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McKesson Reports Fiscal 2019 Third-Quarter Results

Share:
  • Revenues of $56.2 billion for the third quarter, up 5% year over
    year.
  • Third-quarter GAAP earnings per diluted share from continuing
    operations of $2.41.
  • Third-quarter Adjusted Earnings per diluted share of $3.40, flat
    year over year.
  • Fiscal 2019 Outlook: Adjusted Earnings of $13.45 to $13.65 per
    diluted share.

McKesson Corporation (NYSE:MCK) today reported that revenues for the
third quarter ended December 31, 2018, were $56.2 billion, up 5%
compared to $53.6 billion a year ago, and also up 5% on a constant
currency basis. On the basis of U.S. generally accepted accounting
principles ("GAAP"), third-quarter earnings per diluted share from
continuing operations was $2.41, compared to earnings per diluted share
of $4.32 a year ago. Prior year GAAP earnings per diluted share included
a net tax benefit of approximately $1.78 per diluted share driven by the
Tax Cuts and Jobs Act of 2017.

Third-quarter Adjusted Earnings per diluted share was $3.40, flat
compared to $3.41 a year ago, primarily driven by a lower share count
and growth in our Medical-Surgical business, offset by a higher tax rate
and lower profit contribution from our U.S. Pharmaceutical business,
which includes a $60 million, or approximately $0.23 cents per diluted
share, charge related to a customer bankruptcy and previously announced
customer losses.

For the first nine months of the fiscal year, McKesson generated cash
from operations of $141 million, and invested $405 million internally,
resulting in negative free cash flow of $264 million, which was in line
with the company's expectations. During the first nine months of the
fiscal year, McKesson also paid $866 million for acquisitions,
repurchased approximately $1.4 billion of its common stock, paid $216
million in dividends and the company ended the quarter with cash and
cash equivalents of $1.8 billion.

"Our third-quarter results reflect solid adjusted operating profit
performance, particularly in our Medical-Surgical and McKesson
Prescription Technology Solutions businesses, and we are pleased with
the progress we are seeing in our U.S. Pharmaceutical and Canadian
businesses as we work to offset headwinds we discussed when providing
our fiscal year outlook in May," said John H. Hammergren, chairman and
chief executive officer, McKesson Corporation. "Our year-to-date results
provide momentum heading into our fiscal fourth quarter, positioning the
company well as Brian Tyler assumes the role of chief executive officer
on April 1, 2019."

Segment Results

U.S. Pharmaceutical and Specialty Solutions revenues were $44.3 billion
for the quarter, up 6%, driven primarily by market growth and
acquisitions, partially offset by previously announced customer losses
and branded to generic conversions. Segment GAAP operating profit was
$671 million and GAAP operating margin was 1.52%. Segment adjusted
operating profit was $593 million and adjusted operating margin was
1.34%.

European Pharmaceutical Solutions revenues were $6.9 billion for the
quarter, down 1% on a reported basis and up 2% on a constant currency
basis, driven primarily by market growth, partially offset by the
previously disclosed reduction in owned retail pharmacies and a
challenging operating environment in the U.K. Segment GAAP operating
profit was $26 million and GAAP operating margin was 0.38%. Segment
adjusted operating profit was $69 million and adjusted operating margin
was 1.00%. On a constant currency basis, adjusted operating profit was
$71 million and adjusted operating margin was 0.99%.

Medical-Surgical Solutions revenues were $2.0 billion for the quarter,
up 19%, driven primarily by an acquisition and market growth. Segment
GAAP operating profit was $136 million and GAAP operating margin was
6.76%. Segment adjusted operating profit was $170 million and adjusted
operating margin was 8.45%.

Revenues included in Other were $3.0 billion for the quarter, up 1% on a
reported basis and up 5% on a constant currency basis, driven primarily
by market growth. Other GAAP operating profit was $74 million and
adjusted operating profit was $224 million. On a constant currency
basis, adjusted operating profit was $226 million.

Fiscal Year 2019 Outlook

McKesson now expects Adjusted Earnings per diluted share of $13.45 to
$13.65 for the fiscal year ending March 31, 2019, from the previous
range of $13.20 to $13.80 per diluted share.

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 thirty-nine cents per share of common stock. The dividend will be
payable on April 1, 2019, to stockholders of record on March 1, 2019.

Conference Call Details

The company has scheduled a conference call for today, Thursday, January
31st, at 5:00 PM ET. The dial-in number for individuals
wishing to participate on the call is 323-794-2588. 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. For
individuals wishing to listen to the replay, the dial-in number is
719-457-0820 and the pass code is 9871695. 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
conference:

  • 8th Annual Leerink Partners Global Healthcare Conference,
    February 28, 2019, New York, NY.

Audio 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 is
available on the company's Investor Relations website.

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.

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 December 31,   Nine Months Ended December 31,
2018   2017   Change 2018   2017   Change

 

Revenues $ 56,208 $ 53,617 5 % $ 161,890 $ 156,729 3 %
Cost of sales (1)   (53,238 )   (50,902 ) 5   (153,337 )   (148,620 ) 3
Gross profit 2,970 2,715 9 8,553 8,109 5
Operating expenses (2) (3) (4) (2,156 ) (1,984 ) 9 (6,219 ) (5,920 ) 5
Goodwill impairment charges (5) (21 ) - NM (591 ) (350 ) 69
Restructuring and asset impairment charges (6) (110 ) (6 ) NM (288 ) (242 ) 19
Gain from sale of business (7)   -     109   (100 )   -     109   (100 )
Total operating expenses   (2,287 )   (1,881 ) 22   (7,098 )   (6,403 ) 11
Operating income 683 834 (18 ) 1,455 1,706 (15 )
Other income, net (8) 84 20 320 144 102 41
Loss from equity method investment in Change Healthcare (9) (50 ) (90 ) (44 ) (162 ) (271 ) (40 )
Interest expense   (67 )   (67 ) -   (194 )   (204 ) (5 )
Income from continuing operations before income taxes 650 697 (7 )

 

1,243 1,333 (7 )
Income tax (expense) benefit (10)   (123 )   263   (147 )   (245 )   46   (633 )
Income from continuing operations after tax 527 960 (45 ) 998 1,379 (28 )
Income (Loss) from discontinued operations, net of tax (1 )   1   (200 )   1     3   (67 )
Net income 526 961 (45 ) 999 1,382 (28 )
Net income attributable to noncontrolling interests   (57 )   (58 ) (2 )   (169 )   (169 ) -
Net income attributable to McKesson Corporation $ 469   $ 903   (48 ) % $ 830   $ 1,213   (32 ) %
 
Earnings per common share attributable to

McKesson Corporation (a)

Diluted
Continuing operations $ 2.41 $ 4.32 (44 ) % $ 4.17 $ 5.75 (27 ) %
Discontinued operations   (0.01 )   0.01   (200 )   0.01     0.01   -
Total $ 2.40   $ 4.33   (45 ) % $ 4.18   $ 5.76   (27 ) %
 
Basic
Continuing operations $ 2.42 $ 4.34 (44 ) % $ 4.19 $ 5.78 (28 ) %

Discontinued operations

  (0.01 )   0.01   (200 )   -     0.02   (100 )

Total

$ 2.41   $ 4.35   (45 ) % $ 4.19   $ 5.80   (28 ) %
 
Dividends declared per common share $ 0.39   $ 0.34   $ 1.12   $ 0.96  
 
Weighted average common shares
Diluted 195 208 (6 ) % 199 210 (5 ) %
Basic 194 207 (6 ) 198 209 (5 )
 

(a)

      Certain computations may reflect rounding adjustments.

NM

Computation not meaningful.
 
Refer to the section entitled "Financial Statement Notes" at the end
of this release.
   
Refer to our applicable filings with the SEC for additional
disclosures including our Quarterly Reports on Form 10-Q for the
third quarters of fiscal 2019 and 2018 as well as our Annual Report
on Form 10-K for fiscal 2018.
 
 

Schedule 2A

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

Change

Quarter Ended December 31, 2018 Vs. Prior Quarter
 

Amortization

  Acquisition-       Restructuring      

 

of Acquisition-

Related LIFO Inventory Gains from and Asset Other Adjusted Adjusted
As Reported

Related

Expenses and -Related Antitrust Legal Impairment Adjustments, Earnings As Reported Earnings
(GAAP)   Intangibles   Adjustments   Adjustments   Settlements   Charges, Net   Net   (Non-GAAP) (GAAP)   (Non-GAAP)
 
Gross profit (1) $ 2,970 $ - $ - $ (21 ) $ (104 ) $ - $ - $ 2,845 9 % 5 %
 
Operating expenses (6) $ (2,287 ) $ 122 $ 27 $ - $ - $ 110 $ 21 $ (2,007 ) 22 % 8 %
 
Other income, net (8) $ 84 $ - $ - $ - $ - $ - $ (56 ) $ 28 320 % 27 %
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (50 ) $ 75 $ 25 $ - $ - $ - $ 2 $ 52 (44 ) % (5 ) %
 

Income from continuing operations before income taxes

$ 650 $ 197 $ 52 $ (21 ) $ (104 ) $ 110 $ (33 ) $ 851 (7 ) % (2 ) %
 
Income tax expense (10) $ (123 ) $ (50 ) $ (13 ) $ 6 $ 27 $ (18 ) $ 41 $ (130 ) (147 ) % 30 %
 

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

$ 470 $ 147 $ 39 $ (15 ) $ (77 ) $ 92 $ 8 $ 664 (48 ) % (7 ) %

 

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

$ 2.41       $ 0.76       $ 0.20       $ (0.08 )     $ (0.39 )     $ 0.47       $ 0.03       $

3.40(b)

 

 

(44 ) % - %
 
Diluted weighted average common shares   195         195  

 

    195         195         195         195         195         195     (6 ) % (6 ) %
 
Quarter Ended December 31, 2017
Amortization Acquisition- Restructuring
of Acquisition- Related LIFO Inventory- Gains from and Asset Other Adjusted
As Reported Related Expenses and Related Antitrust Legal Impairment Adjustments, Earnings
(GAAP)   Intangibles   Adjustments   Adjustments   Settlements   Charges, Net   Net   (Non-GAAP)
 
Gross profit (1) $ 2,715 $ - $ 6 $ (2 ) $ - $ (1 ) $ - $ 2,718
 
Operating expenses (4) (7) $ (1,881 ) $ 123 $ 24 $ - $ - $ 33 $ (157 ) $ (1,858 )
 
Other income, net $ 20 $ - $ 1 $ - $ - $ - $ 1 $ 22
 

Income (Loss) from equity method investment in Change Healthcare
(9)

$ (90 ) $ 70 $ 63 $ - $ - $ - $ 12 $ 55
 

Income from continuing operations before income taxes

$ 697 $ 193 $ 94 $ (2 ) $ - $ 32 $ (144 ) $ 870
 
Income tax benefit (expense) (10) $ 263 $ (53 ) $ (27 ) $ 1 $ - $ (4 ) $ (280 ) $ (100 )
 

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

$ 902 $ 140 $ 67 $ (1 ) $ - $ 28 $ (424 ) $ 712
 
 

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

$ 4.32       $ 0.67       $ 0.32       $ (0.01 )     $ -       $ 0.14       $ (2.03 )     $ 3.41    
 
Diluted weighted average common shares   208         208         208         208         208         208         208         208    
 
(a)   Certain computations may reflect rounding adjustments.
(b)

Adjusted Earnings per share on a Constant Currency basis for third
quarter of fiscal 2019 was $3.41 per diluted share, which excludes
the foreign currency exchange effect of $0.01 per diluted share.

 
Refer to the section entitled "Financial Statement Notes" at the end
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 2B

McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS
(NON-GAAP)
(unaudited)
(in millions, except per share amounts)
 
  Change
  Nine Months Ended December 31, 2018 Vs. Prior Period
  Amortization   Acquisition-       Restructuring      

 

of Acquisition- Related LIFO Inventory- Gains from and Asset Other Adjusted Adjusted

As Reported

Related Expenses and Related Antitrust Legal Impairment Adjustments, Earnings As Reported Earnings
(GAAP)   Intangibles  

Adjustments

  Adjustments   Settlements   Charges, Net   Net   (Non-GAAP) (GAAP)   (Non-GAAP)
 

Gross profit (1)

$ 8,553 $ - $ 1 $ (64 ) $ (139 ) $ - $ - $ 8,351 5 % 3 %
 
Operating expenses (3) (5) (6) $ (7,098 ) $ 364 $ 84 $ - $ - $ 288 $ 508 $ (5,854 ) 11 % 6 %
 
Other income, net (8) $ 144 $ 1 $ - $ - $ - $ - $ (56 ) $ 89 41 % 44 %
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (162 ) $ 229 $ 99 $ - $ - $ - $ 6 $ 172 (40 ) % (14 ) %
 

Income from continuing operations before income taxes

$ 1,243 $ 594 $ 184 $ (64 ) $ (139 ) $ 288 $ 458 $ 2,564 (7 ) % (3 ) %
 
Income tax expense (10) $ (245 ) $ (148 ) $ (46 ) $ 17 $ 36 $ (44 ) $ 2 $ (428 ) (633 ) % (21 ) %
 

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

$ 829 $ 446 $ 138 $ (47 ) $ (103 ) $ 244 $ 460 $ 1,967 (31 ) % 2 %
 

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

$ 4.17       $ 2.24       $ 0.69       $ (0.24 )     $ (0.52 )     $ 1.23       $ 2.32       $

9.89(b)

 

 

(27 ) % 8 %
 
Diluted weighted average common shares   199         199         199         199         199         199         199         199     (5 ) % (5 ) %
 
Nine Months Ended December 31, 2017
Amortization Acquisition- Restructuring
of Acquisition- Related LIFO Inventory- Gains from and Asset Other Adjusted
As Reported Related Expenses and

Related

Antitrust Legal Impairment Adjustments, Earnings
(GAAP)   Intangibles   Adjustments   Adjustments   Settlements   Charges, Net   Net   (Non-GAAP)
 
Gross profit (1) $ 8,109 $ - $ 12 $ (5 ) $ - $ (1 ) $ - $ 8,115
 
Operating expenses (2) (4) (5) (6) (7) $ (6,403 ) $ 369 $ 19 $ - $ - $ 293 $ 182 $ (5,540 )
 

Other income, net (8)

$ 102 $ 1 $ 1 $ - $ - $ - $ (42 ) $ 62
 

Income (Loss) from equity method investment in Change Healthcare (9)

$ (271 ) $ 214 $ 245 $ - $ - $ - $ 12 $ 200
 

Income from continuing operations before income taxes

$ 1,333 $ 584 $ 277 $ (5 ) $ - $ 292 $ 152 $ 2,633
 

Income tax benefit (expense) (10)

$ 46 $ (183 ) $ (90 ) $ 2 $ - $ (56 ) $ (259 ) $ (540 )
 

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

$ 1,210 $ 401 $ 187 $ (3 ) $ - $ 236 $ (107 ) $ 1,924
 

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

$ 5.75       $ 1.90       $ 0.89       $ (0.01 )     $ -       $ 1.12       $ (0.51 )     $ 9.14    
 

Diluted weighted average common shares

  210         210         210         210         210         210         210         210    
 
(a)   Certain computations may reflect rounding adjustments.
(b)

Adjusted Earnings per share on a Constant Currency basis for
fiscal 2019 was $9.90 per diluted share, which excludes the
foreign currency exchange effect of $0.01 per diluted share.

 
Refer to the section entitled "Financial Statement Notes" at the end
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 3A

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED
EARNINGS (NON-GAAP)
(unaudited)
(in millions)
 
  Quarter Ended December 31, 2018   Quarter Ended December 31, 2017   GAAP   Non-GAAP   Change
              Adjusted     Constant
Adjusted Adjusted Foreign Foreign As Earnings Constant Currency
As Reported Earnings As Reported Earnings Currency Constant Currency Constant Reported (Non- Currency (Non-
(GAAP)   Adjustments   (Non-GAAP) (GAAP)   Adjustments   (Non-GAAP) Effects   Currency Effects   Currency (GAAP) GAAP) (GAAP) GAAP)
REVENUES
U.S. Pharmaceutical and Specialty Solutions $ 44,279 $ - $ 44,279 $ 41,969 $ - $ 41,969 $ - $ 44,279 $ - $ 44,279 6 % 6 % 6 % 6 %
European Pharmaceutical Solutions 6,911 - 6,911 6,989 - 6,989 228 7,139 228 7,139 (1 ) (1 ) 2 2
Medical-Surgical Solutions 2,012 - 2,012 1,693 - 1,693 - 2,012 - 2,012 19 19 19 19
Other (a)   3,006         -       3,006       2,966         -     2,966       113       3,119       113       3,119     1 1 5 5
Revenues $ 56,208       $ -     $ 56,208     $ 53,617       $ -   $ 53,617     $ 341     $ 56,549     $ 341     $ 56,549     5 % 5 % 5 % 5 %
 
OPERATING PROFIT (6)
U.S. Pharmaceutical and Specialty Solutions (1) $ 671 $ (78 ) $ 593 $ 565 $ 40 $ 605 $ - $ 671 $ - $ 593 19 % (2 ) % 19 % (2 ) %
European Pharmaceutical Solutions 26 43 69 16 69 85 - 26 2 71 63 (19 ) 63 (16 )
Medical-Surgical Solutions 136 34 170 123 18 141 - 136 - 170 11 21 11 21
Other (a) (4) (7) (8) (9)   74         150       224       180         33     213       (3 )     71       2       226     (59 ) 5 (61 ) 6
Operating profit 907 149 1,056 884 160 1,044 (3 ) 904 4 1,060 3 1 2 2
Corporate   (190

)

 

    52       (138

)

 

  (120

)

 

    13     (107

)

 

  -      

(190

)

 

  -       (138

)

 

58 29 58 29

Income from continuing operations before interest expense and
income taxes

$ 717       $ 201     $ 918     $ 764       $ 173   $ 937     $ (3 )   $ 714     $ 4     $ 922     (6 ) % (2 ) % (7 ) % (2 ) %
 
OPERATING PROFIT AS A % OF REVENUES
U.S. Pharmaceutical and Specialty Solutions 1.52

 

%

1.34

%

 

1.35

%

1.44

%

1.52

%

1.34

%

17 bp (10 ) bp 17 bp (10 ) bp
European Pharmaceutical Solutions 0.38 1.00 0.23 1.22 0.36 0.99 15 (22 ) 13 (23 )
Medical-Surgical Solutions 6.76 8.45 7.27 8.33 6.76 8.45 (51 ) 12 (51 ) 12
 
(a)   Other primarily includes the results of our McKesson Canada and
McKesson Prescription Technology Solutions businesses. Other for
fiscal 2018 also includes the Enterprise Information Solutions
("EIS") business, which was sold in the third quarter of fiscal
2018. Operating profit for Other also includes our proportionate
share of income (loss) from our equity method investment in Change
Healthcare.
 
Refer to the section entitled "Financial Statement Notes" at the end
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 3B

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED
EARNINGS (NON-GAAP)
(unaudited)
(in millions)
 
  Nine Months Ended December 31, 2018   Nine Months Ended December 31, 2017   GAAP   Non-GAAP   Change
              Adjusted     Constant
Adjusted Adjusted Foreign Foreign As Earnings Constant Currency
As Reported Earnings As Reported Earnings Currency Constant Currency Constant Reported (Non- Currency (Non-
(GAAP)   Adjustments   (Non-GAAP) (GAAP)   Adjustments   (Non-GAAP) Effects   Currency   Effects   Currency (GAAP) GAAP) (GAAP) GAAP)
REVENUES
U.S. Pharmaceutical and Specialty Solutions $ 126,866 $ - $ 126,866 $ 122,854 $ - $ 122,854 $ - $ 126,866 $ - $ 126,866 3 % 3 % 3 % 3 %
European Pharmaceutical Solutions 20,485 - 20,485 20,144 - 20,144 (191 ) 20,294 (191 ) 20,294 2 2 1 1
Medical-Surgical Solutions 5,663 - 5,663 4,886 - 4,886 -

5,663

- 5,663 16 16 16 16
Other (a)   8,876         -       8,876       8,845       -       8,845       115         8,991       115       8,991     - - 2 2
Revenues $ 161,890       $ -     $ 161,890     $ 156,729     $ -     $ 156,729     $ (76 )     $ 161,814     $ (76 )   $ 161,814     3 % 3 % 3 % 3 %
 
OPERATING PROFIT (6)
U.S. Pharmaceutical and Specialty Solutions (1) (8) $ 1,824 $ (56 ) $ 1,768 $ 1,750 $ 54 $ 1,804 $ - $ 1,824 $ - $ 1,768 4 % (2 ) % 4 % (2 ) %
European Pharmaceutical Solutions (5) (524

)

 

720 196 (496 ) 754 258 21 (503

)

 

(2 ) 194 6 (24 ) 1 (25 )
Medical-Surgical Solutions 334 99 433 349 53 402 - 334 - 433 (4 ) 8 (4 ) 8
Other (a) (2) (3) (4) (7) (8) (9)   283         454       737       271       414       685       (9 )       274       3       740     4 8 1 8
Operating profit 1,917 1,217 3,134 1,874 1,275 3,149 12 1,929 1 3,135 2 - 3 -
Corporate   (480

)

 

    104       (376

)

 

  (337 )     25       (312

)

 

  -         (480

)

 

  -       (376

)

 

42 21 42 21

Income from continuing operations before interest expense and
income taxes

$ 1,437       $ 1,321     $ 2,758     $ 1,537     $ 1,300     $ 2,837     $ 12       $ 1,449     $ 1     $ 2,759     (7 ) % (3 ) % (6 ) % (3 ) %
 
 
OPERATING PROFIT AS A % OF REVENUES
U.S. Pharmaceutical and Specialty Solutions 1.44

%

1.39

%

 

1.42

%

1.47

%

1.44

%

1.39

%

 

2 bp (8 ) bp 2 bp (8 ) bp
European Pharmaceutical Solutions (2.56

)

 

0.96 (2.46 ) 1.28 (2.48

)

 

0.96 (10 ) (32 ) (2 ) (32 )
Medical-Surgical Solutions 5.90 7.65 7.14 8.23 5.90 7.65 (124 ) (58 ) (124 ) (58 )
 
(a)  

Other primarily includes the results of our McKesson Canada and
McKesson Prescription Technology Solutions businesses. Other for
fiscal 2018 includes EIS business, which was sold in the third
quarter of fiscal 2018. Operating profit for Other also includes
our proportionate share of income (loss) from our equity method
investment in Change Healthcare.

 
Refer to the section entitled "Financial Statement Notes" at the end
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)
 
 

 December 31, 

 

  March 31,  

2018 2018
 
ASSETS
Current Assets
Cash and cash equivalents $ 1,849 $ 2,672
Receivables, net 18,932 17,711
Inventories, net 16,951 16,310
Prepaid expenses and other   587   443
Total Current Assets 38,319 37,136
Property, Plant and Equipment, Net 2,503 2,464
Goodwill 10,519 10,924
Intangible Assets, Net 3,920 4,102
Equity Method Investment in Change Healthcare 3,566 3,728
Other Noncurrent Assets   2,184   2,027
Total Assets $ 61,011 $ 60,381
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS
AND EQUITY
Current Liabilities
Drafts and accounts payable $ 32,091 $ 32,177
Short-term borrowings 1,048 -
Current portion of long-term debt 1,120 1,129
Other accrued liabilities   3,165   3,379
Total Current Liabilities 37,424 36,685
Long-Term Debt 7,616 6,751
Long-Term Deferred Tax Liabilities 2,983 2,804
Other Noncurrent Liabilities 2,195 2,625
 
Redeemable Noncontrolling Interests 1,404 1,459
 
McKesson Corporation Stockholders' Equity 9,185 9,804
Noncontrolling Interests   204   253
Total Equity   9,389   10,057
Total Liabilities, Redeemable Noncontrolling Interests and Equity $ 61,011 $ 60,381
 
 

Schedule 5

 
McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)
 
  Nine Months Ended December 31,
2018   2017
 
OPERATING ACTIVITIES
Net income $ 999 $ 1,382
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization 714 697
Goodwill and other asset impairment charges 671 539
Deferred taxes 170 (847 )
LIFO credits (64 ) (5 )
Loss from equity method investment in Change Healthcare 162 271
Gain from sale of businesses and investments (79 ) (155 )
Other non-cash items (16 ) (75 )

Changes in operating assets and liabilities, net of acquisitions:

Receivables (1,543 ) (1,046 )
Inventories (756 ) (1,410 )
Drafts and accounts payable 175 1,203
Taxes (131 ) 689
Other   (161 )   78  
Net cash provided by operating activities   141     1,321  
 
INVESTING ACTIVITIES
Property acquisitions (309 ) (269 )
Capitalized software expenditures (96 ) (123 )
Acquisitions, net of cash, cash equivalents and restricted cash
acquired
(866 ) (1,979 )
Proceeds from sale of businesses and investments, net 81 329
Payments received on Healthcare Technology Net Asset Exchange, net - 126
Other   39     (36 )
Net cash used in investing activities   (1,151 )   (1,952 )
 
FINANCING ACTIVITIES
Proceeds from short-term borrowings 30,392 12,699
Repayments of short-term borrowings (29,346 ) (12,133 )
Proceeds from issuances of long-term debt 1,099 -
Repayments of long-term debt (14 ) (545 )
Common stock transactions:
Issuances 46 114
Share repurchases, including shares surrendered for tax withholding (1,388 ) (951 )
Dividends paid (216 ) (192 )
Other   (256 )   (139 )
Net cash provided by (used in) financing activities   317     (1,147 )
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
  (130 )   143  
Net decrease in cash, cash equivalents and restricted cash (823 ) (1,635 )
Cash, cash equivalents and restricted cash at beginning of period   2,672     4,254  
Cash, cash equivalents and restricted cash at end of period $ 1,849   $ 2,619  
 
McKESSON CORPORATION
FINANCIAL STATEMENT NOTES
 
 
 
 
(1) The third quarters of fiscal 2019 and 2018 include pre-tax credits
of $21 million and $2 million, and the first nine months of fiscal
2019 and 2018 include pre-tax credits of $64 million and $5 million
related to our last-in, first-out ("LIFO") method of accounting for
inventories. The third quarter and first nine months of fiscal 2019
include $104 million and $139 million of net cash proceeds
representing our share of antitrust legal settlements. These credits
are included within our U.S. Pharmaceutical and Specialty Solutions
segment.
 
(2) Operating expenses for the first nine months of fiscal 2018 includes
a pre-tax gain of $37 million ($22 million after-tax) for Other,
related to the final net working capital settlement and other
adjustments from the contribution of the majority of our technology
business to form a joint venture, Change Healthcare, in the fourth
quarter of 2017. This credit is included under "Acquisition-Related
Expenses and Adjustments" in the reconciliation of McKesson's GAAP
financial results to Adjusted Earnings (Non-GAAP) provided in the
Schedule 2 of the accompanying financial statement tables.
 
(3) Operating expenses for the first nine months of fiscal 2019 includes
a gain from an escrow settlement of $97 million (pre-tax and
after-tax) representing certain indemnity and other claims related
to our third quarter 2017 acquisition of Rexall Health, within
Other. This gain is included under "Other Adjustments, Net" in the
reconciliation of McKesson's GAAP financial results to Adjusted
Earnings (Non-GAAP) provided in the Schedule 2 of the accompanying
financial statement tables.
 
(4) Operating expenses for the third quarter and first nine months of
fiscal 2018 include a pre-tax credit of $46 million ($30 million
after-tax) for Other, representing a reduction in our tax receivable
agreement liability payable to the shareholders of Change Healthcare
Holdings, Inc., as a result of the 2017 Tax Cuts and Jobs Act ("2017
Tax Act"). This credit is included under "Other Adjustments, Net" in
the reconciliation of McKesson's GAAP financial results to Adjusted
Earnings (Non-GAAP) provided in the Schedule 2 of the accompanying
financial statement tables.
 
(5) Operating expenses for the first nine months of fiscal 2019 and 2018
include non-cash goodwill impairment charges of $570 million
(pre-tax and after-tax) and $350 million (pre-tax and after-tax) for
our European Pharmaceutical Solutions segment. These charges are
included under "Other Adjustments, Net" in the reconciliation of
McKesson's GAAP financial results to Adjusted Earnings (Non-GAAP)
provided in the Schedule 2 of the accompanying financial statement
tables.
 
(6) Operating expenses for the third quarter and first nine months of
fiscal 2019 include pre-tax restructuring and asset impairment
charges of $110 million ($92 million after-tax) and $288 million
($244 million after-tax), primarily for our retail businesses in
Canada and the United Kingdom ("U.K.") and Corporate. Operating
expenses for the first nine months of fiscal 2018 include pre-tax
restructuring and asset impairment charges of $242 million ($202
million after-tax), primarily for our retail businesses in the U.K.
 
(7) The third quarter and first nine months of fiscal 2018 include a
pre-tax gain of $109 million ($30 million after-tax) recognized from
the 2018 third quarter sale of our Enterprise Information Solutions
("EIS") business within Other. This gain is included under "Other
Adjustments, Net" in the reconciliation of McKesson's GAAP financial
results to Adjusted Earnings (Non-GAAP) provided in the Schedule 2
of the accompanying financial statement tables.
 
(8) The third quarter and first nine months of fiscal 2019 include a
pre-tax gain of $56 million ($41 million after-tax) recognized from
the sale of an equity method investment within Other. The first nine
months of fiscal 2018 include a pre-tax gain of $43 million ($26
million after-tax) recognized from the fiscal 2018 second quarter
sale of an equity method investment within our U.S. Pharmaceutical
and Specialty Solutions segment. These gains are included under
"Other Adjustments, Net" in the reconciliation of McKesson's GAAP
financial results to Adjusted Earnings (Non-GAAP) provided in the
Schedule 2 of the accompanying financial statement tables.
 
(9) Loss from our equity method investment in Change Healthcare includes
the amortization of equity investment intangibles and other acquired
intangibles of $75 million and $70 million for the third quarters of
fiscal 2019 and 2018, and $229 million and $214 million for the
first nine months of fiscal 2019 and 2018. The amortization expenses
are included in our proportionate share of the loss from our equity
method investment in Change Healthcare within Other.
 
(10)

The third quarters of fiscal 2019 and 2018 include net discrete
tax expenses of $27 million and net discrete tax benefits of $370
million, and first nine months of fiscal 2019 and 2018 include net
discrete tax benefits of $11 million and $370 million recognized
in connection with the 2017 Tax Act. These discrete tax expenses
and benefits are included under "Other Adjustments, Net" in the
reconciliation of McKesson's GAAP financial results to Adjusted
Earnings (Non-GAAP) provided in the Schedule 2 of the accompanying
financial statement tables.

    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 and transaction 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 other transaction-related costs including initial public
offering costs. 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 and subsequent true-up adjustments
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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