What drove the sharp drop in GAAP EPS despite revenue growth?

GAAP diluted EPS from continuing operations fell to $4.42 from $7.65. The main causes were a $515M pre-tax bad debt provision in U.S. Pharmaceutical tied to the Rite Aid bankruptcy, and the absence of a $126M prior-year pre-tax gain from terminating the Change Healthcare tax receivable agreement. Management excludes these items from Adjusted EPS.

Is the company's guidance raise meaningful?

The raise is modest. The fiscal 2024 Adjusted EPS range moved to $27.25-$27.65 from $26.80-$27.40, a midpoint increase of about $0.45, or roughly 1.7%. Management cites solid operating performance and a growth rate of 5% to 7%. GAAP EPS is not forecast because certain items, such as LIFO adjustments and litigation, cannot be reliably predicted.

Why is free cash flow negative, and should investors be concerned?

Operating cash flow for the first nine months was $167M, versus $1.83B a year earlier, and capital expenditures plus capitalized software totaled $418M, leaving free cash flow at negative $251M. The filing shows large increases in receivables (up $4.3B in cash flow terms) and inventories (up $2.4B), offset partly by higher payables. Investors should monitor whether working capital normalizes in the fourth quarter, since weak cash generation affects the sustainability of buybacks and dividends.

How significant is the Rite Aid exposure?

The $515M provision in the quarter, and $725M year to date, reflects the remaining trade receivables from Rite Aid before its bankruptcy petition. Management considers this charge outside normal allowances and excludes it from Adjusted results. Investors should note that the write-off is a real economic loss to GAAP earnings and may signal broader customer credit risk within the distribution business.

What are the key segment trends beyond U.S. Pharmaceutical?

Prescription Technology Solutions revenue grew 7% to $1.2B, and its Adjusted Segment Operating Profit rose 25% to $193M on demand for prior authorization services. Medical-Surgical Solutions revenue grew 2%, but Adjusted Segment Operating Profit fell 16% due to lower COVID-19 vaccine kitting and distribution work. International revenue fell 18% on an FX-adjusted basis because of European divestitures, while Adjusted Segment Operating Profit fell 27%.

MCK 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed February 7, 2024. Cited figures are marked; the original filing is the authoritative source.

McKesson reported fiscal Q3 2024 (quarter ended December 31, 2023) revenue of $80.9 billion^a, up 15% year over year, driven mainly by U.S. Pharmaceutical volume growth from specialty products, retail national accounts, and GLP-1 medications.

Adjusted diluted EPS rose 12% to $7.74^b, helped by a lower tax rate and a lower share count. GAAP diluted EPS from continuing operations fell 42% to $4.42, primarily because of a $515 million pre-tax bad debt provision tied to the Rite Aid bankruptcy and a $126 million prior-year benefit from the Change Healthcare tax receivable agreement termination. Management raised its fiscal 2024 Adjusted EPS guidance to $27.25-$27.65 from $26.80-$27.40, implying 5% to 7% growth.

The quality of the quarter is mixed. Nine-month operating cash flow fell to $167 million^c from $1.834 billion, and free cash flow was negative $251 million, driven by higher receivables and inventories. McKesson still returned $2.6 billion to shareholders in the first nine months, including $2.3 billion of buybacks, and diluted shares outstanding fell about 5% year over year.

Cash declined to $1.98 billion^d from $4.68 billion at March 31, 2023, and short-term borrowings and long-term debt both increased. Investors should weigh the Rite Aid write-off, the weak year-to-date cash generation, and the reliance on buybacks against the solid underlying segment growth. The 8-K furnishes these preliminary results under Item 2.02 and states they are not deemed filed for Exchange Act purposes.

02—Key points

Key Highlights

Revenue of $80.9B rose 15% YoY, with U.S. Pharmaceutical revenue up 18% to $73.0B on specialty, retail national account, and GLP-1 volume growth.
GAAP diluted EPS from continuing operations fell 42% to $4.42, reflecting a $515M pre-tax bad debt provision related to Rite Aid's bankruptcy.
Adjusted diluted EPS grew 12% to $7.74, driven by a lower tax rate, lower share count, and growth in U.S. Pharmaceutical and Prescription Technology Solutions.
Fiscal 2024 Adjusted EPS guidance was raised to $27.25-$27.65 from $26.80-$27.40; GAAP EPS guidance is not provided, and the guidance includes about a $0.15 drag from McKesson Ventures losses.
Nine-month operating cash flow was just $167M versus $1.83B a year earlier, producing negative free cash flow of $251M.
Capital returns remained significant, with $2.3B of share repurchases and $232M of dividends in the first nine months; diluted share count fell about 5% YoY.
Prescription Technology Solutions Adjusted Segment Operating Profit rose 25% to $193M on higher prior authorization volumes, while Medical-Surgical Solutions Adjusted Segment Operating Profit fell 16% to $282M.

03—Questions

Frequently Asked Questions

What drove the sharp drop in GAAP EPS despite revenue growth?
GAAP diluted EPS from continuing operations fell to $4.42 from $7.65. The main causes were a $515M pre-tax bad debt provision in U.S. Pharmaceutical tied to the Rite Aid bankruptcy, and the absence of a $126M prior-year pre-tax gain from terminating the Change Healthcare tax receivable agreement. Management excludes these items from Adjusted EPS.
Is the company's guidance raise meaningful?
The raise is modest. The fiscal 2024 Adjusted EPS range moved to $27.25-$27.65 from $26.80-$27.40, a midpoint increase of about $0.45, or roughly 1.7%. Management cites solid operating performance and a growth rate of 5% to 7%. GAAP EPS is not forecast because certain items, such as LIFO adjustments and litigation, cannot be reliably predicted.
Why is free cash flow negative, and should investors be concerned?
Operating cash flow for the first nine months was $167M, versus $1.83B a year earlier, and capital expenditures plus capitalized software totaled $418M, leaving free cash flow at negative $251M. The filing shows large increases in receivables (up $4.3B in cash flow terms) and inventories (up $2.4B), offset partly by higher payables. Investors should monitor whether working capital normalizes in the fourth quarter, since weak cash generation affects the sustainability of buybacks and dividends.
How significant is the Rite Aid exposure?
The $515M provision in the quarter, and $725M year to date, reflects the remaining trade receivables from Rite Aid before its bankruptcy petition. Management considers this charge outside normal allowances and excludes it from Adjusted results. Investors should note that the write-off is a real economic loss to GAAP earnings and may signal broader customer credit risk within the distribution business.
What are the key segment trends beyond U.S. Pharmaceutical?
Prescription Technology Solutions revenue grew 7% to $1.2B, and its Adjusted Segment Operating Profit rose 25% to $193M on demand for prior authorization services. Medical-Surgical Solutions revenue grew 2%, but Adjusted Segment Operating Profit fell 16% due to lower COVID-19 vaccine kitting and distribution work. International revenue fell 18% on an FX-adjusted basis because of European divestitures, while Adjusted Segment Operating Profit fell 27%.

04—Continue

← View all 8-K filings