McKesson Reports Fiscal 2018 Third-Quarter Results

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McKesson Corporation reported that revenues for the third quarter ended December 31, 2017, were $53.6 billion, up 7% compared to $50.1 billion a year ago. On the basis of U.S. generally accepted accounting principles (“GAAP”), third-quarter earnings per diluted share from continuing operations was $4.32, compared to $2.86 a year ago. Third-quarter GAAP earnings per diluted share included a net tax benefit of approximately $370 million, or $1.78, driven by the Tax Cuts and Jobs Act of 2017.

Third-quarter Adjusted Earnings per diluted share, which excludes the $1.78 net tax benefit driven by the Tax Cuts and Jobs Act of 2017, was $3.41, up 12% compared to $3.04 a year ago. Third-quarter results were driven by a lower share count, organic growth across multiple business units, including the company’s strategic sourcing benefits through ClarusONE, incremental profit contribution from acquisitions and a lower tax rate, which included discrete tax benefits unrelated to the Tax Cuts and Jobs Act of 2017.

These positive drivers were partially offset by lower profit in our Technology Solutions segment driven by the contribution of the majority of the businesses to Change Healthcare and the sale of our Enterprise Information Solutions business, and the impact of reduced reimbursement in the company’s U.K. retail pharmacy business. Prior year third-quarter results included two non-recurring charges totaling approximately $60 million in our Distribution Solutions segment.

“Our third-quarter results reflected operating performance in line with our expectations, complemented by a lower share count and lower tax rate,” said John H. Hammergren, chairman and chief executive officer. “As a result of the lower tax rate and share count, we are raising and narrowing our Fiscal 2018 Adjusted Earnings outlook from a range of $11.80 to $12.50 per diluted share to a new range of $12.50 to $12.80 per diluted share.”

For the first nine months 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. Through the first nine months of the year, McKesson repaid $545 million in long-term debt, paid $2.0 billion for acquisitions, repurchased $900 million of its common stock, invested $392 million internally and paid $192 million in dividends.

“We deployed capital in line with our portfolio approach during the third quarter, announcing the RxCrossroads acquisition and repurchasing shares, providing a return to shareholders while continuing to position McKesson for growth in a rapidly evolving industry,” concluded Hammergren.

Segment Results

  • Distribution Solutions revenues were $53.6 billion for the quarter, up 8% on a reported basis and 7% on a constant currency basis.
  • North America pharmaceutical distribution and services revenues of $44.9 billion for the quarter were up 8% on a reported basis and 7% on a constant currency basis, primarily reflecting market growth and acquisitions.
  • International pharmaceutical distribution and services revenues were $7.0 billion for the quarter, up 13% 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 9%, primarily driven by market growth.
  • In the third quarter, Distribution Solutions GAAP operating profit was $819 million and GAAP operating margin was 1.53%. Third-quarter adjusted operating profit was $991 million, up 23% from the prior year on a reported basis and 22% on a constant currency basis. Adjusted operating margin for the Distribution Solutions segment was 1.85% on a constant currency basis. Adjusted operating margin excluding noncontrolling interests for the Distribution Solutions segment was 1.77% on a constant currency basis.
  • Technology Solutions GAAP operating profit was $65 million for the third quarter, primarily driven by a gain on the sale of the company’s Enterprise Information Solutions business.
  • Third-quarter adjusted operating profit was $53 million, primarily driven by our proportionate share of the income from McKesson’s equity investment in Change Healthcare.

Fiscal Year 2018 Outlook
McKesson expects GAAP earnings per diluted share of $7.65 to $9.00 for the fiscal year ending March 31, 2018, which includes the following items:
Amortization of acquisition-related intangibles of $2.35 to $2.65 per diluted share;
Acquisition-related expenses and adjustments of $1.00 to $1.20 per diluted share;
Last-In-First-Out (“LIFO”) inventory-related charges of five cents to credits of five cents per diluted share;

Gains from antitrust legal settlements of up to five cents per diluted share;
Restructuring charges of $1.25 to $1.45 per diluted share; and
Other adjustments resulting in credits of $0.50 to $0.70 per diluted share.
McKesson expects Adjusted Earnings of $12.50 to $12.80 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 $0.34 cents per share of common stock. The dividend will be payable on April 2, 2018, to stockholders of record on March 1, 2018.

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, 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.