02-Feb-2021

McKesson Reports Fiscal 2021 Third-Quarter Results

Third-Quarter Highlights, Year-over-Year:

Total revenues of $62.6 billion, reflecting 6% growth.
McKesson recorded a pre-tax charge of $8.1 billion related to opioid litigation, resulting in third-quarter Loss per diluted share of ($39.03).
Adjusted Earnings per diluted share of $4.60, an increase of 21%.
Board of Directors authorized an additional $2.0 billion share repurchase program.

Fiscal 2021 Guidance:

Increased fiscal 2021 Adjusted Earnings per diluted share guidance range to $16.95 to $17.25, from the previous range of $16.00 to $16.50.
Fiscal 2021 Adjusted Earnings per diluted share guidance assumes $0.25 to $0.35 related to COVID-19 vaccine distribution and $0.20 to $0.30 related to the kitting and distribution of ancillary supplies for COVID-19 vaccines.

IRVING, Texas--(BUSINESS WIRE)--McKesson Corporation (NYSE:MCK) today reported results for the third quarter ended December 31, 2020.

Fiscal 2021 Third-Quarter Result Summary

	Third-Quarter							Year-to-Date
($ in millions, except per share amounts)	FY21			FY20		*Change*		FY21			FY20			*Change*
Revenues	$	62,599		$	59,172	6	%	$	179,086		$	172,516		4	%
Income (loss) from Continuing Operations¹	(6,226		)	191		NM		(5,204		)	(109		)	NM
Adjusted Earnings^1,2	741			685		8		1,978			1,971			-
Earnings (loss) per Diluted Share¹	(39.03		)	1.06		NM		(32.28		)	(0.60		)	NM
Adjusted Earnings per Diluted Share^1,2	4.60			3.81		21		12.17			10.71			14
¹Reflects continuing operations attributable to McKesson, net of tax
²Represents a non-GAAP financial measure; refer to the reconciliations of non-GAAP financial measures included in accompanying schedules

“McKesson continued to demonstrate its operational excellence and extensive healthcare supply chain expertise, as we began the distribution of COVID-19 vaccine doses to the entire U.S. in the third quarter,” said Brian Tyler, chief executive officer. “McKesson’s long history of serving as the centralized distributor for the Vaccines for Children program for the Centers for Disease Control and Prevention, including during the H1N1 public health crisis, positions us well to distribute hundreds of millions of COVID-19 vaccines safely and efficiently to the right location, in the right quantity, and in the right condition. Our COVID-19 vaccine distribution has been highly successful, achieving all volume and timing requirements by the government, and I want to thank our 80,000 employees around the world for their tremendous efforts and dedication.”

“While the overall environment remains challenging due to the sustained impact of the COVID-19 pandemic, we are pleased to report third-quarter adjusted earnings results ahead of our expectations. McKesson’s performance reflects strong execution and the benefits from our ongoing strategic investments in the growth areas of oncology and biopharma services. Based on our year-to-date progress and the successful execution of distributing COVID-19 vaccines and ancillary supplies in the U.S., we are raising and narrowing our guidance range for fiscal 2021 and now expect Adjusted Earnings per diluted share of $16.95 to $17.25.”

Third-quarter revenues were $62.6 billion, up 6% from a year ago, driven by growth in the U.S. Pharmaceutical segment, largely due to market growth and higher specialty volumes, partially offset by branded to generic conversions.

Third-quarter Loss per diluted share of ($39.03) included a pre-tax $8.1 billion expense accrual related to opioid litigation and a pre-tax long-lived asset impairment charge of $115 million primarily related to McKesson’s retail pharmacy businesses in the International segment. Third-quarter Adjusted Earnings per diluted share does not include these charges.

Third-quarter Adjusted Earnings per diluted share was $4.60 compared to $3.81 a year ago, an increase of 21%, driven by a lower share count and growth in the Medical-Surgical Solutions segment, partially offset by a higher tax rate and the lapping of the prior year contribution from the company's now separated investment in Change Healthcare LLC ("Change Healthcare"). Third-quarter Adjusted Earnings per diluted share also included pre-tax net gains of approximately $30 million, or $0.14 per diluted share, associated with McKesson Ventures’ equity investments.

For the first nine months of the fiscal year, McKesson returned $709 million of cash to shareholders via $500 million of common stock repurchases and $209 million of dividend payments. During the first nine months of the fiscal year, McKesson generated cash from operations of $1.2 billion, and invested $427 million internally, resulting in Free Cash Flow of $745 million.

Opioid-related charges

In the third quarter of fiscal 2021, McKesson recorded a GAAP-only pre-tax charge of $8.1 billion, $6.7 billion post-tax, related to the estimated liability for opioid-related claims of governmental entities. The Company is in ongoing, advanced discussions with state attorneys general and plaintiffs’ attorneys regarding a settlement framework under which the Company would pay its portion of a broad settlement over a period of 18 years. A loss in this amount has now been deemed probable and reasonably estimable.

U.S. Pharmaceutical Segment

Third-quarter revenues were $49.5 billion, up 7%, driven by market growth and higher specialty volumes, partially offset by branded to generic conversions.
Third-quarter Segment Operating Profit was $635 million and operating margin was 1.28%. Adjusted Segment Operating Profit was $656 million, up 2% from a year ago, driven by growth in specialty, partially offset by higher operating expenses in support of the company’s strategic growth initiatives. Adjusted operating margin was 1.33%, down 5 basis points.

International Segment

Third-quarter revenues were $9.3 billion, down 6% on a reported basis and down 10% on an FX-Adjusted basis, driven by the contribution of McKesson's German wholesale business to a joint venture with Walgreens Boots Alliance.
Third-quarter Segment Operating Loss was ($71) million and operating margin was (0.77%), driven by a GAAP-only pre-tax long-lived asset impairment charge of $115 million primarily related to McKesson’s retail pharmacy businesses in Canada and Europe. Adjusted Segment Operating Profit was $158 million, up 9%. On an FX-Adjusted basis, Adjusted Segment Operating Profit was $150 million, up 3%. Adjusted operating margin was 1.70%, up 23 basis points. On an FX-Adjusted basis, adjusted operating margin was 1.69%, up 22 basis points.

Medical-Surgical Solutions Segment

Third-quarter revenues were $3.1 billion, up 43%, primarily driven by demand for COVID-19 tests in the Primary Care and Extended Care businesses.
Third-quarter Segment Operating Profit was $260 million and operating margin was 8.51%. Adjusted Segment Operating Profit was $279 million, up 52%, driven by demand for COVID-19 tests and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by inventory charges. Adjusted operating margin was 9.14%, up 55 basis points.

Prescription Technology Solutions Segment

Third-quarter revenues were $777 million, up 9%, driven by new brand support programs and higher volumes of existing brand support programs.
Third-quarter Segment Operating Profit was $114 million and operating margin was 14.67%. Adjusted Segment Operating Profit was $131 million, up 27%, reflecting organic growth in the segment. Adjusted operating margin was 16.86%, up from 14.43% in the prior year.

Company Updates

McKesson launched Ontada, an oncology technology and insights business within the U.S. Pharmaceutical Segment, designed to support innovation, acceleration and evidence generation to drive better outcomes for cancer patients.
McKesson’s Board of Directors authorized an additional $2.0 billion share repurchase program, demonstrating confidence in McKesson’s diversified capital allocation strategy.

Recent Sustainability and ESG Highlights

Dr. Kelvin A. Baggett joined McKesson in the newly created role of chief impact officer effective November 30, 2020.
McKesson issued its FY20 Corporate Responsibility report highlighting its strategy and action towards better health for people and the planet and has joined the United Nations Global Compact initiative, a voluntary leadership platform for the development, implementation and disclosure of responsible business practices.
For the eighth consecutive year, McKesson was recognized as one of the “Best Places to Work for LGBTQ Equality” by the Human Rights Campaign (HRC) Foundation, achieving 100 percent on the HRC’s 2021 Corporate Equality Index.

Fiscal 2021 Outlook

McKesson raised and narrowed fiscal 2021 Adjusted Earnings per diluted share guidance to $16.95 to $17.25 from the previous range of $16.00 to $16.50 to primarily reflect improved growth in the business and the contribution from McKesson’s successful distribution of COVID-19 vaccines and ancillary supplies. Fiscal 2021 Adjusted Earnings per diluted share guidance assumes $0.25 to $0.35 related to COVID-19 vaccine distribution and $0.20 to $0.30 related to the kitting and distribution of ancillary supplies for COVID-19 vaccines.

Fiscal 2021 guidance continues to assume that a full recovery of pharmaceutical prescription volumes and patient visits will not occur this fiscal year.

Other remaining businesses

As a result of the segment realignment effective in the second quarter of fiscal 2021, Other reflects equity earnings and charges for retrospective periods for the company's previous investment in Change Healthcare, which was separated from the company during the fourth quarter of fiscal 2020.

Conference Call Details

The company has scheduled a conference call for today, Tuesday, February 2^nd at 8:00 AM ET to discuss the company’s financial results. A live audio webcast of the conference call will be available on McKesson’s Investor Relations website at http://investor.mckesson.com. An archive of the conference call will also be available on the company’s Investor Relations website at http://investor.mckesson.com.

Upcoming Investor Events

McKesson management will be participating in the following investor conferences:

Cowen 41^st Annual Health Care Conference, March 1, 2021

Webcasts will be available live and archived on the company’s Investor Relations website at http://investor.mckesson.com. A complete listing of upcoming events for the investment community, including details and updates, will be available on the company’s Investor Relations website

Non-GAAP Financial Measures

GAAP refers to the U.S. generally accepted accounting principles. This press release includes GAAP financial measures as well as Non-GAAP financial measures, including Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Other Income, Adjusted Equity Income from Change Healthcare, Adjusted Income Tax Expense, Adjusted Earnings, Adjusted Earnings per Diluted Share, Adjusted Segment Operating Profit, Adjusted Segment Operating Profit Margin, Adjusted Corporate Expenses, Adjusted Operating Profit, FX-Adjusted results and Free Cash Flow which are financial measures not calculated in accordance with GAAP. Refer to the “Supplemental Non-GAAP Financial Information” section of the accompanying financial statement tables for the definitions and usefulness of the Company’s Non-GAAP financial measures and the attached schedules for reconciliations of the differences between the Non-GAAP financial measures and their most directly comparable GAAP financial measures.

The Company does not provide forward-looking guidance on a GAAP basis as McKesson is unable to provide a quantitative reconciliation of this forward-looking Non-GAAP measure to the most directly comparable forward-looking GAAP measure, without unreasonable effort, because McKesson cannot reliably forecast LIFO inventory-related adjustments, gains from antitrust legal settlements, restructuring, impairment and related charges, and other adjustments, which are difficult to predict and estimate. These items are inherently uncertain and depend on various factors, many of which are beyond the company’s control, and as such, any associated estimate and its impact on GAAP performance could vary materially.

Cautionary Statements

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, that involve risks and uncertainties that could cause actual results to differ materially from those in those statements. It is not possible to identify all such risks and uncertainties. The reader should not place undue reliance on forward-looking statements, such as financial performance forecasts, 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 update forward-looking statements. Forward-looking statements may be identified by their use of 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, assumptions or intentions may also include forward-looking statements. We encourage investors to read the important risk factors described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission.

These risk factors include, but are not limited to: we experience costly and disruptive legal disputes, including regarding our role in distributing controlled substances such as opioids; we might experience losses not covered by insurance; we from time to time record significant charges from impairment to goodwill, intangibles and other assets or investments; we experience cybersecurity incidents and might experience significant computer system compromises or data breaches; we might experience significant problems with information systems or networks; we may be unsuccessful in retail pharmacy profitability; we might be harmed by large customer purchase reductions, payment defaults or contract non-renewal; our contracts with government entities involve future funding and compliance risks; we might be harmed by changes in our relationships or contracts with suppliers; we might be adversely impacted by healthcare reform such as changes in pricing and reimbursement models; we might be adversely impacted by changes or disruptions in product supply and we have experienced and may experience difficulties in sourcing products and changes in pricing due to the effects of the COVID-19 pandemic on supply chains; we might be adversely impacted as a result of our distribution of generic pharmaceuticals; we might be adversely impacted by an economic slowdown (including the effects we have experienced from the COVID-19 pandemic) or recession and by disruption in capital and credit markets that might impede our access credit, increase our borrowing costs and impair the financial soundness of our customers and suppliers; we might be adversely impacted by fluctuations in foreign currency exchange rates; we might be adversely impacted by events outside of our control, such as widespread public health issues (including the effects we have experienced from the COVID-19 pandemic), natural disasters, political events and other catastrophic events; and we face uncertainties and risks related to vaccination distribution programs.

About McKesson Corporation

McKesson Corporation is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. 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 a “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 https://www.mckesson.com.

*Schedule 1*

McKESSON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - GAAP (unaudited) (in millions, except per share amounts)

	Three Months Ended December 31,								Nine Months Ended December 31,
	2020			2019			Change		2020			2019			Change
Revenues	$	62,599		$	59,172		6	%	$	179,086		$	172,516		4	%
Cost of sales	(59,448		)	(56,139		)	6		(170,235		)	(163,829		)	4
Gross profit	3,151			3,033			4		8,851			8,687			2
Operating expenses	(2,291		)	(2,535		)	(10	)	(6,625		)	(6,779		)	(2	)
Claims and litigation charges, net	(8,067		)	—			NM		(7,936		)	(82		)	NM
Goodwill impairment charges	—			(2		)	(100	)	(69		)	(2		)	NM
Restructuring, impairment, and related charges	(155		)	(136		)	14		(271		)	(204		)	33
Total operating expenses	(10,513		)	(2,673		)	293		(14,901		)	(7,067		)	111
Operating income (loss)	(7,362		)	360			NM		(6,050		)	1,620			(473	)
Other income (expense), net	54			26			108		152			(15		)	NM
Equity earnings and charges from investment in Change Healthcare Joint Venture	—			(28		)	(100	)	—			(1,478		)	(100	)
Interest expense	(55		)	(64		)	(14	)	(165		)	(184		)	(10	)
Income (loss) from continuing operations before income taxes	(7,363		)	294			NM		(6,063		)	(57		)	NM
Income tax benefit (expense)	1,189			(47		)	NM		1,011			111			811
Income (loss) from continuing operations	(6,174		)	247			NM		(5,052		)	54			NM
Loss from discontinued operations, net of tax	—			(5		)	(100	)	(1		)	(12		)	(92	)
Net income (loss)	(6,174		)	242			NM		(5,053		)	42			NM
Net income attributable to noncontrolling interests	(52		)	(56		)	(7	)	(152		)	(163		)	(7	)
Net income (loss) attributable to McKesson Corporation	$	(6,226	)	$	186		NM		$	(5,205	)	$	(121	)	NM

Earnings (loss) per common share attributable to McKesson Corporation ^(a)
Diluted ^(b)
Continuing operations	$	(39.03	)	$	1.06		NM		$	(32.28	)	$	(0.60	)	NM
Discontinued operations	—			(0.03		)	(100	)	(0.01		)	(0.06		)	(83	)
Total	$	(39.03	)	$	1.03		NM		$	(32.29	)	$	(0.66	)	NM

Basic
Continuing operations	$	(39.03	)	$	1.06		NM		$	(32.28	)	$	(0.60	)	NM
Discontinued operations	—			(0.02		)	(100	)	(0.01		)	(0.06		)	(83	)
Total	$	(39.03	)	$	1.04		NM		$	(32.29	)	$	(0.66	)	NM

Dividends declared per common share	$	0.42		$	0.41				$	1.25		$	1.21

Weighted-average common shares outstanding
Diluted	159.5			179.7			(11	)%	161.2			183.1			(12	)%
Basic	159.5			178.7			(11	)	161.2			183.1			(12	)

(a)	Certain computations may reflect rounding adjustments.
(b)	Net loss per diluted share for the three and nine months ended December 31, 2020 and for the nine months ended December 31, 2019 is calculated by excluding dilutive securities from the denominator due to their antidilutive effects.

NM Computation not meaningful
Refer to our applicable filings with the SEC for additional disclosures including our Quarterly Reports on Form 10-Q for fiscal 2021 and 2020 as well as our Annual Report on Form 10-K for fiscal 2020.

*Schedule 2*

McKESSON CORPORATION RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED RESULTS (NON-GAAP) (unaudited) (in millions, except per share amounts)

	Three Months Ended December 31,								Nine Months Ended December 31,
	2020			2019			Change		2020			2019			Change
Income (loss) from continuing operations (GAAP)	$	(6,174	)	$	247		NM		$	(5,052	)	$	54		NM
Net income attributable to noncontrolling interests (GAAP)	(52		)	(56		)	(7	)	(152		)	(163		)	(7	)
Income (loss) from continuing operations attributable to McKesson Corporation (GAAP)	(6,226		)	191			NM		(5,204		)	(109		)	NM
Pre-tax adjustments:
Amortization of acquisition-related intangibles ⁽¹⁾	109			177			(38	)	321			547			(41	)
Transaction-related expenses and adjustments ^{(2) (3)}	55			341			(84	)	84			667			(87	)
LIFO inventory-related adjustments	(11		)	(66		)	(83	)	(115		)	(114		)	1
Gains from antitrust legal settlements	—			(22		)	(100	)	—			(22		)	(100	)
Restructuring, impairment, and related charges, net ⁽⁴⁾	155			136			14		274			199			38
Claims and litigation charges, net ^{(5) (6) (7)}	8,067			—			NM		7,936			82			NM
Other adjustments, net^{(8) (9) (10) (11)}	(1		)	34			(103	)	124			1,328			(91	)
Income tax effect on pre-tax adjustments	(1,407		)	(106		)	NM		(1,438		)	(607		)	137
Net income attributable to noncontrolling interests effect on other adjustments, net ⁽¹⁰⁾	—			—			NM		(4		)	—			NM
Adjusted Earnings (Non-GAAP)	$	741		$	685		8	%	$	1,978		$	1,971		—	%

Diluted weighted-average common shares outstanding	161.0			179.7			(10	)%	162.5			184.0			(12	)%

Earnings (loss) per diluted common share from continuing operations attributable to McKesson Corporation (GAAP) ^{(a) (b)}	$	(39.03	)	$	1.06		NM		$	(32.28	)	$	(0.60	)	NM
After-tax adjustments:
Amortization of acquisition-related intangibles	0.51			0.75			(32	)	1.52			2.27			(33	)
Transaction-related expenses and adjustments	0.34			1.71			(80	)	0.49			2.99			(84	)
LIFO inventory-related adjustments	(0.05		)	(0.27		)	(81	)	(0.53		)	(0.46		)	15
Gains from antitrust legal settlements	—			(0.09		)	(100	)	—			(0.09		)	(100	)
Restructuring, impairment, and related charges, net	0.85			0.64			33		1.41			0.89			58
Claims and litigation charges, net	41.62			(0.12		)	NM		40.65			0.33			NM
Other adjustments, net	—			0.13			(100	)	0.65			5.39			(88	)
Adjusted Earnings per Diluted Share (Non-GAAP)^{(b) (c)}	$	4.60		$	3.81		21	%	$	12.17		$	10.71		14	%

(a)	Certain computations may reflect rounding adjustments.
(b)	We calculate loss per diluted common share from continuing operations attributable to McKesson Corporation (GAAP) for the three and nine months ended December 31, 2020 and the nine months ended December 31, 2019 using a weighted average of 159.5 million, 161.2 million, and 183.1 million common shares, respectively, which excludes dilutive securities from the denominator due to their antidilutive effect when calculating a net loss per diluted share. We calculate adjusted earnings per diluted share (Non-GAAP) for the three and nine months ended December 31, 2020 and the nine months ended December 31, 2019 on a fully diluted basis, using a weighted average of 161.0 million, 162.5 million, and 184.0 million common shares, respectively. Because we show the GAAP to Non-GAAP per share reconciling items on a fully diluted basis, any footing differences in those items are due to different weighted average share counts. This methodology results in per share differences of $0.36, $0.26, and $0.01 for the three and nine months ended December 31, 2020 and the nine months ended December 31, 2019, respectively.
(c)	Adjusted earnings per diluted share on an FX-adjusted basis for the three and nine months ended December 31, 2020 was $4.58 and $12.15, respectively, which excludes the foreign currency exchange effect of $0.02 in both periods.

NM Computation not meaningful
Refer to the section entitled "Financial Statement Notes" of this release.
For more information relating to the Adjusted Earnings (Non-GAAP) and Adjusted Earnings per Diluted Share (Non-GAAP) definitions, refer to the section entitled “Supplemental Non-GAAP Financial Information” of this release.

Contacts

Holly Weiss, 972-969-9174 (Investors)
Holly.Weiss@McKesson.com
David Matthews, 214-952-0833 (Media)
David.Matthews@McKesson.com

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Last Updated: 02-Feb-2021