- Revenues of $50.0 billion for the second quarter, up 2% year-over-year.
- Second-quarter GAAP earnings per diluted share from continuing operations of $1.35, down 49% year-over-year.
- Excluding a goodwill impairment charge of $1.24 and Cost Alignment Plan credits of 2 cents from Adjusted Earnings, second-quarter results per diluted share of $2.94, down 7% year-over-year, compared to $3.17 in the prior year.
- Board of Directors authorized a new $4.0 billion share repurchase program.
- Revised Fiscal 2017 Outlook: GAAP earnings per diluted share from continuing operations of $8.95 to $9.80.
- Revised Fiscal 2017 Outlook: $12.35 to $12.85 per diluted share, which excludes approximately $1.31 to $1.33 in charges to Adjusted Earnings related to a goodwill impairment and the Cost Alignment Plan.
SAN FRANCISCO, October 27, 2016 – McKesson Corporation (NYSE:MCK) today reported that revenues for the second quarter ended September 30, 2016, were $50.0 billion, up 2% compared to $48.8 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 $1.35, compared to $2.65 a year ago.
Second-quarter results included a non-cash, pre-tax goodwill impairment charge of $290 million, or $1.24, related to our Enterprise Information Solutions (EIS) business within Technology Solutions, and pre-tax credits of $10 million, or 2 cents, related to the company’s cost alignment plan as disclosed in March 2016 (the “Cost Alignment Plan”). Excluding the goodwill impairment charge and the Cost Alignment Plan credits, second-quarter Adjusted Earnings were $2.94 per diluted share. Second-quarter results were impacted by a softer pricing environment in our U.S. Pharmaceutical business within Distribution Solutions compared to previous expectations. Prior year second-quarter Adjusted Earnings, excluding a pre-tax gain of $52 million, or 14 cents, related to the sale of the ZEE Medical business within Distribution Solutions, was $3.17 per diluted share.
The company is updating its outlook from the previous range of $13.43 to $13.93 per diluted share to a new range of $12.35 to $12.85 per diluted share for the fiscal year ending March 31, 2017. This revised outlook excludes from Adjusted Earnings the second-quarter EIS goodwill impairment charge and anticipated Cost Alignment Plan charges of 6 to 8 cents per diluted share.
“Our updated outlook for Fiscal 2017 reflects McKesson’s expectation of a lower profit contribution resulting from recent customer pricing activities and lower operating profit as a result of further moderating branded pharmaceutical pricing trends compared to previous expectations,” said John H. Hammergren, chairman and chief executive officer. “While we work to actively respond to these market forces, we remain focused on our long-term strategy of innovation and value-added solutions. And though we responded quickly to maintain market share and mitigate these pricing challenges, we recognize the near-term impact requires a revision to our outlook.”
For the first half of the fiscal year, McKesson generated cash from operations of $2.9 billion and ended the quarter with cash and cash equivalents of $5.5 billion. During the first half of the year, McKesson paid $2.0 billion for acquisitions, $129 million in dividends and had internal capital spending of $240 million. And our expectation for full-year cash flow from operations remains consistent with our original guidance.
“Despite the downward revision to our outlook, we believe in, and remain committed to, the value we demonstrate every day to our customers and manufacturer partners,” continued Hammergren. “McKesson has a great tradition of customer focus, operational excellence, robust capital deployment, strong management, disciplined execution, and long-term value creation. We remain as committed as ever to our value proposition,” concluded Hammergren.
Segment Results
Distribution Solutions revenues were $49.3 billion for the quarter, up 3% both on a reported and constant currency basis.
North America pharmaceutical distribution and services revenues of $41.4 billion for the quarter were up 2% both on a reported and constant currency basis, primarily reflecting market growth and acquisitions, partially offset by a previously disclosed customer loss in the prior year.
International pharmaceutical distribution and services revenues were $6.3 billion for the quarter, up 7% on a reported basis and 12% on a constant currency basis, driven by acquisitions and market growth.
Medical-Surgical distribution and services revenues were $1.6 billion for the quarter, up 4%, primarily driven by market growth.
In the second quarter, Distribution Solutions GAAP operating profit was $851 million and GAAP operating margin was 1.73%. Second-quarter adjusted operating profit was $930 million, down 19% from the prior year on a reported basis and 18% on a constant currency basis. Adjusted operating margin for the Distribution Solutions segment was 1.89% on a constant currency basis.
Technology Solutions revenues were down 6% both on a reported and constant currency basis in the second quarter, primarily driven by an anticipated year-over-year decline in our hospital software business, partially offset by growth in our other technology businesses.
Technology Solutions GAAP operating loss was $174 million for the second quarter and GAAP operating margin was (25.59%). On a constant currency basis, adjusted operating loss was $143 million for the second quarter and adjusted operating margin was (21.03%). Excluding the goodwill impairment charge related to our EIS business and credits related to the company’s Cost Alignment Plan, adjusted operating profit was $141 million for the second quarter and adjusted operating margin was 20.74%.
Revised Fiscal 2017 Outlook
McKesson expects GAAP earnings per diluted share between $8.95 to $9.80 for the fiscal year ending March 31, 2017. Adjusted Earnings per diluted share excludes the following items:
- Amortization of acquisition-related intangible assets of $1.25 to $1.35 per diluted share;
- Acquisition expenses and related adjustments of 50 cents to 65 cents per diluted share;
- LIFO inventory-related charges of up to 10 cents per diluted share; and
- Claim and litigation reserve credits of 2 cents per diluted share for average wholesale price litigation matters.
Excluding the EIS goodwill impairment charge and an anticipated 6 to 8 cents in expected Cost Alignment Plan charges from Adjusted Earnings, McKesson expects $12.35 to $12.85 per diluted share for the fiscal year ending March 31, 2017. This revised expectation includes the following significant updates to the key assumptions we provided on July 27, 2016:
- Distribution Solutions adjusted operating margin, excluding anticipated Cost Alignment Plan charges, expected to be approximately 30 to 40 basis points below the Fiscal 2016 adjusted operating margin of 234 basis points, primarily driven by increased competitive pricing activity.
- Branded pharmaceutical price trends in the U.S. market are now expected to be meaningfully below those experienced in Fiscal 2016.
- Excluding the EIS goodwill impairment charge, we now expect a full-year adjusted tax rate of approximately 27.5%, which may vary from quarter to quarter.
- Weighted average diluted shares used in the calculation of earnings per share are expected to be approximately 226 million for the year.
The Fiscal 2017 guidance ranges do not include any potential claim or litigation reserve adjustments, or the impact of any potential new acquisitions and divestitures, or impairments and material restructurings beyond those previously publicly disclosed.
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 expenses and related adjustments, claim and litigation reserve adjustments reflecting the company’s reserves for controlled substance distribution claims and average wholesale price litigation matters, and Last-In-First-Out (“LIFO”) inventory-related 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.
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 27th, at 5:00 PM ET. The dial-in number for individuals wishing to participate on the call is 719-234-7317. Craig Mercer, senior vice president, Investor Relations, is the leader of the call, and the password to join the call is ‘McKesson’. The live webcast and supplementary slide presentation for the conference call can be accessed on the company’s Investor Relations website at http://investor.McKesson.com.
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 9279019.
The audio webcast and supplemental slide presentation will be archived on the company’s Investor Relations website after the conclusion of the call. Shareholders are encouraged to review the company’s filings with the Securities and Exchange Commission and the supplementary slide presentation for the conference call, which are located on the company’s website.
About McKesson Corporation
McKesson Corporation, currently ranked 5th on the FORTUNE 500, is a healthcare services and information technology company dedicated to making the business of healthcare run better. McKesson partners with payers, hospitals, physician offices, pharmacies, pharmaceutical companies, and others across the spectrum of care to build healthier organizations that deliver better care to patients in every setting. McKesson helps its customers improve their financial, operational, and clinical performance with solutions that include pharmaceutical and medical-surgical supply management, healthcare information technology, and business and clinical services. For more information, visit www.McKesson.com.
Tables and full-text of earnings release also available for viewing and download in PDF format: McKesson Reports Fiscal 2017 Second-Quarter Results (PDF, 157 KB).