MCKESSON CORPORATION GENERAL
Management's discussion and analysis of financial condition and results of operations, referred to as the "Financial Review," is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position ofMcKesson Corporation together with its subsidiaries (collectively, the "Company," "we," "our" or "us"). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 previously filed with theSEC onMay 15, 2019 ("2019 Annual Report"). Our fiscal year begins onApril 1 and ends onMarch 31 . Unless otherwise noted, all references to a particular year shall mean our fiscal year. Certain statements in this report constitute forward-looking statements. See "Cautionary Notice About Forward-Looking Statements" included in this Quarterly Report on Form 10-Q. Operating Segments We report our financial results in three reportable segments:U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. Refer to Financial Note 19, "Segments of Business," in the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. 40
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
RESULTS OF OPERATIONS
Overview of Consolidated Results:
(Dollars in millions, Three Months Ended December 31, Nine Months Ended December 31,
except per share data) 2019 2018 Change 2019 2018 Change
Revenues $ 59,172 $ 56,208 5 % $ 172,516 $ 161,890 7 %
Gross Profit 3,033 2,970 2 8,687 8,553 2
Gross Profit Margin 5.13 % 5.28 % (15 ) bp 5.04 % 5.28 % (24 ) bp
Operating Expenses:
Operating Expenses $ (2,535 ) $ (2,156 ) 18 % $ (6,861 ) $ (6,219 ) 10 %
Goodwill Impairment Charges (2 ) (21 ) (90 ) (2 ) (591 ) (100 )
Restructuring, Impairment
and Related Charges (136 ) (110 ) 24 (204 ) (288 ) (29 )
Total Operating Expenses (2,673 ) (2,287 ) 17 (7,067 ) (7,098 ) -
Operating Expenses as a
Percentage of Revenues 4.52 % 4.07 % 45 bp 4.10 % 4.38 % (28 ) bp
Other Income (Expense), Net $ 26 $ 84 (69 ) % $ (15 ) $ 144 (110 ) %
Equity Earnings and Charges
from Investment in Change
Healthcare Joint Venture (28 ) (50 ) (44 ) (1,478 ) (162 ) 812
Interest Expense (64 ) (67 ) (4 ) (184 ) (194 ) (5 )
Income (Loss) from
Continuing Operations
Before Income Taxes 294 650 (55 ) (57 ) 1,243 (105 )
Income Tax Benefit
(Expense) (47 ) (123 ) (62 ) 111 (245 ) (145 )
Income from Continuing
Operations 247 527 (53 ) 54 998 (95 )
Income (Loss) from
Discontinued Operations,
Net of Tax (5 ) (1 ) 400 (12 ) 1 NM
Net Income 242 526 (54 ) 42 999 (96 )
Net Income Attributable to
Noncontrolling Interests (56 ) (57 ) (2 ) (163 ) (169 ) (4 )
Net Income (Loss)
Attributable to McKesson
Corporation $ 186 $ 469 (60 ) % $ (121 ) $ 830 (115 ) %
Diluted Earnings (Loss) Per
Common Share Attributable
to McKesson Corporation
Continuing operations $ 1.06 $ 2.41 (56 ) % $ (0.60 ) $ 4.17 (114 ) %
Discontinued operations (0.03 ) (0.01 ) 200 (0.06 ) 0.01 (700 )
Total $ 1.03 $ 2.40 (57 ) % $ (0.66 ) $ 4.18 (116 ) %
Weighted Average Diluted
Common Shares 180 195 (8 ) % 183 199 (8 ) %
bp - basis points
NM - not meaningful
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Revenues
Revenues increased for the three and nine months ended December 31, 2019
compared to the same prior year periods primarily due to market growth,
including expanded business with existing customers. Market growth includes
growing drug utilization, price increases and newly launched products, partially
offset by price deflation associated with brand to generic drug conversion.
Gross Profit
Gross profit increased for the three and nine months ended December 31, 2019
compared to the same prior year periods primarily due to market growth and
higher last-in, first-out ("LIFO") credits in 2020 as further described below,
partially offset by unfavorable effects of foreign currency exchange
fluctuations. Gross profit for the nine months ended December 31, 2019 was
favorably impacted by our 2019 first quarter acquisition of Medical Specialties
Distributors LLC ("MSD").
Additionally, gross profit and gross profit margin for the three and nine months
ended December 31, 2018 included net cash proceeds received of $104 million and
$139 million representing our share of antitrust legal settlements.
LIFO inventory credits were $66 million and $21 million for the three months
ended December 31, 2019 and 2018 and $114 million and $64 million for the nine
months ended December 31, 2019 and 2018, which favorably impacted our gross
profit margin in 2020 compared to the prior year. Our U.S. Pharmaceutical
business uses the LIFO method of accounting for the majority of its inventories,
which results in cost of sales that more closely reflects replacement cost than
under other accounting methods. The business' practice is to pass on to
customers published price changes from suppliers. Manufacturers generally
provide us with price protection, which limits price related inventory losses. A
LIFO expense is recognized when the net effect of price increases on
pharmaceutical and non-pharmaceutical products held in inventory exceeds the
impact of price declines, including the effect of branded pharmaceutical
products that have lost market exclusivity. A LIFO credit is recognized when the
net effect of price declines exceeds the impact of price increases on
pharmaceutical and non-pharmaceutical products held in inventory. Our quarterly
LIFO credit is based on our estimates of the annual LIFO credit which is
impacted by expected changes in year-end inventory quantities, product mix and
manufacturer pricing practices, which may be influenced by market and other
external influences. Changes to any of the above factors could have a material
impact to our annual LIFO credit. The actual valuation of inventory under the
LIFO method is calculated at the end of the fiscal year. LIFO credits are higher
in 2020 compared to 2019 primarily due to lower brand inflation and higher
generic deflation.
Total Operating Expenses
Total operating expenses and operating expenses as a percentage of revenues
increased for the three months ended December 31, 2019 compared to the same
prior year period primarily due to the following significant items:
• 2020 charge of $282 million to remeasure assets and liabilities held for
sale to the lower of carrying value or fair value less costs to sell
related to the expected contribution of the majority of our German
wholesale business to create a joint venture in which McKesson will have a
non-controlling interest within our European Pharmaceutical Solutions
segment. Refer to Financial Note 3, "Held for Sale," to the accompanying
condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q for more information;
• restructuring, impairment and related charges of $136 million and $110
million for the three months ended December 31, 2019 and 2018. Refer toFinancial Note 4, "Restructuring, Impairment and Related Charges," to the
accompanying condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for more information; and
• opioid-related expenses of
months ended
expenses.
These charges were offset by the following significant items:
• 2019 charge of
• 2019 goodwill impairment charge of
Health reporting unit included in Other.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
In addition to the aforementioned items impacting the three months ended
December 31, 2019 , total operating expenses and operating expenses as a
percentage of revenues decreased for the nine months ended December 31, 2019
compared to the same prior year period primarily due to the following
significant items:
• 2019 first quarter goodwill impairment charge of $570 million for our
European Pharmaceutical Solutions segment. Refer to Financial Note 5,"Goodwill Impairment Charges," to the accompanying condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q for
more information;
• restructuring, impairment and related charges of $204 million and $288
million for the nine months ended December 31, 2019 and 2018; and
• favorable effects of foreign currency exchange fluctuations.
These charges were offset by the following significant items:
• 2019 first quarter gain from an escrow settlement of
representing certain indemnity and other claims related to our third
quarter 2017 acquisition of
• opioid-related expenses of
months ended
expenses, including the second quarter charge of
connection with an agreement executed in
opioids related claims filed by two
below; and
• 2019 second quarter credit of $90 million for the derecognition of a
liability related to the tax receivable agreement ("TRA") payable to the
shareholders of Change Healthcare, Inc.
Opioid-Related Litigation and Claims
We are a defendant in over 3,000 cases asserting claims related to distribution
of controlled substances (opioids) in federal and state courts. We are a party
to discussions with the objective of achieving broad resolution of the remaining
claims. Because of the large number of parties involved, together with the
novelty and complexity of the issues, for which there may be different
considerations among the parties, we cannot predict the successful resolution
through a negotiated settlement. On October 21, 2019 , we disclosed a settlement
with two Ohio counties, for which we recorded a charge of $82 million recorded
within operating expense for the second quarter of 2020. An adverse judgment or
negotiated resolution in any of these matters could have a material adverse
impact on our financial position, cash flows or liquidity, or results of
operations. Refer to Financial Note 16, "Commitments and Contingent
Liabilities," to the accompanying condensed consolidated financial statements
included in this Quarterly Report on Form 10Q for more information.
State Opioid Statutes
Legislative, regulatory or industry measures to address the misuse of
prescription opioid medications could affect our business in ways that we may
not be able to predict. In April 2018 , the State of New York adopted the Opioid
Stewardship Act (the "OSA") which required the imposition of an annual surcharge
on all manufacturers and distributors licensed to sell or distribute opioids in
New York . On December 19, 2018 , the U.S. District Court for the Southern
District of New York found the law unconstitutional and issued an injunction
preventing the State of New York from enforcing the law. The State of New York
appealed to the U.S. Court of Appeals to the Second Circuit but did not seek a
stay of the district court's ruling. During the third quarter of 2019, we
reversed the previously accrued estimated liability under the New York State
OSA. The State of New York has subsequently adopted an excise tax on sales of
opioids in the State, which became effective July 1, 2019 . The excise tax would
apply only to the first sale occurring in New York , and thus may not apply to
sales from our distribution centers in New York to New York customers. In
addition, certain states have now passed legislation that could require us to
pay taxes or assessments on the distribution of opioid medications in those
states. Other states are also considering similar legislation. These proposed
and passed bills vary in the amounts and the means of calculation. Liabilities
for taxes or assessments under any such laws could have an adverse impact on our
results of operations, unless we are able to mitigate them through operational
changes or commercial arrangements where permitted. Taxes or assessments
incurred under state opioid statutes were not material during the three and nine
months ended December 31, 2019 and 2018.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Restructuring Initiatives
During 2019, we committed to various restructuring initiatives intended to drive
long-term incremental profit growth and increase operational efficiency. The
initiatives consist of the optimization of our operating models and cost
structures primarily through centralization and outsourcing of certain
administrative functions and cost management. The initiatives also consist of
implementing certain actions including a reduction in workforce, reorganization
and consolidation of our business operations and related headcount reductions,
the closures of retail pharmacy stores in Europe as well as other facility
closures. This set of initiatives are expected to be completed by the end of
2021. Additionally, we committed to certain actions in connection with the
previously announced relocation of our corporate headquarters from San
Francisco, California to Irving, Texas , which became effective April 1, 2019 . We
anticipate that the relocation will be completed by January 2021 . In connection
with these initiatives, we expect to record total charges of approximately $520
million to $660 million , of which $434 million of charges were recorded to date
primarily representing employee severance, exit-related costs, asset impairment
charges and accelerated depreciation. Estimated remaining charges primarily
consist of facility and other exit costs and employee-related costs. Refer to
Financial Note 4, "Restructuring, Impairment and Related Charges," to the
accompanying condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for more information on various initiatives.
Goodwill Impairment
As previously disclosed in our 2019 Annual Report on Form 10-K, the estimated
fair value of our McKesson Canada reporting unit exceeded the carrying value as
part of our 2019 annual goodwill impairment test. However, other risks, expenses
and future developments, such as additional government actions and material
changes in key market assumptions that we were unable to anticipate as of the
2019 testing date may require us to revise the projected cash flows, which could
adversely affect the fair value of our McKesson Canada reporting unit in Other
in future periods.
On October 1, 2019 , we voluntarily changed our annual goodwill impairment
testing date from January 1 to October 1 to better align with the timing of our
annual long-term planning process. This change was not material to our
consolidated financial statements as it did not delay, accelerate, or avoid any
potential goodwill impairment charge. Refer to Note 5, "Goodwill Impairment
Charges," to the accompanying condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q for further information.
Other Income (Expense), Net
Other income (expense), net, decreased in 2020 compared to the prior year
primarily due to higher gains recognized from the sale of investments in the
third quarter of 2019. For the nine months ended December 31, 2019 , the decrease
was also due to the 2020 pension settlement charges of $122 million related to
our previously approved termination of the frozen U.S. defined benefit pension
plan, partially offset by higher settlement gains in 2020 from our derivative
contracts. In connection with the pension plan termination, we purchased annuity
contracts from an insurer that will pay and administer the future pension
benefits of the remaining participants.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Equity Earnings and Charges from Investment in Change Healthcare Joint Venture
Our investment in Change Healthcare LLC ("Change Healthcare JV") is accounted
for using the equity method of accounting. Our proportionate share of loss from
our investment in Change Healthcare JV was $28 million and $50 million for the
three months ended December 31, 2019 and 2018, and $75 million and $162 million
for the nine months ended December 31, 2019 and 2018. During the first quarter
of 2020 and for the three and nine months ended December 31, 2018 , we owned
approximately 70% of this joint venture.
On June 27, 2019 , common stock and certain other securities of Change Healthcare
Inc. began trading on the NASDAQ ("IPO"). On July 1, 2019 , upon the completion
of its IPO, Change Healthcare Inc. contributed net cash proceeds it received
from its offering of common stock to Change Healthcare JV in exchange for
additional membership interests of Change Healthcare JV ("LLC Units") at the
equivalent of its offering price of $13 per share. The proceeds from the
concurrent offering of other securities were also used by Change Healthcare Inc.
to acquire certain securities of Change Healthcare JV. As a result, McKesson's
equity interest in Change Healthcare JV was reduced to approximately 58.5%,
which was used to recognize our proportionate share in net loss from Change
Healthcare JV, commencing the second quarter of 2020. As a result of the
ownership dilution to 58.5% from 70%, we recognized a dilution loss of
approximately $246 million in the second quarter of 2020. Additionally, our
proportionate share of income or loss from this investment is expected to be
further reduced as settlements of other securities may occur in the future
reporting periods.
In the second quarter of 2020, we recorded an other-than-temporary impairment
("OTTI") charge of $1.2 billion to our investment in Change Healthcare JV,
representing the difference between the carrying value of the Company's
investment and the fair value derived from the corresponding closing price of
Change Healthcare Inc.'s common stock at September 30, 2019 . This charge was
included within equity earnings and charges from investment in Change Healthcare
joint venture in the Company's condensed consolidated statements of operations
for the nine months ended December 31, 2019 .
We expect to complete a tax-efficient exit from the investment in Change
Healthcare JV through a distribution of the shares of our subsidiary, PF2
SpinCo, Inc. ("SpinCo"), which holds all of our interests in the Change
Healthcare JV, to our shareholders. This will be followed by a merger of SpinCo
with Change Healthcare Inc. in exchange for shares of common stock in Change
Healthcare Inc. ("Qualified McKesson Exit"). If the Qualified McKesson Exit does
not qualify as a tax-efficient transaction, Change Healthcare Inc. has agreed to
pay us 85% of related cash tax savings realized subsequent to the spin-off or
split-off, and in certain circumstances, if the failure of the Qualified
McKesson Exit to qualify as a tax efficient transaction is due to Change
Healthcare Inc.'s failure to comply with a tax matters agreement, to indemnify
us for certain tax-related losses. In the event of a partial exit, Change
Healthcare Inc. will be required to pay us 85% of the net cash tax savings
realized from the exchange of a portion of our interest in Change Healthcare JV
for shares of common stock in Change Healthcare Inc. On February 4, 2020 , SpinCo
filed a registration statement with the SEC on Form S-4 and Form S-1 relating to
a potential exit from our investment in the Change Healthcare JV.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Transaction-Related Expenses and Adjustments
Transaction-related expenses and adjustments generally include transaction and
integration expenses as well as gains and losses that are directly related to
acquisitions, the formation of joint ventures and divestitures. These expenses
were $341 million and $52 million for the three months ended December 31, 2019
and 2018 and $667 million and $167 million for the nine months ended December
31, 2019 and 2018.
Transaction-related expenses and adjustments were as follows:
Three Months Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2019 2018 2019 2018
Operating Expenses
Integration related expenses $ 20 $ 26 $ 53 $ 77
Restructuring, severance and relocation 1 - 1 4
Transaction-related expenses (1) 303 1 303 3
Other Expenses (2) 17 25 310 83
Transaction-Related Expenses and Adjustments $ 341 $ 52 $ 667 $ 167 (1) The three and nine months ended
million to remeasure to fair value the assets and liabilities of our German
wholesale business to be contributed to a joint venture.
(2) Includes our proportionate share of transaction and integration expenses
incurred by Change Healthcare JV, excluding certain fair value adjustments,
which were recorded within equity earnings and charges from investment in
Change Healthcare joint venture. The nine months ended
includes a dilution loss of
JV investment ownership dilution from approximately 70% to approximately
58.5%.
Amortization Expenses of Acquired Intangible Assets
Amortization expenses of intangible assets directly related to business
acquisitions and our investment in Change Healthcare JV were $177 million and
$197 million for the three months ended December 31, 2019 and 2018 and $547
million and $594 million for the nine months ended December 31, 2019 and 2018.
These amounts are primarily recorded in operating expenses and equity earnings
and charges from investment in Change Healthcare JV.
Income Tax Benefit (Expense)
During the three months ended December 31, 2019 and 2018, we recorded income tax
expense of $47 million and $123 million related to continuing operations. During
the nine months ended December 31, 2019 and 2018, we recorded income tax benefit
of $111 million and expense of $245 million related to continuing operations.
During the three and nine months ended December 31, 2019 , no tax benefit was
recognized for the charge of $282 million to remeasure to fair value the assets
and liabilities of our German wholesale business to be contributed to a joint
venture within our European Pharmaceutical Solutions segment. During the nine
months ended December 31, 2018 , no tax benefit was recognized for the total
goodwill impairment charge of $591 million related to our European
Pharmaceutical Solutions segment and Rexall Health reporting unit in Other given
that this charge is not deductible for income tax purposes. Fluctuations in our
reported income tax rates are primarily due to the prior year impact of
nondeductible impairment charges as well as changes within our business mix of
income and discrete items recognized.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three and nine
months ended December 31, 2019 and 2018, primarily represents ClarusONE, Vantage
Oncology Holdings, LLC and the accrual of the annual recurring compensation
amount of €0.83 per McKesson Europe AG ("McKesson Europe") share that McKesson
is obligated to pay to the noncontrolling shareholders of McKesson Europe under
a domination and profit and loss transfer agreement (the "Domination
Agreement"). Refer to Financial Note 8, "Redeemable Noncontrolling Interests and
Noncontrolling Interests," to the accompanying condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q for more information.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Net Income (Loss) Attributable to McKesson Corporation
Net income attributable to McKesson Corporation was $186 million and $469
million for the three months ended December 31, 2019 and 2018. Net income (loss)
attributable to McKesson Corporation was $(121) million and $830 million for the
nine months ended December 31, 2019 and 2018. Diluted earnings per common share
attributable to McKesson Corporation was $1.03 and $2.40 for the three months
ended December 31, 2019 and 2018. Diluted earnings (loss) per common share
attributable to McKesson Corporation was $(0.66) and $4.18 for the nine months
ended December 31, 2019 and 2018. The nine months ended December 31, 2019 was
calculated by excluding dilutive securities from the denominator due to their
anti-dilutive effects. Additionally, our 2020 and 2019 diluted earnings per
share reflect the cumulative effects of share repurchases.
Weighted Average Diluted Common Shares
Diluted earnings (loss) per common share was calculated based on a weighted
average number of shares outstanding of 180 million and 195 million for the
three months ended December 31, 2019 and 2018 and 183 million and 199 million
for the nine months ended December 31, 2019 and 2018. Weighted average diluted
shares for 2020 decreased from 2019 primarily reflecting common stock
repurchases.
Segment Results:
Revenues:
Three Months Ended Nine Months Ended December
December 31, 31,
(Dollars in millions) 2019 2018 Change 2019 2018 Change
U.S. Pharmaceutical and
Specialty Solutions $ 46,923 $ 44,279 6 % $ 137,067 $ 126,866 8 %
European Pharmaceutical
Solutions 6,931 6,911 - 20,239 20,485 (1 )
Medical-Surgical Solutions 2,141 2,012 6 6,100 5,663 8
Other 3,177 3,006 6 9,110 8,876 3
Total Revenues $ 59,172 $ 56,208 5 % $ 172,516 $ 161,890 7 %
U.S. Pharmaceutical and Specialty Solutions: U.S. Pharmaceutical and Specialty
Solutions revenues for the three and nine months ended December 31, 2019
increased 6% and 8% compared to the same prior year periods primarily due to
market growth, including expanded business with existing customers, and growth
of specialty pharmaceuticals. Market growth includes growing drug utilization,
price increases and newly launched products, partially offset by price deflation
associated with brand to generic drug conversions.
European Pharmaceutical Solutions: European Pharmaceutical Solutions revenues
remained flat for the three months ended December 31, 2019 and decreased 1% for
the nine months ended December 31, 2019 compared to the same prior year periods
primarily due to unfavorable effects of foreign currency exchange fluctuations
of 3% and 4%, partially offset by market growth in our distribution businesses.
Medical-Surgical Solutions: Medical-Surgical Solutions revenues for the three
and nine months ended December 31, 2019 increased 6% and 8% compared to the same
prior year periods primarily due to market growth. Our 2019 first quarter
acquisition of MSD also favorably impacted revenues for the nine months ended
December 31, 2019 .
Other: Revenues in Other for the three and nine months ended December 31, 2019
increased 6% and 3% compared to the same prior year periods primarily due to
growth in our Canadian and McKesson Prescription Technology Solutions ("MRxTS")
businesses.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Segment Operating Profit (Loss), Corporate Expenses, Net and Interest Expense:
Three Months Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2019 2018 Change 2019 2018 Change
Segment Operating Profit (Loss)
(1)
U.S. Pharmaceutical and
Specialty Solutions $ 687 $ 671 2 % $ 1,905 $ 1,824 4 %
European Pharmaceutical
Solutions (2) (303 ) 26 NM (297 ) (524 ) (43 )
Medical-Surgical Solutions 124 136 (9 ) 378 334 13
Other (3) 61 74 (18 ) (1,109 ) 283 (492 )
Subtotal 569 907 (37 ) 877 1,917 (54 )
Corporate Expenses, Net (4) (211 ) (190 ) 11 (750 ) (480 ) 56
Interest Expense (64 ) (67 ) (4 ) (184 ) (194 ) (5 )
Income (Loss) from Continuing
Operations Before Income Taxes $ 294 $ 650 (55 ) % $ (57 )
Segment Operating Profit (Loss) MarginU.S. Pharmaceutical and Specialty Solutions 1.46 % 1.52 % (6 ) bp 1.39 % 1.44 % (5 ) bp European Pharmaceutical Solutions (4.37 ) 0.38 (475 ) (1.47 ) (2.56 ) 109 Medical-Surgical Solutions 5.79 6.76 (97 ) 6.20 5.90 30 bp - basis points NM - not meaningful (1) Segment operating profit (loss) includes gross profit, net of operating
expenses, as well as other income (expenses), net, for our operating
segments.
(2) Operating loss of our European Pharmaceutical Solutions segment includes a
charge of
of our German wholesale business to be contributed to a joint venture for the
three and nine months ended
charge of
(3) Operating loss for Other for the nine months ended
an impairment charge of
related to our investment in Change Healthcare JV.
(4) Corporate expenses, net for the nine months ended
a pension settlement charge of
million related to opioid claims.
U.S. Pharmaceutical and Specialty Solutions: Operating profit increased and operating profit margin decreased for this segment for the three and nine months endedDecember 31, 2019 compared to the same prior year periods. Operating profit for 2020 was favorably impacted by market growth, including growth in our specialty business. Operating profit and operating profit margin for 2020 was favorably impacted by higher compensation from branded pharmaceutical manufacturers and higher LIFO credits. Additionally, operating profit and operating profit margin in 2019 includes higher net cash proceeds representing our share of antitrust legal settlements and a reversal of the previously accrued estimated liability under theNew York State OSA in the third quarter of 2019, partially offset by a$60 million charge in the third quarter of 2019 related to a customer bankruptcy. European Pharmaceutical Solutions: Operating loss for the three months endedDecember 31, 2019 compared to Operating profit for the same prior year period was primarily due to the charge of$282 million in the third quarter of 2020 for the fair value remeasurement related to our German wholesale business to be contributed to a joint venture and higher restructuring, impairment and related charges primarily due to long-lived asset impairments of$64 million . Operating loss and operating loss margin for this segment improved for the nine months endedDecember 31, 2019 compared to the same prior year period primarily due to the 2019 goodwill impairment charge of$570 million , partially offset by the aforementioned 2020 third quarter fair value remeasurement charge and long-lived asset impairment charge. Medical-Surgical Solutions: Operating profit and operating profit margin for this segment decreased for the three months endedDecember 31, 2019 compared to the same prior year period primarily due to the remeasurement of assets and liabilities held for sale to fair value related to a divestiture, which closed in the fourth quarter of 2020, partially offset by market growth. 48
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Operating profit and operating profit margin for this segment increased for the
nine months ended December 31, 2019 compared to the same prior year period
primarily due to market growth and lower restructuring charges, partially offset
by the aforementioned fair value remeasurement charge.
Other: Operating profit for Other decreased for the three and nine months ended
December 31, 2019 compared to the same prior year periods. Operating profit for
Other included the following significant items:
• 2020 second quarter impairment charge of $1.2 billion and the dilution
loss of $246 million related to our investment in Change Healthcare JV;
• 2019 first quarter gain from an escrow settlement of $97 million
representing certain indemnity and other claims related to our third
quarter 2017 acquisition of Rexall Health ;
• 2019 second quarter credit of $90 million for the derecognition of a
liability related to the TRA payable to the shareholders of Change
Healthcare, Inc.;
• 2019 third quarter gain of
an equity investment;
• 2019 third quarter goodwill impairment charge of
for our Rexall Health retail business; and
• lower restructuring, impairment and related charges for our Canada
business and growth in our MRxTS business for the nine months ended
December 31, 2019 .
Corporate: Corporate expenses, net, increased for the three and nine months
ended December 31, 2019 compared to the same prior year periods due to higher
costs for technology initiatives, partially offset by lower restructuring
expenses. For the nine months ended December 31, 2019 , the increase was also due
to a $122 million pension settlement charge and an $82 million opioid claim
settlement charge, partially offset by higher net settlement gains in 2020 from
our derivative contracts.
Interest Expense: Interest expense decreased for the three and nine months ended
December 31, 2019 compared to the same prior year periods primarily due to a
decrease in the issuance of commercial paper. Interest expense fluctuates based
on timing, amounts and interest rates of term debt repaid and new term debt
issued, as well as amounts incurred associated with financing fees.
Business Combinations
Refer to Financial Note 6, "Business Combinations," to the accompanying
condensed consolidated financial statements included in this Quarterly Report on
Form 10Q.
New Accounting Pronouncements
New accounting pronouncements that we have recently adopted as well as those
that have been recently issued but not yet adopted by us are included in
Financial Note 1, "Significant Accounting Policies," to the accompanying
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q.
Critical Accounting Policies and Estimates
Commencing on October 1, 2019 , we voluntarily changed our annual goodwill
impairment testing date from January 1 to October 1 to better align with the
timing of our annual long-term planning process. Refer to Financial Note 5,
"Goodwill Impairment Charges," to the accompanying condensed consolidated
financial statements included in this Quarterly Report on Form 10Q for further
information.
There have been no material changes during the period covered by this Quarterly
Report on Form 10-Q to the "Critical Accounting Policies and Estimates"
disclosed in Part II, Item 7 of our 2019 Annual Report on Form 10-K, as updated
in "Critical Accounting Policies and Estimates" section in Item 2 of Part I of
our report on Form 10-Q for the quarter ended June 30, 2019 .
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Financial Condition, Liquidity and Capital Resources
We expect our available cash generated from operations, together with our
existing sources of liquidity from our credit facilities and commercial paper
program will be sufficient to fund our long-term and short-term capital
expenditures, working capital and other cash requirements. In addition, from
time to time, we may access the long-term debt capital markets to discharge our
other liabilities.
The following table summarizes the net change in cash, cash equivalents and restricted cash for the periods shown:
Nine Months Ended December 31,
(Dollars in millions) 2019 2018 $ Change
Cash provided by (used in):
Operating activities $ (280 ) $ 141 $ (421 )
Investing activities (409 ) (1,151 ) 742
Financing activities (254 ) 317 (571 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash 27 (130 ) 157
Net change in cash, cash equivalents and
restricted cash $ (916 ) $ (823 ) $ (93 )
Operating activities utilized cash of $280 million and generated cash of $141
million during the nine months ended December 31, 2019 and 2018. Operating
activities for the nine months ended December 31, 2019 were affected by
decreases in draft and accounts payable primarily associated with timing and an
increase in receivables and inventory primarily due to revenue growth, and for
the nine months ended December 31, 2018 were affected by increases in
receivables, inventory and draft and accounts payable primarily associated with
revenue growth. Cash flows from operations can be significantly impacted by
factors such as timing of receipts from customers, inventory receipts and
payments to vendors. Additionally, working capital is primarily a function of
sale and purchase volumes, inventory requirements and vendor payment terms.
During the nine months ended December 31, 2019 , we made a cash payment of $114
million from the executive benefit retirement plan. Operating activities for the
nine months ended December 31, 2019 also includes a non-cash fair value
remeasurement charge of $282 million and a non-cash pension settlement charge of
$122 million and for the nine months ended December 31, 2018 includes a non-cash
derecognition of the TRA liability of $90 million .
Investing activities utilized cash of $409 million and $1.2 billion during the
nine months ended December 31, 2019 and 2018. Investing activities for 2020 and
2019 include $338 million and $405 million in capital expenditures for property,
plant and equipment, and capitalized software. Investing activities for the nine
months ended December 31, 2018 included $866 million of net cash payments for
acquisitions, including $784 million for our acquisition of MSD. Investing
activities for 2019 also included $97 million cash received as a result of
resolving certain indemnity and other claims related to our 2017 acquisition of
Rexall Health .
Financing activities utilized cash of $254 million during the nine months ended
December 31, 2019 and provided cash of $317 million during the nine months ended
December 31, 2018 . Financing activities for the nine months ended December 31,
2019 included cash receipts of $15.9 billion and payments of $13.7 billion for
short-term borrowings, primarily commercial paper. Financing activities for the
nine months ended December 31, 2018 included cash receipts of $30.4 billion and
payments of $29.3 billion for short-term borrowings. Financing activities for
the nine months ended December 31, 2019 and 2018 include $2.0 billion and $1.4
billion of cash paid for stock repurchases, including shares surrendered for tax
withholding. Additionally, financing activities for nine months ended December
31, 2019 and 2018 also include $222 million and $216 million of cash paid for
dividends.
The Company's Board has authorized the repurchase of McKesson's common stock
from time-to-time in open market transactions, privately negotiated
transactions, accelerated share repurchase ("ASR") programs, or by any
combination of such methods. The timing of any repurchases and the actual number
of shares repurchased will depend on a variety of factors, including our stock
price, corporate and regulatory requirements, restrictions under our debt
obligations and other market and economic conditions.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
In May 2019 , we entered into an ASR program with a third-party financial
institution to repurchase $600 million of the Company's common stock. We
repurchased a total of 4.7 million shares at an average price per share of
$127.68 during the first quarter of 2020.
During the first quarter of 2020, we repurchased 0.7 million of the Company's
shares for $84 million through open market transactions at an average price per
share of $128.64 . During the second quarter of 2020, we repurchased 5.2 million
of the Company's shares for $750 million through open market transactions at an
average price per share of $144.28 . During the third quarter of 2020, we
repurchased 3.4 million of the Company's shares for $500 million through open
market transactions at an average price per share of $148.39 .
The total authorization outstanding for repurchases of the Company's common
stock was $1.5 billion at December 31, 2019 .
We believe that our operating cash flow, financial assets and current access to
capital and credit markets, including our existing credit facilities, will give
us the ability to meet our financing needs for the foreseeable future. However,
there can be no assurance that future volatility and disruption in the global
capital and credit markets will not impair our liquidity or increase our costs
of borrowing.
As previously discussed in this financial review, we are a party to discussions
with the objective of achieving broad resolution of the remaining opioid-related
litigation and claims. Although we are not able to predict the outcome or
estimate a range of reasonably possible losses in these matters, an adverse
judgment or negotiated resolution in any of these matters could have a material
adverse impact on our financial position, cash flows or liquidity.
Selected Measures of Liquidity and Capital Resources
(Dollars in millions) December 31, 2019 March 31, 2019
Cash, cash equivalents and restricted cash $ 2,065 $ 2,981
Working capital (665 ) 839
Debt to capital ratio (1) 55.7 % 43.3 %
Return on McKesson stockholders' equity (2) (12.1 ) % 0.4 %
(1) Ratio is computed as total debt divided by the sum of total debt and McKesson
stockholders' equity, which excludes noncontrolling and redeemable
noncontrolling interests and accumulated other comprehensive income (loss).
(2) Ratio is computed as net income (loss) attributable to
for the last four quarters, divided by a five-quarter average of McKesson
stockholders' equity, which excludes noncontrolling and redeemable
noncontrolling interests.
Cash equivalents, which are readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime andU.S. government money market funds denominated inU.S. dollars, overnight repurchase agreements collateralized byU.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by theU.S. government and British pound sterling denominated AAA rated prime money market funds. The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds. Our cash and cash equivalents balance as ofDecember 31, 2019 andMarch 31, 2019 included approximately$1.1 billion and$1.5 billion of cash held by our subsidiaries outside ofthe United States . Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the vast majority of cash held outsidethe United States is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash tothe United States is generally no longer taxable for federal income tax purposes. Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and accounts payable, short-term borrowings, current portion of long-term debt and other current liabilities. We require a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements. 51
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Our debt to capital ratio increased for the nine months ended December 31, 2019
primarily due to higher short-term borrowings and a decrease in stockholders'
equity driven by share repurchases.
In July 2019 , we raised our quarterly dividend from $0.39 to $0.41 per common
share for dividends declared on or after such date by the Board. We anticipate
that we will continue to pay quarterly cash dividends in the future. However,
the payment and amount of future dividends remain within the discretion of the
Board and will depend upon our future earnings, financial condition, capital
requirements and other factors.
The carrying value of redeemable noncontrolling interests related to McKesson
Europe was $1.4 billion at December 31, 2019 , which exceeded the maximum
redemption value of $1.2 billion . The balance of redeemable noncontrolling
interests is reported at the greater of its carrying value or its maximum
redemption value at each reporting date. Upon the effectiveness of the
Domination Agreement on December 2, 2014 , the noncontrolling shareholders of
McKesson Europe received a put right that enables them to put their McKesson
Europe shares to McKesson at €22.99 per share, which price is increased annually
for interest in the amount of 5 percentage points above a base rate published
semiannually by the German Bundesbank, less any compensation amount or
guaranteed dividend already paid ("Put Amount"). The redemption value is the Put
Amount adjusted for exchange rate fluctuations each period. The ultimate amount
and timing of any future cash payments related to the Put Amount are uncertain.
Additionally, we are obligated to pay an annual recurring compensation of €0.83
per McKesson Europe share (the "Compensation Amount") to the noncontrolling
shareholders of McKesson Europe under the Domination Agreement. The Compensation
Amount is recognized ratably during the applicable annual period. The Domination
Agreement does not have an expiration date and can be terminated by McKesson
without cause in writing no earlier than March 31, 2020 .
Refer to Financial Note 8, "Redeemable Noncontrolling Interests and
Noncontrolling Interests," to the condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q.
Credit Resources
We fund our working capital requirements primarily with cash and cash
equivalents as well as short-term borrowings from our credit facilities and
commercial paper issuances. Funds necessary for future debt maturities and our
other cash requirements are expected to be met by existing cash balances, cash
flow from operations, existing credit sources and other capital market
transactions. Detailed information regarding our debt and financing activities
is included in Financial Note 11, "Debt and Financing Activities," to the
accompanying condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2 of Part I
of this report, contains 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. Some of these statements can be identified by the use of
terminology such as "believes," "expects," "anticipates," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates," or the
negative of these words and other comparable terminology. The discussion of
financial trends, strategy, plans or intentions may also include forward-looking
statements. Readers are cautioned not to place undue reliance on forwardlooking
statements, which speak only as of the date such statements were first made. We
undertake no obligation to publicly release any updates or revisions to our
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
projected, anticipated or implied. Although it is not possible to predict or
identify all such risks and uncertainties, they include the following factors,
which are described in more detail in the Risk Factors discussion in Item 1A of
Part I of our most recent Annual Report on Form 10-K, as updated in Item 1A of
Part II of our reports on Form 10-Q for the quarters ended June 30, 2019 and
September 30, 2019 and of this report. The reader should not consider this list
to be a complete statement of all potential risks and uncertainties:
• Changes in the U.S. healthcare industry and regulatory environments could
have a material adverse impact on our results of operations.
• Our foreign operations subject us to a number of operating, economic,
political and regulatory risks that may have a material adverse impact on our
financial position and results of operations.
• Changes in the Canadian healthcare industry and regulatory environment could
have a material adverse impact on our results of operations.
• General European economic conditions together with austerity measures taken
by certain European governments could have a material adverse impact on our
results of operations.
• Changes in the foreign regulatory environment with respect to privacy and
data protection regulations could have a material adverse impact on our
results of operations.
• Our results of operations, which are stated in
adversely impacted by fluctuations in foreign currency exchange rates.
• Our business could be hindered if we are unable to complete and integrate
acquisitions successfully.
• Our results of operations are impacted by our investment in Change Healthcare
JV.
• Our business and results of operations could be impacted if we fail to manage
and complete divestitures and distributions.
• We are subject to legal and regulatory proceedings that could have a material
adverse impact on our financial position and results of operations.
• Competition and industry consolidation may erode our profit.
• A material reduction in purchases or the loss of a large customer or group
purchasing organization, as well as substantial defaults in payments by a
large customer or group purchasing organization, could have a material
adverse impact on our financial position and results of operations.
• Contracts with foreign and domestic government entities and their agencies
pose additional risks relating to future funding and compliance.
• Our future results could be materially affected by public health issues
whether occurring in
• We rely on sophisticated computer systems to perform our business operations
and elements of those systems are from time to time subject to cybersecurity
incidents, such as malware and ransomware attacks, unauthorized access,
system failures, user errors and disruptions. Although we, our customers, our
strategic partners and our external service providers use a variety of
security measures to protect our and their computer systems, a failure or
compromise of our, our customers', our strategic partners' or our external
service providers' computer systems from a cyberattack, disaster, or
malfunction may result in material adverse operational and financial
consequences.
• We could experience losses or liability not covered by insurance.
• Proprietary protections may not be adequate, and products may be found to
infringe the rights of third parties.
• System errors or failures of our products or services to conform to
specifications cause unforeseen liabilities or injury, harm our reputation
and have a material adverse impact on our results of operations.
• Various risks could interrupt customers' access to their data residing in our
service centers, exposing us to significant costs.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONCLUDED)
(UNAUDITED)
• We may be required to record a significant charge to earnings if ourgoodwill, intangible and other long-lived assets, or investments become
further impaired.
• Tax legislation initiatives or challenges to our tax positions could have a
material adverse impact on our results of operations.
• Volatility and disruption to the global capital and credit markets may
adversely affect our ability to access credit, our cost of credit and the
financial soundness of our customers and suppliers.
• Changes in accounting standards issued by the Financial Accounting Standards
Board ("FASB") or other standard-setting bodies may adversely affect our
consolidated financial statements.
• We could face significant liability if we withdraw from participation in one
or more multiemployer pension plans in which we participate, or if one or
more multiemployer plans in which we participate is underfunded.
• We may not realize the expected benefits from our restructuring and business
process initiatives.
• We may experience difficulties with outsourcing and similar third-party
relationships.
• We may face risks associated with our retail expansion.
• We may be unable to keep existing retail store locations or open new retail
locations in desirable places, which could materially adversely affect our
results of operations.
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McKESSON CORPORATION
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