On January 31, 2019 McKesson Corporation (NYSE:MCK) 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 (Press release, McKesson, JAN 31, 2019, View Source [SID1234532992]). 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.
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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 View Source
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 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.
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.