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" and other similar pronouns). 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, 2020 previously filed with theSecurities and Exchange Commission onMay 22, 2020 ("2020 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. Overview of Our Business: We are a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. We partner with life sciences companies, manufacturers, providers, pharmacies, governments, and other healthcare organizations to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively. 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, which primarily consists ofMcKesson Canada , McKesson Prescription Technology Solutions ("MRxTS"), and our investment inChange Healthcare LLC ("Change Healthcare JV"), which was split-off from the Company in the fourth quarter of 2020 as further discussed in this Financial Review. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of 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. OnJuly 1, 2020 , we announced a change in our organizational structure to reflect our continued focus on delivering new and innovative solutions to respond to the evolving needs of the healthcare industry, customers, and patients. In connection with the completion of this change, our operating structure will be realigned, and we will report our financial results in four reportable segments on a retrospective basis commencing in the second quarter of 2021 as follows: •U.S. Pharmaceutical •International •Medical-Surgical Solutions •Prescription Technology Solutions ("RxTS") Our equity method investment in Change Healthcare JV, which was split-off from McKesson in the fourth quarter of 2020, will be included in Other for retrospective periods presented. The segment changes reflect how our chief operating decision maker allocates resources and assesses performance commencing in the second quarter of 2021. The segment changes will not affect the previously issued consolidated financial statements nor earnings per common share of McKesson for historical periods. 32
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Executive Summary:
The following summary provides highlights and key factors that impacted our
business, operating results, financial condition, and liquidity for the three
months ended June 30, 2020 .
•Coronavirus disease 2019 ("COVID-19") impacted our results of operations for
the first quarter of 2021 primarily due to the decreased pharmaceutical
distribution volumes resulting from the weakened and uncertain global economic
environment and COVID-19 restrictions, including government shutdowns and
shelter-in-place orders, following the onset of the pandemic. For a more
in-depth discussion of how COVID-19 impacted our business, operations, and
outlook, see the COVID-19 section of "Trends and Uncertainties" included below;
•Revenues of $55.7 billion remained flat from the same prior year period.
Revenues decreased from COVID-19 impacts primarily due to pharmaceutical
distribution volume declines across our businesses, which was largely offset by
market growth in our U.S. Pharmaceutical and Specialty Solutions segment;
•Gross profit decreased 3% from the same prior year period primarily driven by
declines in our Medical-Surgical Solutions and European Pharmaceutical Solutions
segments due to COVID-19, including doctors' office closures, deferred and
cancelled elective procedures, lower distribution volumes, and reduced retail
pharmacy foot traffic;
•Total operating expenses for the three months ended June 30, 2020 includes a
net gain of $131 million recorded in connection with insurance proceeds received
from the settlement of the shareholder derivative action related to our
controlled substances monitoring program, within Corporate expenses, net;
•Diluted earnings per common share from continuing operations attributable to
McKesson Corporation for the three months ended June 30, 2020 of $2.72 reflects
the aforementioned items and a lower share count compared to the prior year
driven largely by the separation of our investment in Change Healthcare JV on
March 10, 2020 ;
•We returned $74 million of cash to shareholders through dividend payments
during the quarter, and on July 29, 2020 , raised our quarterly dividend from
$0.41 to $0.42 per common share; and
•On July 1, 2020 , we announced the realignment of our reportable segments
commencing in the second quarter of 2021 to respond to the evolving needs of the
healthcare industry, customers, and patients.
Trends and Uncertainties:
COVID-19
In December 2019 , a novel strain of coronavirus, which causes the infectious
disease known as COVID-19, was reported in Wuhan, China . The World Health
Organization declared COVID-19 a "Public Health Emergency of International
Concern" on January 30, 2020 and a global pandemic on March 11, 2020 .
We continue to evaluate the nature and extent COVID-19 may have to our business
and operations. The pandemic developed rapidly during our fourth quarter of 2020
and continues to evolve. Infection rates and COVID-19 cases began to increase to
higher levels late in the current period, particularly in the United States
("U.S."). The full extent to which COVID-19 will impact us depends on future
developments, including the continued duration and spread of the virus, as well
as potential new outbreaks.
In response to the COVID-19 pandemic, federal, state, and local government
directives and policies have been put in place in the U.S. to enhance
availability of medications and supplies to meet the increased demand, assist
front-line healthcare providers, manage public health concerns by creating
social distancing, and address the economic impacts, including sharply reduced
business activity, increased unemployment, and overall uncertainty presented by
this new healthcare emergency. Similar governmental actions have occurred in
Canada and Europe , the timing of which has varied across geographies.
As a global leader in healthcare supply chain management solutions, retail
pharmacy, community oncology and specialty care, and healthcare information
technology, we are well positioned to respond to the COVID-19 pandemic in the
U.S. , Canada , and Europe . We have worked and continue to work closely with
national and local governments, agencies, and industry partners to ensure
supplies, including personal protective equipment, and medicine reached our
customers and patients.
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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
We have taken the necessary steps to ensure that we continue to supply our
customers and protect the safety of our employees. The various responses we put
in place to mitigate the impact of COVID-19 on our business operations,
including telecommuting and work-from-home policies, restricted travel
requirements, employee support programs, and enhanced safety measures are
intended to limit exposure to COVID-19. We expanded employee medical benefits
covering COVID-19 related visits, treatments, and testing as well as expanded
telehealth options to not only protect employee safety, but to provide further
support including additional emergency leave and an internal paid time off
donation platform for employees impacted by COVID-19. We have taken steps to
enhance employee safety within our facilities by promoting the practice of
social distancing where feasible, providing reminders to wash or disinfect their
hands, avoiding unnecessary face touching, placing hand sanitizers within our
operating environments, and periodically cleaning and disinfecting our
facilities. These responses were initially put in place during our fourth
quarter of 2020, which we maintained in the first quarter of 2021. These steps
to protect the safety of our employees have resulted in limited disruption of
our normal business operations, productivity trends, and have not materially
impacted our operating expenses or operating margins.
We have evaluated the impact of our telecommuting and work-from-home policies on
our system of internal controls and we have concluded that these policies did
not have a material effect on our internal control over financial reporting
during the first quarter of 2021. We also took various actions to mitigate the
impact of COVID-19 on our results from operations through cost-containment and
payroll-related expenses.
During the first quarter, we experienced growth in pharmaceutical distribution
and specialty drug volumes at a lower rate in the
The decreased volumes and revenues unfavorably impacted income from continuing
operations before income taxes, partially offset by decreased operating expenses
largely due to savings from restricted travel requirements, decreased meetings,
and decreased payroll-related expenses. The favorable reduction in operating
expenses was partially offset by increased costs of transport, costs for
enhanced sterilization procedures to sanitize operating facilities, and costs of
personal protective equipment for our employees. The above items had a negative
impact on consolidated income from continuing operations before income taxes, as
compared to the same period in the prior year. Impacts to future periods due to
COVID-19 may differ based on future developments, including the duration and
spread of the virus as well as potential seasonality of new outbreaks.
On
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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) We continue to monitor the COVID-19 pandemic impact on our supply chain. Although the availability of various products is dependent on our suppliers, their location, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers, industry partners, and government agencies to meet the needs of our customers during the pandemic. We have assembled aCritical Care Drug Task Force , made up of our procurement specialists, clinical health systems pharmacists, and supply chain professionals, focused on securing additional product where available, sourcing back-up products, adjusting allocations to ensure equitable distribution, and to protect our operations across all locations and facilities. We have a robust Business Continuity and Disaster Recovery Program ("BCRP") and we have proactively enhanced our BCRP in response to the COVID-19 pandemic to support our priorities to protect our customers, ensure the safety and security of our employees and workplaces, and ensure the continuity of critical business processes. We were able to maintain appropriate labor and overall vendor supply levels during the first quarter. Our inventory levels have fluctuated in response to supply availability and customer demand patterns for certain products, with varying inventory level impacts depending on the specific product within our portfolio of offerings. We collaborated closely with the federal government and other healthcare stakeholders to source more critical personal protective equipment to theU.S. This collaboration expedited the shipment of critical medical supplies to areas hit hardest by COVID-19, as identified by theFederal Emergency Management Agency . We are closely monitoring demand and usage of personal protective equipment. As our supply levels improve, and the federal government evolves guidance on the prioritization of providers or geographic markets, we will continue to adapt our distribution policies. We face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our future business operations, financial condition, results of operations, and liquidity. Additionally, continued responses from authorities and regulators at all levels of government may materially impact us in future periods. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when stability will return remains challenging. Refer to Item 1A - Risk Factors in Part I of our 2020 Annual Report for a disclosure of risk factors related to COVID-19. Opioid-Related Litigation and Claims We are a defendant in over 3,100 legal proceedings asserting claims related to distribution of controlled substances (opioids) in federal and state courts throughout theU.S. , and inPuerto Rico andCanada . We are vigorously defending ourselves against such claims and proceedings and 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. 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 13, "Commitments and Contingent Liabilities," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information. 35
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