McKesson Reports Fiscal 2018 Second-Quarter Results

• Revenues of $52.1 billion for the second quarter, up 4% year-over-year.
• Second-quarter GAAP earnings per diluted share from continuing operations of $0.01, down 99% year-over-year. GAAP earnings per diluted share includes impairment and restructuring charges of $2.60 related to our retail pharmacy business in the United Kingdom (U.K.).
• Second-quarter Adjusted Earnings per diluted share of $3.28, up 11% year-over-year, compared to $2.96 in the prior year.
• Fiscal 2018 Outlook: GAAP earnings per diluted share from continuing operations of $4.80 to $6.90.
• Fiscal 2018 Outlook: Adjusted Earnings of $11.80 to $12.50 per diluted share.
• Paul Julian, executive vice president and group president, Distribution Solutions, will retire at the close of the calendar year.

SAN FRANCISCO, October 26, 2017 – McKesson Corporation (NYSE:MCK) today reported that revenues for the second quarter ended September 30, 2017, were $52.1 billion, up 4% compared to $50.0 billion a year ago. On the basis of U.S. generally accepted accounting principles (“GAAP”), second-quarter earnings per diluted share from continuing operations was $0.01, compared to $1.35 a year ago. During the quarter, McKesson initiated a number of strategic and operational actions within our U.K. retail pharmacy business in response to the previously discussed U.K. government reimbursement reductions. As a result, second-quarter GAAP earnings per diluted share included $2.41 of non-cash goodwill and other long-lived asset impairment charges and $0.19 of restructuring charges.

Second-quarter Adjusted Earnings per diluted share was $3.28, up 11% compared to $2.96 a year ago. Second-quarter results were driven by organic growth across multiple business units, including the company’s strategic sourcing benefits through ClarusONE, a lower share count and incremental profit contribution from acquisitions. This growth more than offset the year-over-year lapping effect of the previously disclosed lower profit contribution from increased price competition in our independent pharmacy business in Fiscal 2017, and the impact of reduced reimbursement in the company’s U.K. retail pharmacy business.

For the first half of the fiscal year, McKesson generated cash from operations of $1.3 billion and ended the quarter with cash and cash equivalents of $2.6 billion. During the first half of the year, McKesson repaid $545 million in long-term debt, paid $1.9 billion for acquisitions, repurchased $650 million of its common stock, invested $255 million internally and paid $121 million in dividends.

In addition, immediately following the close of the second quarter, McKesson completed the sale to Allscripts of the company’s Enterprise Information Solutions (EIS) business within the Technology Solutions segment.

“As expected, we generated strong sequential results in the second quarter, and our solid year-to-date cash flow performance allowed us to deploy meaningful capital for acquisitions and share repurchases, delivering further value for our shareholders,” said John H. Hammergren, chairman and chief executive officer. “Additionally, we took important actions during the quarter to better position our business in light of reimbursement pressures levied by the National Health Service across our retail pharmacy operations in the U.K.” 

“We continue to focus on executing across our businesses and are reiterating our previous Fiscal 2018 Adjusted Earnings outlook of $11.80 to $12.50 per diluted share, as we work towards a strong finish to our Fiscal 2018,” Hammergren concluded.

McKesson Executive Management Update

Paul Julian, executive vice president and group president, Distribution Solutions, will retire at the close of the calendar year, following 21 years of dedicated service to McKesson. Among his many accomplishments, Julian helped McKesson regain its position as the largest North American pharmaceutical distributor during his tenure as president of McKesson Pharmaceutical.

“For more than two decades, Paul has been a tremendous asset to McKesson. He has helped the company become the healthcare leader that it is today, and has developed a deep bench of talented leaders who are ready to take the company forward. Paul’s dedication and tireless commitment to our customers, our people, and the industry set him apart. Paul and I have worked together for longer than just his time at McKesson. He has been a great business partner and friend, and I will miss him,” commented Hammergren.

Segment Results

Distribution Solutions revenues were $51.9 billion for the quarter, up 5% both on a reported and constant currency basis.

North America pharmaceutical distribution and services revenues of $43.5 billion for the quarter were up 5% both on a reported and constant currency basis, primarily reflecting market growth and acquisitions.

International pharmaceutical distribution and services revenues were $6.8 billion for the quarter, up 8% on a reported basis and 4% on a constant currency basis, driven by acquisitions and market growth.

Medical-Surgical distribution and services revenues were $1.7 billion for the quarter, up 2%, primarily driven by market growth.

In the second quarter, Distribution Solutions GAAP operating profit was $388 million and GAAP operating margin was 0.75%. Second-quarter adjusted operating profit was $1.0 billion, up 13% from the prior year on a reported basis and 12% on a constant currency basis. Adjusted operating margin for the Distribution Solutions segment was 2.01% on a constant currency basis. Adjusted operating margin excluding noncontrolling interests for the Distribution Solutions segment was 1.92% on a constant currency basis.

Technology Solutions revenues were down 82% on both a reported and constant currency basis in the second quarter, following the contribution of the majority of McKesson’s Technology Solutions businesses to the Change Healthcare joint venture on March 1, 2017. Technology Solutions revenues now reflect the remaining EIS business.

Second-quarter GAAP loss from McKesson’s equity investment in Change Healthcare was $61 million. Adjusted income from McKesson’s equity investment in Change Healthcare was $75 million for the second quarter.

Technology Solutions GAAP operating loss was $33 million for the second quarter. Adjusted operating profit was $92 million for the second quarter, primarily reflecting our equity share of Change Healthcare’s net income.

Fiscal Year 2018 Outlook

McKesson expects GAAP earnings per diluted share of $4.80 to $6.90 for the fiscal year ending March 31, 2018, which includes the following items:

• Amortization of acquisition-related intangibles of $2.40 to $2.70 per diluted share;

• Acquisition-related expenses and adjustments of $0.90 to 1.10 per diluted share;

LIFO inventory-related charges of 20 cents to credits of 10 cents per diluted share;

• Gains from antitrust legal settlements of up to 10 cents per diluted share;
• Restructuring charges of $1.10 to $1.40 per diluted share; and
• Other adjustments of $1.40 to $1.60 per diluted share.

McKesson expects Adjusted Earnings of $11.80 to $12.50 per diluted share for the fiscal year ending March 31, 2018.

Dividend Declaration

The company’s Board of Directors yesterday declared a regular dividend of thirty-four cents per share of common stock. The dividend will be payable on January 2, 2018, to stockholders of record on December 1, 2017.

Adjusted Earnings

McKesson separately reports financial results on the basis of Adjusted Earnings. Adjusted Earnings is a non-GAAP financial measure defined as GAAP income from continuing operations, excluding amortization of acquisition-related intangible assets, acquisition-related expenses and adjustments, Last-In-First-Out (“LIFO”) inventory-related adjustments, gains from antitrust legal settlements, restructuring charges, and other adjustments. A reconciliation of McKesson’s GAAP financial results to Adjusted Earnings is provided in Schedules 2, 3 and 4 of the financial statement tables included with this release.

Constant Currency

McKesson also presents its financial results on a constant currency basis. The company conducts business worldwide in local currencies, including the Euro, British pound and Canadian dollar. As a result, the comparability of the financial results reported in U.S. dollars can be affected by changes in foreign currency exchange rates. Constant currency information is presented to provide a framework for assessing how the company’s business performed excluding the effect of foreign currency exchange rate fluctuations. The supplemental constant currency information of the company’s GAAP financial results and Adjusted Earnings (Non-GAAP) is provided in Schedule 3 of the financial statement tables included with this release.

Adjusted Operating Profit Margin Excluding Noncontrolling Interests

McKesson also provides adjusted operating profit margin excluding noncontrolling interests. The company has arrangements involving third-party noncontrolling interests. As a result, pre-tax results are affected by the portion of pre-tax earnings attributable to noncontrolling interests. Adjusted operating profit margin excluding noncontrolling interests information is presented to provide a framework for assessing how the company’s business performed excluding the effect of pre-tax earnings that is not attributable to McKesson. The supplemental adjusted operating profit margin excluding noncontrolling interests information of the company’s GAAP financial results and Adjusted Earnings (Non-GAAP) is provided in Schedule 3 of the financial statement tables included with this release.

Risk Factors

Except for historical information contained in this press release, matters discussed may constitute “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, as amended, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking terminology such as “believes”, “expects”, “anticipates”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, the most significant of these risks and uncertainties are described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: changes in the U.S. healthcare industry and regulatory environment; managing foreign expansion, including the related operating, economic, political and regulatory risks; changes in the Canadian healthcare industry and regulatory environment; exposure to European economic conditions, including recent austerity measures taken by certain European governments; changes in the European regulatory environment with respect to privacy and data protection regulations; fluctuations in foreign currency exchange rates; the company’s ability to successfully identify, consummate, finance and integrate acquisitions; the company’s ability to manage and complete divestitures; material adverse resolution of pending legal proceedings; competition and industry consolidation; substantial defaults in payment or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization; the loss of government contracts as a result of compliance or funding challenges; public health issues in the U.S. or abroad; cyberattack, natural disaster, or malfunction of sophisticated internal computer systems to perform as designed; the adequacy of insurance to cover property loss or liability claims; the company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances; the company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others; system errors or failure of our technology products or services to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; the delay or extension of our sales or implementation cycles for external software products; changes in circumstances that could impair our goodwill or intangible assets; new or revised tax legislation or challenges to our tax positions; general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the company, its customers or suppliers; changes in accounting principles generally accepted in the United States of America; withdrawal from participation in multiemployer pension plans or if such plans are reported to have underfunded liabilities; inability to realize the expected benefits from the company’s restructuring and business process initiatives; difficulties with outsourcing and similar third party relationships; risks associated with the company’s retail expansion; and the company’s inability to keep existing retail store locations or open new retail locations in desirable places. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are first made. Except to the extent required by law, the company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Conference Call Details

The company has scheduled a conference call for today, Thursday, October 26^th, at 8:00 AM ET. The dial-in number for individuals wishing to participate on the call is 323-794-2423. Craig Mercer, senior vice president, Investor Relations, is the leader of the call, and the password to join the call is ‘McKesson’. A telephonic replay of this conference call will be available for five calendar days. The dial-in number for individuals wishing to listen to the replay is 719-457-0820 and the pass code is 1076652. An archive of the conference call will also be available on the company’s Investor Relations website at http://investor.McKesson.com.

Shareholders are encouraged to review the company’s filings with the Securities and Exchange Commission.

About McKesson Corporation

McKesson Corporation, currently ranked 5^th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information technology. McKesson partners with pharmaceutical manufacturers, providers, pharmacies, governments and other organizations in healthcare to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. United by our ICARE shared principles, our employees work every day to innovate and deliver opportunities that make our customers and partners more successful — all for the better health of patients. McKesson has been named the “Most Admired Company” in the healthcare wholesaler category by FORTUNE, a “Best Place to Work” by the Human Rights Campaign Foundation, and a top military-friendly company by Military Friendly. For more information, visit www.McKesson.com.