Market Overview

McKesson Reports Fiscal 2019 First-Quarter Results

Share:
  • Revenues of $52.6 billion for the first quarter, up 3% year over
    year.
  • First-quarter GAAP loss per diluted share from continuing
    operations of $(0.69).
  • First-quarter Adjusted Earnings per diluted share of $2.90, up 18%
    year over year.
  • Fiscal 2019 Outlook: Adjusted Earnings of $13.00 to $13.80 per
    diluted share.
  • Board of Directors approved raising the quarterly dividend by 15%
    from 34 cents to 39 cents per share.

McKesson Corporation (NYSE:MCK) today reported that revenues for the
first quarter ended June 30, 2018, were $52.6 billion, up 3% compared to
$51.1 billion a year ago. On a constant currency basis, revenues
increased 2% over the prior year. On the basis of U.S. generally
accepted accounting principles ("GAAP"), first-quarter loss per diluted
share from continuing operations was $(0.69), compared to earnings per
diluted share of $1.44 a year ago. GAAP loss per diluted share included
a pre-tax and after-tax non-cash goodwill impairment charge of $570
million, or $2.81 per diluted share, in the European Pharmaceutical
Solutions segment, primarily triggered by additional U.K. government
reimbursement reductions announced on June 29, 2018, as well as the
change to the company's segment reporting structure.

First-quarter Adjusted Earnings per diluted share was $2.90, up 18%
compared to $2.46 a year ago, driven by a lower tax rate and share
count, and growth in the U.S. Pharmaceutical and Specialty Solutions
segment.

For the first quarter, McKesson used $1.1 billion in cash from
operations, and invested $145 million internally, resulting in negative
free cash flow of $1.2 billion, in line with the company's expectations.
During the quarter, McKesson also paid $826 million for acquisitions,
repurchased approximately $300 million of its common stock, paid $71
million in dividends and the company ended the quarter with cash and
cash equivalents of $2.2 billion.

"McKesson's first quarter adjusted earnings results were in line with
our expectations. We are, however, disappointed by the recent
government-initiated reimbursement cuts in the U.K. These incremental
cuts create ongoing challenges in our U.K. retail pharmacy business,"
said John H. Hammergren, chairman and chief executive officer. "During
the quarter, we began executing against our multi-year strategic growth
initiative, which included our acquisition of Medical Specialties
Distributors. And I am pleased with the initial progress made on
transforming our operating model, which will allow us to become a more
efficient organization, and drive savings that will help fund
investments in our priority growth areas."

New Segment Financial Reporting Effective Fiscal Year 2019

As previously disclosed on May 24, 2018, McKesson revised its reportable
segments effective with the first quarter of Fiscal 2019. McKesson's new
reportable segments are:

  • U.S. Pharmaceutical and Specialty Solutions;
  • European Pharmaceutical Solutions; and
  • Medical-Surgical Solutions.

All remaining operating segments and business activities are included in
Other. Other primarily includes McKesson Canada, McKesson Prescription
Technology Solutions (MRxTS) and the company's equity method investment
in Change Healthcare.

Segment Results

U.S. Pharmaceutical and Specialty Solutions revenues were $41.0 billion
for the quarter, up 2%, driven primarily by market growth and
acquisitions, partially offset by previously announced customer losses
and branded to generic conversions. Segment GAAP operating profit was
$543 million and GAAP operating margin was 1.33%. Segment adjusted
operating profit was $540 million and adjusted operating margin was
1.32%.

European Pharmaceutical Solutions revenues were $6.9 billion for the
quarter, up 9% on a reported basis and 1% on a constant currency basis,
driven primarily by market growth and acquisitions, largely offset by
the previously disclosed increased competition in France and a reduction
in owned retail pharmacies in the U.K. versus the prior year. Segment
GAAP operating loss was $560 million and GAAP operating margin was
(8.07)%. Segment adjusted operating profit was $74 million and adjusted
operating margin was 1.07%. On a constant currency basis, adjusted
operating profit was $69 million and adjusted operating margin was 1.07%.

Medical-Surgical Solutions revenues were $1.7 billion for the quarter,
up 11%, driven primarily by market growth and an acquisition. Segment
GAAP operating profit was $93 million and GAAP operating margin was
5.46%. Segment adjusted operating profit was $125 million and adjusted
operating margin was 7.34%.

Other revenues were $3.0 billion for the quarter, up 5% on a reported
basis and 1% on a constant currency basis, driven primarily by market
growth, mostly offset by the impact of government actions on the
McKesson Canada business. Other GAAP operating profit was $114 million
and adjusted operating profit was $213 million. On a constant currency
basis, adjusted operating profit was $204 million.

Fiscal Year 2019 Outlook

McKesson expects Adjusted Earnings per diluted share of $13.00 to $13.80
for the fiscal year ending March 31, 2019.

McKesson does not provide forward-looking guidance on a GAAP basis as
the company 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, as items are
inherently uncertain and depend on various factors, many of which are
beyond the company's control.

Dividend Declaration

The company's Board of Directors yesterday declared a regular dividend
of $0.39 cents per share of common stock, a 15% increase from $0.34
cents per share in the prior quarter. The dividend will be payable on
October 1, 2018, to stockholders of record on September 4, 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 and asset impairment charges, and other
adjustments. A reconciliation of McKesson's GAAP financial results to
Adjusted Earnings is provided in Schedules 2 and 3 of the financial
statement tables included with this release.

The company does not provide forward-looking guidance on a GAAP basis
prospectively 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 and
asset impairment 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.

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.

Free Cash Flow

McKesson also provides free cash flow, a non-GAAP measure. Free cash
flow is defined as net cash provided by operating activities less
property acquisitions and capitalized software expenditures, as outlined
in the company's condensed consolidated statements of cash flows.

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 performance of the company's investment in Change
Healthcare; 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 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; 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, July 26th,
at 8:00 AM ET. The dial-in number for individuals wishing to participate
on the call is 323-994-2093. 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
1175861. 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 6th 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.

 

Schedule 1

McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - GAAP
(unaudited)
(in millions, except per share amounts)
 
Quarter Ended June 30,
 
2018 2017 Change
 
Revenues $ 52,607 $ 51,051 3 %
Cost of sales (1)   (49,828 )   (48,491 ) 3
  Gross profit 2,779 2,560 9
Operating expenses (2) (2,127 ) (1,927 ) 10
Goodwill impairment charges (3) (570 ) - -
Restructuring and asset impairment charges (4) (96 ) - -
Gain from escrow settlement (5)   97     -   -
Total operating expenses   (2,696 )   (1,927 ) 40
Operating income 83 633 (87 )
Other income, net 40 13 208
Loss from equity method investment in Change Healthcare (6) (56 ) (120 ) (53 )
Interest expense   (61 )   (68 ) (10 )
Income from continuing operations before income taxes

 

6 458 (99 )
Income tax expense   (87 )   (95 ) (8 )
Income (loss) from continuing operations after tax (81 ) 363 (122 )
Income from discontinued operations, net of tax   1     2   (50 )
  Net income (loss) (80 ) 365 (122 )
Net income attributable to noncontrolling interests   (58 )   (56 ) 4
Net income (loss) attributable to McKesson Corporation $ (138 ) $ 309   (145 ) %
 
 

Earnings (loss) per common share attributable to McKesson
Corporation (a)

 

Diluted (b)
Continuing operations $ (0.69 ) $ 1.44 (148 ) %
Discontinued operations   0.01     0.01   -
  Total $ (0.68 ) $ 1.45   (147 ) %
 
 
Basic
Continuing operations $ (0.69 ) $ 1.46 (147 ) %
Discontinued operations   0.01     -   -
Total $ (0.68 ) $ 1.46   (147 ) %
 
Dividends declared per common share $ 0.34   $ 0.28  
       
Weighted average common shares (b)
Diluted 202 213 (5 ) %
Basic 202 211 (4 )
 
 
(a) Certain computations may reflect rounding adjustments.
(b) Fiscal year 2019 diluted loss per share is calculated by excluding
dilutive securities from the denominator due to their anti-dilutive
effects.
 

(1) (2) (3) (4) (5) (6) Refer to the section entitled
"Financial Statement Footnotes" of this release.

 
 

Schedule 2

McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS
(NON-GAAP)
(unaudited)
(in millions, except per share amounts)
                                 
Change
Quarter Ended June 30, 2018 Vs. Prior Period  
 

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition-
Related
Expenses and
Adjustments

 

LIFO Inventory-
Related
Adjustments

 

Gains from
Antitrust Legal
Settlements

 

Restructuring
and Asset
Impairment
Charges, Net

 

Other
Adjustments,
Net

 

Adjusted
Earnings
(Non-GAAP)

As
Reported
(GAAP)

 

Adjusted
Earnings
(Non-GAAP)

 
Gross profit (1) $ 2,779 $ - $ 1 $ (21 ) $ (35 ) $ - $ - $ 2,724 9 % 5 %
 

Operating expenses (2) (3) (4) (5)

$ (2,696 ) $ 121 $ 20 $ - $ - $ 96 $ 487 $ (1,972 ) 40 % 9 %
 
Other income, net $ 40 $ 1 $ - $ - $ - $ - $ - $ 41 208 % 215 %
 

Income (Loss) from equity method investment in Change Healthcare (6)

$ (56 ) $ 77 $ 40 $ - $ - $ - $ 3 $ 64 (53 ) % (9 ) %
 

Income from continuing operations before income taxes

$ 6 $ 199 $ 61 $ (21 ) $ (35 ) $ 96 $ 490 $ 796 (99 ) % 1 %
 

Income tax expense

$ (87 ) $ (50 ) $ (16 ) $ 6 $ 9 $ (11 ) $ - $ (149 ) (8 ) % (29 ) %
 

Income (loss) from continuing operations, net of tax, attributable
to McKesson Corporation

$ (139 ) $ 149 $ 45 $ (15 ) $ (26 ) $ 85 $ 490 $ 589 (145 ) % 13 %
 

Diluted earnings (loss) per common share from continuing
operations, net of tax, attributable to McKesson Corporation (a)
(b)

$ (0.69 )   $ 0.74     $ 0.22     $ (0.07 )   $ (0.13 )   $ 0.42     $ 2.41     $

2.90(c)

 

(148 ) % 18 %
 

Diluted weighted average common shares (b)

  202       203       203       203       203       203       203       203   (5 ) % (5 ) %
 
 
Quarter Ended June 30, 2017
 

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition-
Related
Expenses and
Adjustments

 

LIFO Inventory-
Related
Adjustments

 

Gains from
Antitrust Legal
Settlements

 

Restructuring
and Asset
Impairment
Charges, Net

 

Other
Adjustments,
Net

 

Adjusted
Earnings
(Non-GAAP)

 
Gross profit (1) $ 2,560 $ - $ 4 $ 26 $ - $ - $ - $ 2,590
 
Operating expenses (2) $ (1,927 ) $ 121 $ (11 ) $ - $ - $ 3 $ (2 ) $ (1,816 )
 
Other income, net $ 13 $ - $ - $ - $ - $ - $ - $ 13
 

Income (Loss) from equity method investment in Change Healthcare (6)

$ (120 ) $ 71 $ 119 $ - $ - $ - $ - $ 70
 

Income from continuing operations before income taxes

$ 458 $ 192 $ 112 $ 26 $ - $ 3 $ (2 ) $ 789
 
Income tax expense $ (95 ) $ (66 ) $ (39 ) $ (10 ) $ - $ (1 ) $ 1 $ (210 )
 

Income from continuing operations, net of tax, attributable to
McKesson Corporation

$ 307 $ 126 $ 73 $ 16 $ - $ 2 $ (1 ) $ 523
 

Diluted earnings per common share from continuing operations, net
of tax, attributable to McKesson Corporation (a)

$ 1.44     $ 0.60     $ 0.34     $ 0.08     $ -     $ 0.01     $ (0.01 )   $ 2.46  
 

Diluted weighted average common shares

  213       213       213       213       -       213       213       213  

 

 
(a)   Certain computations may reflect rounding adjustments.
(b) Fiscal year 2019 diluted loss per share, as reported under GAAP, is
calculated using a weighted average of 202 million common shares and
excludes dilutive securities from the denominator due to their
anti-dilutive effects. Potentially dilutive securities were excluded
from the fiscal year 2019 GAAP per share computations due to our
reported net loss for fiscal year 2019. Diluted earnings per share
(Non-GAAP), and GAAP to Non-GAAP per share reconciling items, are
calculated using a weighted average of 203 million common shares and
includes dilutive securities.
(c) Adjusted Earnings per share on a Constant Currency basis for fiscal
year 2019 was $2.85 per diluted share, which excludes the foreign
currency exchange effect of $0.05 per diluted share.
 
(1) (2) (3) (4) (5) (6) Refer to the section entitled
"Financial Statement Footnotes" of this release.
 

For more information relating to the Adjusted Earnings (Non-GAAP)
definition, refer to the section entitled "Supplemental Non-GAAP
Financial Information" of this release.

 
 

Schedule 3

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED
EARNINGS (NON-GAAP)
(unaudited)
(in millions)
       
 
          Quarter Ended June 30, 2018 Quarter Ended June 30, 2017   GAAP   Non-GAAP     Change
 

As Reported
(GAAP)

 

Adjustments

 

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

 

Adjustments

 

Adjusted
Earnings
(Non-GAAP)

 

 

Foreign
Currency
Effects

 

Constant
Currency

 

Foreign
Currency
Effects

 

Constant
Currency

As
Reported
(GAAP)

 

Adjusted
Earnings
(Non-
GAAP)

 

Constant
Currency
(GAAP)

 

Constant
Currency
(Non-
GAAP)

REVENUES        

U.S. Pharmaceutical and Specialty Solutions

$ 40,977 $ - $ 40,977 $ 40,282 $ - $ 40,282 $ - $ 40,977 $ - $ 40,977 2 % 2 % 2 % 2 %
European Pharmaceutical Solutions 6,935 - 6,935 6,382 - 6,382 (487 ) 6,448 (487 ) 6,448 9 9 1 1
Medical-Surgical Solutions 1,703 - 1,703 1,533 - 1,533 - 1,703 - 1,703 11 11 11 11
Other (a)   2,992         -       2,992     2,854           -       2,854     (111 )       2,881     (111 )       2,881   5 5 1 1
Revenues $ 52,607       $ -     $ 52,607   $ 51,051         $ -     $ 51,051   $ (598 )     $ 52,009   $ (598 )     $ 52,009   3 % 3 % 2 % 2 %
 
OPERATING PROFIT (4)

U.S. Pharmaceutical and Specialty Solutions (1)

$ 543 $ (3 ) $ 540 $ 475 $ 54 $ 529 $ - $ 543 $ - $ 540 14 % 2 % 14 % 2 %
European Pharmaceutical Solutions (3) (560 ) 634 74 35 49 84 21 (539 ) (5 ) 69 (1,700 ) (12 ) (1,640 ) (18 )
Medical-Surgical Solutions 93 32 125 108 17 125 - 93 - 125 (14 ) - (14 ) -
Other (a) (2) (5) (6)   114         99       213     17           214       231     (13 )       101     (9 )       204   571 (8 ) 494 (12 )
Operating profit 190 762 952 635 334 969 8 198 (14 ) 938 (70 ) (2 ) (69 ) (3 )
Corporate   (123 )       28       (95 )   (109 )         (3 )     (112 )   -         (123 )   1         (94 ) 13 (15 ) 13

 

(16 )

Income from continuing operations before interest expense and
income taxes

$ 67       $ 790     $ 857   $ 526         $ 331     $ 857   $ 8       $ 75   $ (13 )     $ 844   (87 ) % - % (86 ) % (2 ) %
 
 
OPERATING PROFIT AS A % OF REVENUES
U.S. Pharmaceutical and Specialty Solutions 1.33 % 1.32 % 1.18 % 1.31 % 1.33 % 1.32 % 15 bp 1 bp 15 bp 1 bp
European Pharmaceutical Solutions (8.07 ) 1.07 0.55 1.32 (8.36 ) 1.07 (862 ) (25 ) (891 ) (25 )
Medical-Surgical Solutions 5.46 7.34 7.05 8.15 5.46 7.34 (159 ) (81 ) (159 ) (81 )
 
 
(a) Other primarily includes the results of our McKesson Canada and
McKesson Prescription Technology Solutions businesses. Other for
fiscal year 2018 includes the Enterprise Information Solutions
("EIS") business, which was sold in the third quarter of fiscal year
2018. Operating profit for Other also includes our proportionate
share of income (loss) from our equity method investment in Change
Healthcare.
 
(1) (2) (3) (4) (5) (6) Refer to the section entitled
"Financial Statement Footnotes" of this release.
 

For more information relating to the Adjusted Earnings (Non-GAAP)
and Constant Currency (Non-GAAP) definitions, refer to the section
entitled "Supplemental Non-GAAP Financial Information" of this
release.

 
               

Schedule 4

McKESSON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions)
 
 

    June 30,    

March 31,

2018

2018
 
ASSETS
Current Assets
Cash and cash equivalents $ 2,199 $ 2,672
Receivables, net 19,093 17,711
Inventories, net 16,364 16,310
Prepaid expenses and other 558 443
Total Current Assets 38,214 37,136
Property, Plant and Equipment, Net 2,483 2,464
Goodwill 10,585 10,924
Intangible Assets, Net 4,258 4,102
Equity Method Investment in Change Healthcare 3,672 3,728
Other Noncurrent Assets   2,070   2,027
Total Assets $ 61,282 $ 60,381
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS
AND EQUITY
Current Liabilities
Drafts and accounts payable $ 32,063 $ 32,177
Short-term borrowings 2,033 -
Current portion of long-term debt 1,127 1,129
Other accrued liabilities   3,125   3,379
Total Current Liabilities 38,348 36,685
Long-Term Debt 6,592 6,751
Long-Term Deferred Tax Liabilities 2,825 2,804
Other Noncurrent Liabilities 2,448 2,625
 
Redeemable Noncontrolling Interests 1,422 1,459
 
McKesson Corporation Stockholders' Equity 9,407 9,804
Noncontrolling Interests   240   253
Total Equity   9,647   10,057
Total Liabilities, Redeemable Noncontrolling Interests and Equity $ 61,282 $ 60,381
 
       

Schedule 5

 
McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
Quarter Ended June 30,

      2018      

2017
 

OPERATING ACTIVITIES

Net income (loss) $ (80 ) $ 365

Adjustments to reconcile to net cash provided by (used in)
operating activities:

Depreciation and amortization 235 227
Goodwill and asset impairment charges 610 -
Deferred taxes 45 85
LIFO charges (credits) (21 ) 26
Loss from equity method investment in Change Healthcare 56 120
Other non-cash items (79 ) 7
Changes in operating assets and liabilities, net of acquisitions:
Receivables (1,414 ) (363 )
Inventories (114 ) (59 )
Drafts and accounts payable 32 463
Taxes (61 ) (18 )
Other   (270 )   (112 )
Net cash provided by (used in) operating activities   (1,061 )   741  
 

INVESTING ACTIVITIES

Property acquisitions (101 ) (75 )
Capitalized software expenditures (44 ) (43 )
Acquisitions, net of cash, cash equivalents and restricted cash
acquired
(826 ) (1,485 )
Other   96     5  
Net cash used in investing activities   (875 )   (1,598 )
 

FINANCING ACTIVITIES

Proceeds from short-term borrowings 9,036 2,282
Repayments of short-term borrowings (7,005 ) (2,463 )
Repayments of long-term debt (2 ) (541 )
Common stock transactions:
Issuances 22 27
Share repurchases, including shares surrendered for tax withholding (307 ) (300 )
Dividends paid (71 ) (62 )
Other   (132 )   (74 )
Net cash provided by (used in) financing activities   1,541     (1,131 )
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
  (78 )   75  
Net decrease in cash, cash equivalents and restricted cash (473 ) (1,913 )
Cash, cash equivalents and restricted cash at beginning of period   2,672     4,254  

Cash, cash equivalents and restricted cash at end of period

$ 2,199   $ 2,341  
 
 
McKESSON CORPORATION
FINANCIAL STATEMENT FOOTNOTES
 
 
 
 
 
(1) Fiscal years 2019 and 2018, as reported under GAAP, include pre-tax
credits of $21 million and pre-tax charges of $26 million related to
our last-in-first-out ("LIFO") method of accounting for inventories.
Fiscal year 2019, as reported under GAAP, includes $35 million of
net cash proceeds representing our share of antitrust legal
settlements. These credits and charges are included within our U.S.
Pharmaceutical and Specialty Solutions segment.
(2) Operating expenses for fiscal year 2018, as reported under GAAP,
include a pre-tax gain of $37 million ($22 million after-tax)
related to the final net working capital settlement and other
adjustments from the contribution of the Core MTS business to Change
Healthcare in the fourth quarter of 2017. This credit is included
under "Acquisition-Related Expenses and Adjustments" in the Schedule
2 of the accompanying financial statement tables.
(3) Fiscal year 2019, as reported under GAAP, includes non-cash goodwill
impairment charges of $570 million (pre-tax and after-tax) for our
two reporting units within our European Pharmaceutical Solutions
segment. These charges are included under "Other Adjustments, Net"
in the Schedule 2 of the accompanying financial statement tables.
(4) Operating expenses for fiscal year 2019, as reported under GAAP,
include pre-tax restructuring and asset impairment charges of $96
million ($85 million after-tax).
(5) Operating expenses for fiscal year 2019, as reported under GAAP,
include a gain from an escrow settlement of $97 million representing
certain indemnity and other claims related to our third quarter 2017
acquisition of Rexall Health. This gain is included under "Other
Adjustments, Net" in the Schedule 2 of the accompanying financial
statement tables.
(6) Loss from our equity method investment in Change Healthcare, as
reported under GAAP, includes the amortization of equity investment
intangibles and other acquired intangibles of $77 million and $71
million for fiscal years 2019 and 2018. The amortization expenses
are included in our proportionate share of the loss from our equity
method investment in Change Healthcare.
 
                                            1 of 2
SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION
 
 
In an effort to provide investors with additional information
regarding the Company's financial results as determined by generally
accepted accounting principles ("GAAP"), McKesson Corporation (the
"Company" or "we") also presents the following Non-GAAP measures in
this press release. The Company believes the presentation of
Non-GAAP measures provides useful supplemental information to
investors with regard to its operating performance, as well as
assists with the comparison of its past financial performance to the
Company's future financial results. Moreover, the Company believes
that the presentation of Non-GAAP measures assists investors'
ability to compare its financial results to those of other companies
in the same industry. However, the Company's Non-GAAP measures used
in the press tables may be defined and calculated differently by
other companies in the same industry.
 
Adjusted Earnings (Non-GAAP): We define Adjusted Earnings as
GAAP income from continuing operations attributable to McKesson,
excluding amortization of acquisition-related intangibles,
acquisition-related expenses and adjustments, Last-In-First-Out
("LIFO") inventory-related adjustments, gains from antitrust legal
settlements, restructuring and asset impairment charges, other
adjustments as well as the related income tax effects for each of
these items, as applicable. The Company evaluates its definition of
Adjusted Earnings on a periodic basis and updates the definition
from time to time. The evaluation considers both the quantitative
and qualitative aspects of the Company's presentation of Adjusted
Earnings. A reconciliation of McKesson's GAAP financial results to
Adjusted Earnings (Non-GAAP) is provided in Schedules 2 and 3 of the
financial statement tables included with this release.
 

Amortization of acquisition-related
intangibles
- Amortization expenses of intangible assets
directly related to business combinations and/or the formation of
joint ventures and equity method investments.

 

Acquisition-related expenses and adjustments
- Transaction, integration and other expenses that are directly
related to business combinations, the formation of joint ventures
and the Healthcare Technology Net Asset Exchange. Examples include
transaction closing costs, professional service fees, legal fees,
restructuring or severance charges, retention payments and
employee relocation expenses, facility or other exit-related
expenses, certain fair value adjustments including deferred
revenues, contingent consideration and inventory, recoveries of
acquisition-related expenses or post-closing expenses, bridge loan
fees, gains or losses related to foreign currency contracts
entered into directly due to acquisitions, gains or losses on
business combinations, and gain on the Healthcare Technology Net
Asset Exchange.

 

LIFO inventory-related adjustments -
LIFO inventory-related non-cash expense or credit adjustments.

 

Gains from antitrust legal settlements
- Net cash proceeds representing the Company's share of antitrust
lawsuit settlements.

 

Restructuring and asset impairment charges
- Non-acquisition related restructuring charges that are incurred
for programs in which we change our operations, the scope of a
business undertaken by our business units, or the manner in which
that business is conducted, as well as long-lived asset
impairments. Such charges may include employee severance,
retention bonuses, facility closure or consolidation costs, lease
or contract termination costs, asset impairments, accelerated
depreciation and amortization, and other related expenses. The
restructuring programs may be implemented due to the sale or
discontinuation of a product line, reorganization or management
structure changes, headcount rationalization, realignment of
operations or products, and/or Company-wide cost saving
initiatives. The amount and/or frequency of these restructuring
charges are not part of our underlying business, which includes
normal levels of reinvestment in the business. Any credit
adjustments due to subsequent changes in estimates are also
excluded from the Adjusted Earnings.

 

Other adjustments - The Company
evaluates the nature and significance of transactions
qualitatively and quantitatively on an individual basis and may
include them in the determination of our Adjusted Earnings from
time to time. While not all-inclusive, other adjustments may
include: gains or losses from divestitures of businesses that do
not qualify as discontinued operations and from dispositions of
assets; other asset impairments; adjustments to claim and
litigation reserves for estimated probable losses and settlements;
certain discrete benefits related to the December 2017 enactment
of the 2017 Tax Cuts and Jobs Act; gains or losses from debt
extinguishment; and other similar substantive and/or infrequent
items as deemed appropriate.

 
Income taxes on Adjusted Earnings are calculated in accordance with
Accounting Standards Codification ("ASC") 740, "Income Taxes," which
is the same accounting principle used by the Company when presenting
its GAAP financial results.
 
Additionally, our equity method investments' financial results are
adjusted for the above noted items.
 
2 of 2
SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION (continued)
 

Constant Currency (Non-GAAP): To present our financial
results on a constant currency basis, we convert current year
period results of our operations in foreign countries, which are
recorded in local currencies, into U.S. dollars by applying the
average foreign currency exchange rates of the comparable prior
year period. To present Adjusted Earnings per diluted share on a
constant currency basis, we estimate the impact of foreign
currency rate fluctuations on the Company's noncontrolling
interests and adjusted income tax expense, which may vary from
quarter to quarter. 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.

 
The Company internally uses Non-GAAP financial measures in
connection with its own financial planning and reporting processes.
Specifically, Adjusted Earnings serves as one of the measures
management utilizes when allocating resources, deploying capital and
assessing business performance and employee incentive compensation.
The Company conducts its business internationally in local
currencies, including Euro, British pound sterling and Canadian
dollars. As a result, the comparability of our results reported in
U.S. dollars can be affected by changes in foreign currency exchange
rates. We present constant currency information to provide a
framework for assessing how our business performed excluding the
estimated effect of foreign currency exchange rate fluctuations.
Nonetheless, Non-GAAP financial results and related measures
disclosed by the Company should not be considered a substitute for,
nor superior to, financial results and measures as determined or
calculated in accordance with GAAP.
 

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