10-QPeriod: Q2 FY2018

MCKESSON CORP Quarterly Report for Q2 Ended Sep 30, 2017

Filed October 27, 2017For Securities:MCK

Summary

McKesson Corporation's (MCK) third quarter of fiscal year 2018 filing (ending September 29, 2017) reveals a significant year-over-year decline in net income attributable to McKesson Corporation, falling from $307 million to $1 million. This steep decrease is largely driven by substantial goodwill impairment charges, particularly impacting the McKesson Europe segment, and restructuring/asset impairment charges related to its UK retail business. While revenues saw a modest 4% increase to $52.1 billion, driven by the Distribution Solutions segment, profitability was severely impacted by these one-time charges and a significant loss from the equity method investment in Change Healthcare. Despite the earnings hit, McKesson continued to execute on its strategic priorities, including business acquisitions and share repurchases. The company's liquidity remains strong, supported by operating cash flow and existing credit facilities. However, investors should closely monitor the ongoing legal and regulatory proceedings, especially those related to the distribution of controlled substances and opioid litigation, which could pose material risks to future financial performance.

Financial Highlights

52 data points
Beta

Revenue

$52.06B

5.4% Gross Margin

Net Income

$1.00M

0.0% Net Margin

EPS (Diluted)

$0.01

Total Assets

$63.85B

Cash & Equivalents

$2.56B

Free Cash Flow

$509.00M

Financial Statements
Beta
Revenue$52.06B
Cost of Revenue$49.23B
Gross Profit$2.83B
Operating Expenses$2.60B
Operating Income$239.00M
Net Income$1.00M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)209.00M
Shares Outstanding (Diluted)210.00M

Key Highlights

  • 1Revenue increased by 4% year-over-year to $52.1 billion for the quarter, primarily driven by the Distribution Solutions segment.
  • 2Net income attributable to McKesson Corporation significantly decreased to $1 million from $307 million in the prior year's quarter.
  • 3The company recorded a substantial goodwill impairment charge of $350 million related to its McKesson Europe reporting unit.
  • 4Restructuring and asset impairment charges of $236 million were recognized, primarily related to the UK retail business.
  • 5A loss of $61 million was recorded from the equity method investment in Change Healthcare.
  • 6Operating cash flow for the first six months was $1.34 billion, down from $2.93 billion in the prior year.
  • 7McKesson continued its share repurchase program, with $701 million spent in the first six months of the fiscal year.

Frequently Asked Questions

The significant decrease in net income attributable to McKesson Corporation, from $307 million in the prior year's quarter to $1 million, was primarily due to substantial non-cash charges, including a $350 million goodwill impairment charge for the McKesson Europe segment and $236 million in restructuring and asset impairment charges related to the UK retail business. Additionally, a $61 million loss from the equity method investment in Change Healthcare contributed to the decline.

McKesson's investment in Change Healthcare is accounted for using the equity method. For the quarter, the company recorded a $61 million loss from this investment, which included transaction and integration expenses incurred by the joint venture, as well as fair value adjustments and amortization of equity method intangible assets.

McKesson expects its available cash generated from operations, combined with existing liquidity from credit facilities and its commercial paper program, to be sufficient to fund its capital expenditures, working capital, and other cash requirements. The company's debt-to-capital ratio remained stable at 39.3% as of September 30, 2017. However, ongoing legal and regulatory proceedings, particularly those related to controlled substances and opioid litigation, represent a potential risk to future financial performance and could impact liquidity.

During the period, McKesson completed the acquisition of CoverMyMeds LLC for $1.3 billion. It also entered into an agreement to sell its EIS business, with the transaction closing in October 2017. The company also continues to integrate other previously announced acquisitions such as Rexall Health and made several smaller acquisitions in the second quarter of 2018.