2018 reduction in owned retail pharmacies and a challenging market environment in the U.K. and France. GAAP operating loss was $(2.0) billion and GAAP operating margin was (7.26)%. The segment GAAP results include full-year pre-tax restructuring charges of $63 million as a result of actions taken to address performance in the segment. Adjusted operating profit was $219 million, down 36%, and adjusted operating margin was 0.80%. On an FX-adjusted basis, adjusted operating profit was $220 million, down 35%, and adjusted operating margin was 0.80%.
Medical-Surgical Solutions Segment
Fourth Quarter: Revenues were $2.0 billion, up 13%, driven primarily by an acquisition and growth in the Primary Care and Lab Solutions businesses. GAAP operating profit was $121 million and GAAP operating margin was 6.19%. Adjusted operating profit was $172 million, up 21%, and adjusted operating margin was 8.80%.
Full Year: Revenues were $7.6 billion, up 15%, driven primarily by an acquisition and growth in the Primary Care and Lab Solutions businesses. GAAP operating profit was $455 million and GAAP operating margin was 5.97%. Adjusted operating profit was $605 million, up 11%, and adjusted operating margin was 7.94%.
Other remaining businesses (primarily including McKesson Canada, MRxTS and equity accounting method investment in Change Healthcare)
Fourth Quarter: Revenues were $2.8 billion, down 6% on a reported basis and down 1% on an FX-adjusted basis, driven primarily by April 2018 government actions taken in Canada, partially offset by market growth. GAAP operating profit was $111 million and adjusted operating profit was $258 million, up 6%. On an FX-adjusted basis, adjusted operating profit was $261 million, up 7%.
Full Year: Revenues were $11.7 billion, down 1% on a reported basis and up 1% on an FX-adjusted basis, driven primarily by market growth, partially offset by government actions enacted in Canada and the fiscal 2018 sale of the company’s Enterprise Information Solutions business. GAAP operating profit was $394 million and adjusted operating profit was $995 million, up 7%. On an FX-adjusted basis, adjusted operating profit was $1.0 billion, up 8%.
Company Updates
Renewed pharmaceutical distribution relationship with CVS Health through June 2023.
McKesson relocated its global corporate headquarters from San Francisco, California, to Irving, Texas, effective April 1, 2019.
Board of Directors elected Dominic Caruso and Brad Lerman as new independent directors.
In January of 2019, the Board of Directors formed a Compliance Committee to enhance oversight of the company’s compliance programs and management’s identification and evaluation of the principal legal and regulatory compliance risks. Brad Lerman, who has significant experience leading global legal, government affairs, ethics and compliance functions, chairs the committee.
Following McKesson’s announcement of a $100 million contribution to create a non-profit foundation to address the opioid epidemic in March 2018, the Foundation for Opioid Response Efforts (FORE) appointed Dr. Andrea Barthwell as board chair and Dr. Karen A. Scott as president.
Enhanced leadership and executive teams: appointed Kirk Kaminsky president of U.S. Pharmaceutical and Specialty Solutions business effective April 15, 2019, and appointed Tracy Faber executive vice president and chief human resources officer effective October 1, 2019, following Jorge Figueredo’s announced retirement.
Cost Savings Target Update
As a result of actions taken in the second half of fiscal 2019 to address challenges in the European business and to better position the U.S. and Canadian businesses, the company now anticipates it will generate approximately $400 million to $500 million in annual pre-tax savings that will be substantially realized by the end of fiscal 2021, an increase from the prior expectation of $300 million to $400 million as previously announced on October 25, 2018.
"We are making important progress towards our initiatives and are confident that the actions we are taking position us for growth in fiscal 2020 and beyond," Tyler concluded.
Fiscal 2020 Outlook and Key Assumptions
McKesson expects full-year fiscal 2020 Adjusted Earnings per diluted share of $13.85 to $14.45, which reflects solid growth across the company’s operating segments, a continuation of disciplined, efficient capital deployment, investments in the business, increased costs for opioids litigation and modest improvement in the U.K. business.
The fiscal 2020 outlook is based on the following key assumptions and expectations, and is also subject to risk factors such as those described below:
McKesson to deliver low- to mid-single digit percent revenue growth and flat to low-single digit percent adjusted income from operations decline in fiscal 2020.
U.S. Pharmaceutical and Specialty Solutions to deliver low- to mid-single digit percent revenue and adjusted operating profit growth in fiscal 2020.
European Pharmaceutical Solutions to deliver low- to mid-single digit percent revenue and adjusted operating profit growth in fiscal 2020.
Medical-Surgical Solutions to deliver high-single digit percent revenue growth and high-single to low double-digit percent adjusted operating profit growth in fiscal 2020.
Other to deliver approximately flat to low-single digit percent revenue decline and adjusted operating profit is expected to decline low- to mid-single digit percent in fiscal 2020, which assumes the company’s continued 70% equity interest in Change Healthcare through March 31, 2020.
Adjusted corporate expenses to be between approximately $725 million and $775 million, primarily driven by an anticipated increase in opioid-related litigation costs, and investments in technology-related infrastructure and growth-oriented data and analytics capabilities.
Interest expense to be between $245 million and $265 million.
The guidance range assumes a full-year adjusted tax rate of approximately 18-19%, which may vary from quarter to quarter.
Foreign currency exchange rate movements to have a net neutral impact to adjusted earnings per diluted share year over year.
Free cash flow to be $2.8 billion to $3.0 billion, which is net of expected payments for property, plant and equipment and capitalized software expenditures of between $500 million and $700 million.
Weighted average diluted shares used in the calculation of earnings per share to be approximately 185 million for the year.
Conference Call Details
The company has scheduled a conference call for today, Wednesday, May 8th, at 8:00 AM ET. The dial-in number for individuals wishing to participate on the call is 323-794-2093. Holly Weiss, 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 3096337. 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:
Bank of America Merrill Lynch Health Care Conference, May 14, 2019, in Las Vegas, Nevada; and
Goldman Sachs 40th Annual Global Healthcare Conference, June 11, 2019, in Rancho Palos Verdes, California.
Audio 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 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.
FX-Adjusted
McKesson also presents its financial results on an FX-adjusted basis, which is the same measure formerly designated Constant Currency. 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.