On August 3, 2022 McKesson Corporation (NYSE:MCK) reported results for the first-quarter ended June 30, 2022 (Press release, McKesson, AUG 3, 2022, View Source [SID1234617444]).
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"McKesson had a solid start to fiscal 2023. Our results this quarter demonstrate the strength of our streamlined portfolio and successful execution as a diversified healthcare services company," said Brian Tyler, chief executive officer. "Our talented associates continue to deliver exceptional performance, and we remain confident that our strategy positions McKesson for long-term growth and value creation. As a result of our first-quarter operating performance and the continuation of COVID-19 response efforts, we are raising our guidance for fiscal 2023 Adjusted Earnings per Diluted Share to $23.95 to $24.65."
First-quarter revenues were $67.2 billion, an increase of 7% from a year ago, driven by growth in the U.S. Pharmaceutical segment, resulting from increased specialty product volumes, including retail national account customers, and market growth, partially offset by lower revenues in the International segment as a result of the planned progress with McKesson’s divestiture of its European businesses.
First-quarter earnings per diluted share from continuing operations was $5.25 compared to $3.09 a year ago, an increase of $2.16.
First-quarter Adjusted Earnings per Diluted Share was $5.83 compared to $5.56 a year ago, an increase of 5%, driven by growth across the North American businesses and a lower share count, partially offset by a higher tax rate and lower contribution from COVID-19 vaccine distribution, kitting, and storage programs with the U.S. government. First-quarter Adjusted Earnings per Diluted Share also included pre-tax net losses of approximately $22 million associated with McKesson Ventures’ equity investments, compared to pre-tax net gains of approximately $7 million in the first-quarter of fiscal 2022.
For the first three months of the fiscal year, McKesson returned $1.1 billion of cash to shareholders, which included $1.0 billion of common stock repurchases and $71 million of dividend payments. During the first three months of the fiscal year, McKesson used cash from operations of $941 million, and invested $100 million in capital expenditures, resulting in negative Free Cash Flow of $1.0 billion.
Capital Deployment Updates
McKesson maintains a disciplined approach to capital allocation, centered on delivering sustainable growth and long-term shareholder value. McKesson’s capital allocation framework consists of three pillars:
Prioritizing growth by investing internally and making acquisitions that support our strategic priorities.
Returning capital to shareholders through share repurchases and McKesson’s commitment to a growing dividend. Share repurchases are principally used to return cash to shareholders in absence of growth investment opportunities.
Maintaining a strong balance sheet, including strong Free Cash Flow generation, which provides ample liquidity and financial flexibility.
On July 22, 2022, McKesson’s Board of Directors declared a 15% increase to its quarterly dividend from $0.47 per share to $0.54 per share.
On July 22, 2022, McKesson’s Board of Directors authorized the company to repurchase up to an additional $4.0 billion of its common shares in a manner deemed in the best interest of the company and its stockholders, considering other growth opportunities and prevailing business and market conditions. Fiscal 2023 Adjusted Earnings per Diluted Share guidance continues to assume approximately $3.5 billion of share repurchases.
Business Highlights
Oncology: On June 23, 2022, McKesson announced an agreement to form a joint venture combining McKesson’s U.S. Oncology Research and HCA Healthcare’s Sarah Cannon Research Institute. Together, the joint venture will create a fully integrated oncology research organization aimed at expanding clinical research, accelerating drug development, and increasing availability and access to clinical trials for community oncology providers and patients, including those in underserved communities. The transaction is anticipated to close in 2022.
Europe: McKesson progressed in its planned exit of business operations within the European region and has completed divestitures or entered into agreements to sell 11 of the 12 countries.
After entering into an agreement in June 2022 to sell its Denmark business to Erhvervsinvest, McKesson closed the transaction on July 29, 2022.
After entering into an agreement in November 2021 to sell its UK business to AURELIUS, McKesson closed the transaction on April 6, 2022.
In July 2021, McKesson announced an agreement to sell certain McKesson Europe businesses in France, Italy, Ireland, Portugal, Belgium, and Slovenia to the PHOENIX Group. The transaction is expected to close in the second half of fiscal 2023.
Norway remains the only country that McKesson has not entered into an agreement to sell.
COVID-19: McKesson continues to play a leading role in the fight against COVID-19. McKesson renewed its partnership with the U.S. government to support the COVID-19 response efforts. The vaccine distribution contract has been extended through July 2023; and the kitting, storage, and distribution of ancillary supplies contract has been extended through January 2023.
U.S. Pharmaceutical Segment
First-quarter revenues were $56.9 billion, an increase of 14%, resulting from increased specialty product volumes, including retail national account customers, and market growth, partially offset by branded to generic conversions.
First-quarter Segment Operating Profit was $696 million. Adjusted Segment Operating Profit was $711 million, an increase of 4%, driven by growth in distribution of specialty products to providers and health systems, partially offset by lower demand of COVID-19 vaccine distribution. Excluding the impact of COVID-19 vaccine distribution, the U.S. Pharmaceutical segment delivered Adjusted Segment Operating Profit growth of 9%.
Prescription Technology Solutions Segment
First-quarter revenues were $1.1 billion, an increase of 21%, driven by our biopharma services programs due to prescription volume growth, and third-party logistics and technology service revenues.
First-quarter Segment Operating Profit was $144 million. Adjusted Segment Operating Profit was $165 million, an increase of 19%, driven by growth from access, affordability, and adherence solutions.
Medical-Surgical Solutions Segment
First-quarter revenues were $2.6 billion, an increase of 3%, driven by growth in the primary care business, partially offset by lower sales of COVID-19 tests and lower contribution from kitting, storage, and distribution of ancillary supplies for the U.S. government’s COVID-19 vaccine program.
First-quarter Segment Operating Profit was $256 million. Adjusted Segment Operating Profit was $268 million, an increase of 4%, driven by organic business performance as well as growth and improvements in the primary care business.
International Segment
First-quarter revenues were $6.5 billion. On an FX-Adjusted basis, revenues were $7.1 billion, a decrease of 23%, driven by the divestitures of McKesson’s UK and Austrian businesses.
First-quarter Segment Operating Loss was $6 million. On an FX-Adjusted basis, Adjusted Segment Operating Profit was $152 million, a decrease of 11%, driven by the divestitures of McKesson’s Austrian and UK businesses, partially offset by the reduction of depreciation and amortization on European assets under agreements to sell.
Opioid-Related Litigation
McKesson has settled, or reached agreements to settle, the opioid-related claims of all 50 states, as well as the District of Columbia and all eligible territories.
On May 3, 2022, McKesson reached an agreement in principle with the State of Washington.
On June 27, 2022, McKesson reached an agreement in principle with the State of Oklahoma.
On July 4, 2022, after a full trial, a federal judge ruled that McKesson along with two other distributors could not be held liable to two West Virginia subdivisions for contributing to the opioid crisis.
Corporate Responsibility Updates
McKesson was recognized by Forbes as one of the "Best Employers for Women," achieving an industry-leading ranking and demonstrating its outstanding progress in promoting gender equity and diversity in the workplace.
For the seventh consecutive year, McKesson was named a "Best Place to Work for Disability Inclusion." McKesson earned a top-ranking score of 100 on the 2022 Disability Equality Index, a joint initiative of the American Association of People with Disabilities and Disability:IN.
Fiscal 2023 Outlook
McKesson raised fiscal 2023 Adjusted Earnings per Diluted Share guidance to $23.95 to $24.65 from the previous range of $22.90 to $23.60 to reflect first-quarter operating performance and increased contribution from the U.S. government’s COVID-19 vaccine distribution, kitting, and storage programs and COVID-19 tests.
Fiscal 2023 Adjusted Earnings per Diluted Share guidance includes approximately $0.99 to $1.29 of impacts attributable to the following:
Fiscal 2023 Adjusted Earnings per Diluted Share guidance, excluding the impacts of the above items from both fiscal 2023 guidance and fiscal 2022 results, indicates 10% to 15% forecasted growth compared to prior year.
Additional modeling considerations will be provided in the earnings call presentation.
Conference Call Details
McKesson has scheduled a conference call for today, Wednesday, August 3rd at 4:30 PM ET to discuss the company’s financial results. The audio webcast of the conference call will be available live and archived on McKesson’s Investor Relations website at investor.mckesson.com.
Upcoming Investor Events
McKesson management will be participating in the following investor conference:
Morgan Stanley Healthcare Conference, September 13, 2022
Audio webcast, and a complete listing of upcoming events for the investment community, including details and updates, will be available on McKesson’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 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, certain litigation loss and gain contingencies, 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.