filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS
GENERAL
Management’s discussion and analysis of financial condition and results of operations, referred to as the “Financial Review,” is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of McKesson Corporation together with its subsidiaries (collectively, the “Company,” “McKesson,” “we,” “our,” or “us,” and other similar pronouns). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q (“Quarterly Report”) and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 previously filed with the Securities and Exchange Commission (the “SEC”) on May 9, 2023 (“2023 Annual Report”).
Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean our fiscal year.
Certain statements in this report constitute forward-looking statements. See “Cautionary Notice About Forward-Looking Statements” included in this Quarterly Report.
Overview of our Business:
We are a diversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. Our teams partner with biopharma companies, care providers, pharmacies, manufacturers, governments, and others to deliver insights, products, and services to help make quality care more accessible and affordable.
We report our financial results in four reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, as well as the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit (loss) before interest expense and income taxes.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
The following summarizes our four reportable segments. Refer to Financial Note 12, “Segments of Business,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information regarding our reportable segments.
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U.S. Pharmaceutical** is a reportable segment that distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs, and other healthcare-related products in the United States (“U.S.”). This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate sites) and provides consulting, outsourcing, technological, and other services.
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Prescription Technology Solutions** is a reportable segment that combines automation and our ability to navigate the healthcare ecosystems to connect patients, pharmacies, providers, pharmacy benefit managers, health plans, and biopharma companies to address patients’ medication access, affordability, and adherence challenges. RxTS also offers prescription price transparency, benefit insight, dispensing support services, third-party logistics, and wholesale distribution support across various therapeutic categories and temperature ranges to biopharma customers throughout the product lifecycle.
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Medical-Surgical Solutions** is a reportable segment that provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the U.S., including physician offices, surgery centers, nursing homes, hospital reference labs, and home health care agencies. This segment offers national brand medical-surgical products as well as McKesson’s own line of high-quality products through a network of distribution centers within the U.S.
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International** is a reportable segment that includes our operations in Canada and Europe, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. Our operations in Canada deliver medicines, supplies, and information technology solutions throughout Canada and includes Rexall Health pharmacies. During fiscal 2023, we completed transactions to sell certain of our businesses in the European Union (“E.U. disposal group”), and our retail and distribution businesses in the United Kingdom (“U.K. disposal group”). Our remaining operations in Europe provide distribution and services to wholesale and retail customers in Norway where we own, partner, or franchise with retail pharmacies. Refer to Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information regarding these divestiture transactions.
Executive Summary:
The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the three and nine months ended December 31, 2023:
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For the three months ended December 31, 2023 compared to the prior year, revenues increased by 15%, gross profit decreased by 1%, total operating expenses increased by 30%, and other income, net decreased by $242 million. For the nine months ended December 31, 2023 compared to the prior year, revenues increased by 12%, gross profit decreased by 1%, total operating expenses increased by 11%, and other income, net decreased by $368 million. Refer to the “Overview of Consolidated Results” section below for an analysis of these changes;
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Diluted earnings per common share from continuing operations attributable to McKesson Corporation decreased to $4.42 from $7.65 for the three months ended December 31, 2023 and decreased to $16.39 from $19.32 for the nine months ended December 31, 2023 compared to the respective prior year periods;
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For the three and nine months ended December 31, 2023, we recorded a provision for bad debts of $515 million and $725 million, respectively, related to the bankruptcy of our customer, Rite Aid Corporation (including certain of its subsidiaries, “Rite Aid”), in October 2023. Refer to the “Trends and Uncertainties” section below for more information;
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We received $23 million and $220 million for the three and nine months ended December 31, 2023, respectively, related to our share of antitrust legal settlements. These amounts were recorded as a gain within "Cost of sales" in the Condensed Consolidated Statements of Operations within our U.S. Pharmaceutical segment;
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For the three and nine months ended December 31, 2023, we recognized a discrete tax benefit of $154 million related to the release of a valuation allowance based on management’s reassessment of the amount of our deferred tax assets that are more likely than not to be realized;
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
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For the nine months ended December 31, 2023, we recognized a net discrete tax benefit of $147 million related to the repatriation of certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions;
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During the three and nine months ended December 31, 2023, we recorded fair value adjustment gains of $2 million and $78 million, respectively, related to the contingent consideration liability recognized as part of our acquisition of Rx Savings Solutions, LLC. The gains, within Prescription Technology Solutions, resulted from remeasurement of the liability to fair value at the end of each reporting period based on the estimated amount and timing of projected operational and financial information and the probability of achievement of performance milestones;
*•*On June 15, 2023, we completed a public offering of 4.90% Notes due July 15, 2028 in a principal amount of $400 million and 5.10% Notes due July 15, 2033 in a principal amount of $600 million, for proceeds received, net of discounts and offering expenses, of $397 million and $592 million, respectively. A portion of the net proceeds from these offerings was utilized to fund the repurchase of our 3.80% Notes due March 15, 2024 (the “2024 Notes”) discussed below, while the remaining net proceeds was available for general corporate purposes;
*•*On June 16, 2023, we completed a cash tender offer for any and all of the 2024 Notes with a principal amount of $918 million, which was made concurrently with the June 15, 2023 notes offering described above. Using a portion of the net proceeds from the June 15, 2023 notes offering described above, we paid an aggregate consideration of $268 million to repurchase $271 million of principal amount of the 2024 Notes plus any accrued and unpaid interest;
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Following the consummation of the cash tender offer discussed above, on June 16, 2023, we irrevocably deposited U.S. government obligations with the trustee under the indenture governing the 2024 Notes sufficient to fund the payment of accrued and unpaid interest of the remaining $647 million principal amount of the 2024 Notes as it becomes due, and of the principal amount of those 2024 Notes on their March 15, 2024 maturity date. Refer to Financial Note 7, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information; and
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We returned $2.6 billion of cash to shareholders during the nine months ended December 31, 2023 through $2.3 billion of common stock repurchases through open market transactions and $232 million of dividend payments. In July 2023, our Board of Directors (the “Board”) approved an increase of $6.0 billion in the authorization for repurchase of the Company’s common stock and raised our quarterly dividend to $0.62 from $0.54 per share of common stock. The total remaining authorization outstanding for repurchases of the Company’s common stock at December 31, 2023 was $7.3 billion.
Trends and Uncertainties:
Legislative Developments
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”). Among other provisions, the IRA includes a 15% corporate minimum tax, a 1% excise tax on certain repurchases of an entity’s own common stock after December 31, 2022, and various drug pricing reforms. We do not anticipate that this legislation will have a material impact on our consolidated financial statements or related disclosures; however, we continue to evaluate the impact of these legislative changes. Refer to Financial Note 11, “Stockholders' Deficit,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for further details regarding excise taxes incurred on our share repurchases during the three and nine months ended December 31, 2023.
COVID-19
The U.S. federal government and World Health Organization suspended their respective public health emergencies in regards to the SARS-CoV-2 coronavirus (“COVID-19”) in May 2023. In the second quarter of fiscal 2024, we began transitioning the distribution of COVID-19 vaccines to commercial channels, the results of which are included primarily within our U.S. Pharmaceutical and Medical-Surgical Solutions segments. The impacts from COVID-19 related items were not material to revenues and operating profit for the three and nine months ended December 31, 2023. For additional disclosure of trends and uncertainties due to COVID-19, refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2023 Annual Report.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Opioid-Related Litigation and Claims
As described in the discussion of opioid-related matters in Financial Note 10, “Commitments and Contingent Liabilities,” to the condensed consolidated financial statements accompanying this Quarterly Report, we are a defendant in many legal proceedings asserting claims related to the distribution of controlled substances (opioids) in federal and state courts throughout the U.S., and in Puerto Rico and Canada. The plaintiffs in these actions have included state attorneys general, county and municipal governments, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. The Company believes it has valid legal defenses in all opioid-related matters, including claims not covered by settlement agreements, and it intends to mount a vigorous defense. Other than as to the settlement agreements and the U.S. governmental subdivision claims described in Financial Note 10, the Company has not concluded a loss is probable in any of the matters; nor is any possible loss or range of loss reasonably estimable. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on the Company’s financial position, cash flows or liquidity, or results of operations. During the nine months ended December 31, 2023, the Company made payments totaling $529 million associated with various settlement agreements for opioid-related claims of states, subdivisions, and Native American tribes. Our total estimated liability for opioid-related claims was $6.6 billion as of December 31, 2023, of which $516 million was included within “Other accrued liabilities” for the amount estimated to be paid within the next twelve months, and the remaining liability was included in “Long-term litigation liabilities” in our Condensed Consolidated Balance Sheet.
Rite Aid Bankruptcy Proceedings
In October 2023, our customer Rite Aid filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. As a result, we recorded provisions for bad debts of $515 million and $725 million during the three and nine months ended December 31, 2023, respectively. The provision for bad debts of $515 million recorded in the third quarter of fiscal 2024 related to uncollected trade accounts receivable from sales to Rite Aid in October 2023 prior to its bankruptcy petition filing. During the second quarter of fiscal 2024, we recorded a provision for bad debts of $210 million, which represented the uncollected trade accounts receivable balance as of September 30, 2023 due from Rite Aid. These charges were recorded within “Selling, distribution, general, and administrative expenses” in the Company’s Condensed Consolidated Statements of Operations and included within the U.S. Pharmaceutical segment.
We believe the reserves maintained and expenses recorded in fiscal 2024 for Rite Aid trade accounts receivable are appropriate and consistent with our accounting policy and assessment of the information currently available. We evaluate our reserves periodically and as circumstances warrant which may result in changes to our reserves. For additional disclosure of our policy regarding allowances for credit losses, refer to the “Critical Accounting Estimates” section within Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2023 Annual Report.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
RESULTS OF OPERATIONS
Overview of Consolidated Results:
| (Dollars in millions, except per share data) | Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 80,898 | $ | 70,490 | 15 | % | $ | 232,596 | $ | 207,801 | 12 | % | |||||||||||||||||||||||||||||
| Gross profit | 3,152 | 3,174 | (1) | 9,243 | 9,292 | (1) | |||||||||||||||||||||||||||||||||||
| Gross profit margin | 3.90 | % | 4.50 | % | (60) | bp | 3.97 | % | 4.47 | % | (50) | bp | |||||||||||||||||||||||||||||
| Total operating expenses | $ | (2,510) | $ | (1,933) | 30 | % | $ | (6,550) | $ | (5,891) | 11 | % | |||||||||||||||||||||||||||||
| Total operating expenses as a percentage of revenues | 3.10 | % | 2.74 | % | 36 | bp | 2.82 | % | 2.83 | % | (1) | bp | |||||||||||||||||||||||||||||
| Other income, net | $ | 34 | $ | 276 | (88) | % | $ | 98 | $ | 466 | (79) | % | |||||||||||||||||||||||||||||
| Interest expense | (64) | (69) | (7) | (172) | (169) | 2 | |||||||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 612 | 1,448 | (58) | 2,619 | 3,698 | (29) | |||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | 18 | (329) | 105 | (289) | (799) | (64) | |||||||||||||||||||||||||||||||||||
| Reported income tax rate | (2.9) | % | 22.7 | % | (2,560) | bp | 11.0 | % | 21.6 | % | (1,060) | bp | |||||||||||||||||||||||||||||
| Income from continuing operations | $ | 630 | $ | 1,119 | (44) | % | $ | 2,330 | $ | 2,899 | (20) | % | |||||||||||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax | — | 1 | (100) | — | (3) | (100) | |||||||||||||||||||||||||||||||||||
| Net income | 630 | 1,120 | (44) | 2,330 | 2,896 | (20) | |||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (41) | (41) | — | (119) | (123) | (3) | |||||||||||||||||||||||||||||||||||
| Net income attributable to McKesson Corporation | $ | 589 | $ | 1,079 | (45) | % | $ | 2,211 | $ | 2,773 | (20) | % | |||||||||||||||||||||||||||||
| Diluted earnings (loss) per common share attributable to McKesson Corporation | |||||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 4.42 | $ | 7.65 | (42) | % | $ | 16.39 | $ | 19.32 | (15) | % | |||||||||||||||||||||||||||||
| Discontinued operations | — | 0.01 | (100) | — | (0.02) | (100) | |||||||||||||||||||||||||||||||||||
| Total | $ | 4.42 | $ | 7.66 | (42) | % | $ | 16.39 | $ | 19.30 | (15) | % | |||||||||||||||||||||||||||||
| Weighted-average diluted common shares outstanding | 133.3 | 141.0 | (5) | % | 134.9 | 143.7 | (6) | % |
Any percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Revenues
Revenues increased for the three and nine months ended December 31, 2023 compared to the same prior year periods largely due to market growth in our U.S. Pharmaceutical segment, including higher volumes from retail national account customers and growth in specialty pharmaceuticals. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with branded to generic drug conversion. This revenue growth was partially offset by lower revenues in our International segment driven by the completed divestiture of our E.U. disposal group and unfavorable effects of foreign currency exchange fluctuations.
Gross Profit
Gross profit decreased for the three and nine months ended December 31, 2023 compared to the same prior year periods primarily driven by the completed divestiture of our E.U. disposal group within our International segment, partially offset by growth of specialty pharmaceuticals, our share of antitrust legal settlements received in the first nine months of fiscal 2024, increased contributions from our generics programs in our U.S. Pharmaceutical segment, and increased technology services revenue from higher volumes in our RxTS segment.
We recognized gains of $23 million and $129 million for the three months ended December 31, 2023 and 2022, respectively, and $220 million and $129 million for the nine months ended December 31, 2023 and 2022, respectively, related to our share of antitrust legal settlements. We recognized these amounts within "Cost of sales" in the Condensed Consolidated Statements of Operations within our U.S. Pharmaceutical segment.
Last-in, first-out (“LIFO”) inventory charges recognized during the three months ended December 31, 2023 and 2022 were comparable, with $2 million and $5 million recorded in the third quarter of fiscal 2024 and fiscal 2023, respectively. A LIFO charge of $89 million and a credit of $31 million were recognized during the nine months ended December 31, 2023 and 2022, respectively, primarily due to higher brand inventory levels, slightly higher estimated brand inflation, lower estimated generics deflation, as well as lower off patent launch activity.
Our U.S. Pharmaceutical business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business’ practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price related inventory losses. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our quarterly LIFO adjustment is based on our estimates of the annual LIFO adjustment which is impacted by expected changes in year-end inventory quantities, product mix, and manufacturer pricing practices, which may be influenced by market and other external factors. Changes to any of the above factors could have a material impact to our annual LIFO adjustment. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year.
Total Operating Expenses
A summary of the components of our total operating expenses for the three and nine months ended December 31, 2023 and 2022 is as follows:
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Selling, distribution, general, and administrative expenses (“SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, administrative expenses, remeasurement charges to the lower of carrying value or fair value less costs to sell, provisions for bad debts, and other general charges.
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Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes in estimates. Legal fees to defend claims, which are expensed as incurred, are included within SDG&A.
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Restructuring, impairment, and related charges, net: Charges recorded under this component include those 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.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||||
| Selling, distribution, general, and administrative expenses | $ | 2,506 | $ | 1,903 | 32 | % | $ | 6,468 | $ | 5,812 | 11 | % | |||||||||||||||||||||||||||||
| Claims and litigation charges, net | — | (1) | (100) | (2) | (5) | (60) | |||||||||||||||||||||||||||||||||||
| Restructuring, impairment, and related charges, net | 4 | 31 | (87) | 84 | 84 | — | |||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 2,510 | $ | 1,933 | 30 | % | $ | 6,550 | $ | 5,891 | 11 | % | |||||||||||||||||||||||||||||
| Percent of revenues | 3.10 | % | 2.74 | % | 36 | bp | 2.82 | % | 2.83 | % | (1) | bp |
Any percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
For the three and nine months ended December 31, 2023, total operating expenses increased compared to the same prior year periods. Total operating expenses as a percentage of revenues increased for the three months ended December 31, 2023, however slightly decreased for the nine months ended December 31, 2023, when compared to the same prior year periods. Total operating expenses were impacted by the following significant items:
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SDG&A for the three and nine months ended December 31, 2023 includes a provision for bad debts of $515 million and $725 million, respectively, related to the bankruptcy of Rite Aid in October 2023. Refer to the Rite Aid Bankruptcy Proceedings section of "Trends and Uncertainties" for further discussion;
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SDG&A for the three and nine months ended December 31, 2023 includes fair value adjustment gains of $2 million and $78 million, respectively, which reduced our contingent consideration liability related to the RxSS acquisition, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;
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SDG&A for the three and nine months ended December 31, 2023 was impacted by lower operating expenses from the completed divestiture of our E.U. disposal group in fiscal 2023, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;
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Claims and litigation charges, net was not material. Refer to the Opioid-Related Litigation and Claims section of "Trends and Uncertainties" for further discussion; and
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Restructuring, impairment, and related charges, net were $4 million and $31 million, respectively, for the three months ended December 31, 2023 and 2022 and $84 million for each of the nine months ended December 31, 2023 and 2022, as discussed in more detail below under “Restructuring Initiatives.”
Goodwill Impairment
We evaluate goodwill for impairment on an annual basis in the first fiscal quarter, and at an interim date if indicators of potential impairment exist. The annual impairment testing performed in fiscal 2024 and fiscal 2023 did not indicate any impairment of goodwill, and no goodwill impairment charges were recorded during the three and nine months ended December 31, 2023 and 2022. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment, where the risk of a material goodwill impairment is higher than other reporting units.
Restructuring Initiatives
We recorded restructuring, impairment, and related charges of $4 million and $31 million for the three months ended December 31, 2023 and 2022, respectively, and $84 million for each of the nine months ended December 31, 2023 and 2022. These charges were included in “Restructuring, impairment, and related charges, net” in the Condensed Consolidated Statements of Operations.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
During the fourth quarter of fiscal 2023, we approved a broad set of initiatives to drive operational efficiencies and increase cost optimization efforts, with the intent of simplifying our infrastructure and realizing long-term sustainable growth. These initiatives include headcount reductions and the exit or downsizing of certain facilities. We anticipate total charges of approximately $125 million across our RxTS and U.S. Pharmaceutical segments as well as Corporate, consisting primarily of employee severance and other employee-related costs, facility and other exit-related costs, as well as long-lived asset impairments. Of this amount, $101 million of cumulative charges were recorded through December 31, 2023. For the three and nine months ended December 31, 2023, we recorded charges of $2 million and $41 million related to this program, respectively, which primarily includes real estate and other related asset impairments and facility costs within Corporate. This restructuring program is anticipated to be substantially complete by the end of fiscal 2024.
Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information on our restructuring initiatives.
Other Income, Net
Other income, net decreased for the three and nine months ended December 31, 2023 compared to the same prior year periods primarily due to:
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a gain in the third quarter of fiscal 2023 of $126 million due to the cash received for the early termination of a tax receivable agreement (“TRA”) entered into as part of the formation of the joint venture with Change Healthcare Inc. (“Change”). This gain was recorded within Corporate expenses, net;
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a gain in the third quarter of fiscal 2023 of $97 million from the termination of fixed interest rate swaps accounted for as cash flow hedges within Corporate expenses, net; and
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a gain in the second quarter of fiscal 2023 of $142 million related to the exit of one of our investments in equity securities held within our U.S. Pharmaceutical segment.
Interest Expense
Interest expense decreased for the three months ended December 31, 2023 compared to the same prior year period primarily driven by changes in our loan portfolio. Interest expense increased for the nine months ended December 31, 2023 compared to the same prior year period primarily due to the impact of higher interest rates on our debt and derivative portfolios, partially offset by a $9 million gain on debt extinguishment in the first quarter of fiscal 2024. Refer to Financial Note 7, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information. Interest expense may fluctuate based on timing, amounts, and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Income Tax (Benefit) Expense
For the three months ended December 31, 2023 and 2022, we recorded income tax (benefit) of ($18 million) and expense of $329 million, respectively. For the nine months ended December 31, 2023 and 2022, we recorded income tax expense of $289 million and $799 million, respectively. Our reported income tax rates were (2.9)% and 22.7% for the three months ended December 31, 2023 and 2022, respectively, and 11.0% and 21.6% for the nine months ended December 31, 2023 and 2022, respectively.
Fluctuations in our reported income tax rates are primarily due to changes in our business mix of earnings between various taxing jurisdictions and discrete tax items recognized in the quarters. We recognized a net discrete tax benefit of $141 million in the three months ended December 31, 2023, including $154 million related to the release of a valuation allowance based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. We also recognized a net discrete tax benefit of $147 million in the nine months ended December 31, 2023 primarily related to the repatriation of certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions. Refer to Financial Note 4, “Income Taxes,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations, net of tax, was $1 million and ($3 million) for the three and nine months ended December 31, 2022, respectively. Subsequent to our divestiture of the E.U. disposal group in October 2022, we no longer have discontinued operations.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three and nine months ended December 31, 2023 and 2022 primarily represents the proportionate results of third-party equity interests in the Company’s consolidated entities of ClarusONE Sourcing Services LLP and Vantage Oncology Holdings, LLC. Net income attributable to noncontrolling interests also includes the proportionate results of third-party equity interest in SCRI Oncology, LLC (“SCRI Oncology”) from its formation on October 31, 2022.
Net Income Attributable to McKesson Corporation
Net income attributable to McKesson Corporation was $589 million and $1.1 billion for the three months ended December 31, 2023 and 2022, respectively, and $2.2 billion and $2.8 billion for the nine months ended December 31, 2023 and 2022, respectively. Diluted earnings per common share attributable to McKesson Corporation was $4.42 and $7.66 for the three months ended December 31, 2023 and 2022, respectively, and $16.39 and $19.30 for the nine months ended December 31, 2023 and 2022, respectively. Our diluted earnings per share also reflects the cumulative effects of share repurchases during each period.
Weighted-Average Diluted Common Shares Outstanding
Diluted earnings per common share was calculated based on a weighted-average number of shares outstanding of 133.3 million and 141.0 million for the three months ended December 31, 2023 and 2022, respectively, and 134.9 million and 143.7 million for the nine months ended December 31, 2023 and 2022, respectively. Weighted-average diluted shares outstanding for the three and nine months ended December 31, 2023 decreased from the same prior year periods primarily due to the cumulative effect of share repurchases.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Overview of Segment Results:
Segment Revenues:
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||||
| Segment revenues | |||||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical | $ | 73,023 | $ | 61,934 | 18 | % | $ | 209,949 | $ | 178,940 | 17 | % | |||||||||||||||||||||||||||||
| Prescription Technology Solutions | 1,205 | 1,121 | 7 | 3,589 | 3,205 | 12 | |||||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 3,031 | 2,986 | 2 | 8,476 | 8,421 | 1 | |||||||||||||||||||||||||||||||||||
| International | 3,639 | 4,449 | (18) | 10,582 | 17,235 | (39) | |||||||||||||||||||||||||||||||||||
| Total revenues | $ | 80,898 | $ | 70,490 | 15 | % | $ | 232,596 | $ | 207,801 | 12 | % |
Any percentage changes displayed above which are not meaningful are displayed as zero percent.
U.S. Pharmaceutical
Three Months Ended December 31, 2023 vs. 2022
U.S. Pharmaceutical revenues for the three months ended December 31, 2023 increased $11.1 billion or 18% compared to the same prior year period. Within the segment, sales to pharmacies and healthcare providers increased $9.8 billion and sales to specialty practices and other increased $1.3 billion. Overall, these increases were primarily due to market growth, including growth in specialty pharmaceuticals and higher volumes from retail national account customers, and branded pharmaceutical price increases, partially offset by branded to generic drug conversions.
Nine Months Ended December 31, 2023 vs. 2022
U.S. Pharmaceutical revenues for the nine months ended December 31, 2023 increased $31.0 billion or 17% compared to the same prior year period. Within the segment, sales to pharmacies and healthcare providers increased $28.2 billion and sales to specialty practices and other increased $2.8 billion. Overall, these increases were primarily due to market growth, including higher volumes from retail national account customers and growth in specialty pharmaceuticals, and branded pharmaceutical price increases, partially offset by branded to generic drug conversions and unfavorability from one less sales day compared to the same prior year period.
Prescription Technology Solutions
Three Months Ended December 31, 2023 vs. 2022
RxTS revenues for the three months ended December 31, 2023 increased $84 million or 7% compared to the same prior year period due to higher technology service revenues and increased volumes primarily in our third-party logistics and wholesale distribution services.
Nine Months Ended December 31, 2023 vs. 2022
RxTS revenues for the nine months ended December 31, 2023 increased $384 million or 12% compared to the same prior year period due to higher technology service revenues and increased volumes primarily in our third-party logistics and wholesale distribution services.
Medical-Surgical Solutions
Three Months Ended December 31, 2023 vs. 2022
Medical-Surgical Solutions revenues for the three months ended December 31, 2023 increased $45 million or 2% compared to the same prior year period. Within the segment, sales to primary care customers increased $77 million and sales to our extended care customers increased by $31 million, driven by underlying business growth. These increases were partially offset by our Other segment sales which declined by $63 million driven by lower contribution from the kitting and distribution of ancillary supplies used to administer COVID-19 vaccines.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Nine Months Ended December 31, 2023 vs. 2022
Medical-Surgical Solutions revenues for the nine months ended December 31, 2023 increased $55 million or 1% compared to the same prior year period. Within the segment, sales to our extended care customers increased $159 million and sales to our primary care customers increased $57 million driven by underlying business growth. Other sales declined $161 million driven by lower contribution from the kitting and distribution of ancillary supplies used to administer COVID-19 vaccines.
International
Three Months Ended December 31, 2023 vs. 2022
International revenues for the three months ended December 31, 2023 decreased $810 million or 18%, including unfavorable effects of foreign currency exchange fluctuations of $25 million, compared to the same prior year period. Within the segment, sales in Europe declined by $913 million largely due to the completed divestiture of our E.U. disposal group in the third quarter of fiscal 2023, partially offset by increased sales in Canada of $128 million which was primarily driven by higher pharmaceutical distribution volumes.
Nine Months Ended December 31, 2023 vs. 2022
International revenues for the nine months ended December 31, 2023 decreased $6.7 billion or 39%, including unfavorable effects of foreign currency exchange fluctuations of $324 million, compared to the same prior year period. Within the segment, sales in Europe declined by $6.9 billion largely due to the completed divestiture of our E.U. disposal group in the third quarter of fiscal 2023, partially offset by increased sales in Canada of $520 million which was primarily driven by higher pharmaceutical distribution volumes.
Segment Operating Profit and Corporate Expenses, Net:
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||||
| Segment operating profit (1) | |||||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical (2) | $ | 307 | $ | 850 | (64) | % | $ | 1,727 | $ | 2,442 | (29) | % | |||||||||||||||||||||||||||||
| Prescription Technology Solutions (3) | 178 | 136 | 31 | 647 | 400 | 62 | |||||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 268 | 328 | (18) | 739 | 883 | (16) | |||||||||||||||||||||||||||||||||||
| International (4) | 126 | 136 | (7) | 249 | 93 | 168 | |||||||||||||||||||||||||||||||||||
| Subtotal | 879 | 1,450 | (39) | 3,362 | 3,818 | (12) | |||||||||||||||||||||||||||||||||||
| Corporate expenses, net (5) | (203) | 67 | (403) | (571) | 49 | — | |||||||||||||||||||||||||||||||||||
| Interest expense | (64) | (69) | (7) | (172) | (169) | 2 | |||||||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | $ | 612 | $ | 1,448 | (58) | % | $ | 2,619 | $ | 3,698 | (29) | % | |||||||||||||||||||||||||||||
| Segment operating profit margin | |||||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical | 0.42 | % | 1.37 | % | (95) | bp | 0.82 | % | 1.36 | % | (54) | bp | |||||||||||||||||||||||||||||
| Prescription Technology Solutions | 14.77 | 12.13 | 264 | 18.03 | 12.48 | 555 | |||||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 8.84 | 10.98 | (214) | 8.72 | 10.49 | (177) | |||||||||||||||||||||||||||||||||||
| International | 3.46 | 3.06 | 40 | 2.35 | 0.54 | 181 |
Any percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
(1)Segment operating profit includes gross profit, net of total operating expenses, as well as other income, net, for our reportable segments.
(2)Operating profit for our U.S. Pharmaceutical segment includes the following:
- a provision for bad debts of $515 million and $725 million for the three and nine months ended December 31, 2023, respectively, related to the bankruptcy of Rite Aid in October 2023, as discussed in more detail in the “Trends and Uncertainties” section;
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
-
cash receipts for our share of antitrust legal settlements of $23 million and $129 million for the three months ended December 31, 2023 and 2022, respectively, and $220 million and $129 million for the nine months ended December 31, 2023 and 2022, respectively;
-
charges of $2 million and $5 million related to the LIFO method of accounting for inventories for the three months ended December 31, 2023 and 2022, respectively, and a charge of $89 million and a credit of $31 million for the nine months ended December 31, 2023 and 2022, respectively; and
-
a gain of $142 million for the nine months ended December 31, 2022 related to the exit of one of our investments in equity securities in July 2022 for proceeds of $179 million, which was recorded within “Other income, net” in the Company’s Condensed Consolidated Statements of Operations.
(3)Operating profit for our RxTS segment for the three and nine months ended December 31, 2023 includes fair value adjustment gains of $2 million and $78 million, respectively, which reduced our contingent consideration liability related to the RxSS acquisition, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
(4)Operating profit for our International segment for the three and nine months ended December 31, 2022 includes charges of $3 million and $240 million, respectively, to remeasure the assets and liabilities of our E.U. disposal group to fair value less costs to sell, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
(5)Corporate expenses, net includes the following:
-
restructuring charges of $50 million and $38 million for the nine months ended December 31, 2023 and 2022, respectively, for restructuring initiatives as discussed in more detail in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;
-
gains of $34 million and $306 million for the three and nine months ended December 31, 2022, respectively, primarily related to the effect of accumulated other comprehensive loss components from our E.U. disposal group, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;
-
a gain of $126 million for the three and nine months ended December 31, 2022 related to the cash payment received for the early termination of our TRA with Change; and
-
a gain of $97 million for the three and nine months ended December 31, 2022 from the termination of fixed interest rate swaps accounted for as cash flow hedges.
U.S. Pharmaceutical
Three Months Ended December 31, 2023 vs. 2022
Operating profit for this segment decreased for the three months ended December 31, 2023 compared to the same prior year period primarily due to a provision for bad debts of $515 million related to the bankruptcy of Rite Aid in October 2023, a decrease from net cash proceeds received representing our share of antitrust legal settlements, and an increase in operating expenses to support higher volumes, partially offset by growth in specialty pharmaceuticals.
Nine Months Ended December 31, 2023 vs. 2022
Operating profit for this segment decreased for the nine months ended December 31, 2023 compared to the same prior year period primarily due to a provision for bad debts of $725 million related to the bankruptcy of Rite Aid in October 2023, a gain of $142 million related to the exit of one of our investments in equity securities in fiscal 2023, a LIFO charge in the first nine months of fiscal 2024 compared to a credit in the same prior year period, and an increase in operating expenses to support higher volumes, partially offset by growth in specialty pharmaceuticals, an increase from net cash proceeds received representing our share of antitrust legal settlements, and increased contributions from our generics programs.
Prescription Technology Solutions
Three Months Ended December 31, 2023 vs. 2022
Operating profit for this segment increased for the three months ended December 31, 2023 compared to the same prior year period driven by increased volumes from our access solutions, primarily related to prior authorization services.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Nine Months Ended December 31, 2023 vs. 2022
Operating profit for this segment increased for the nine months ended December 31, 2023 compared to the same prior year period driven by increased volumes, primarily from growth in our access solutions related to prior authorization services, and fair value adjustment gains which reduced our contingent consideration liability related to the RxSS acquisition.
Medical-Surgical Solutions
Three Months Ended December 31, 2023 vs. 2022
Operating profit for this segment decreased for the three months ended December 31, 2023 compared to the same prior year period due to a lower contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by growth in our extended care business.
Nine Months Ended December 31, 2023 vs. 2022
Operating profit for this segment decreased for the nine months ended December 31, 2023 compared to the same prior year period due to a lower contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines and higher expenses to support business growth, partially offset by growth in our extended care business.
International
Three Months Ended December 31, 2023 vs. 2022
Operating profit for this segment decreased for the three months ended December 31, 2023 compared to the same prior year period primarily as a result of lower contributions from the European operations divested in fiscal 2023, partially offset by remeasurement charges recorded in the prior year related to the E.U. disposal group.
Nine Months Ended December 31, 2023 vs. 2022
Operating profit for this segment increased for the nine months ended December 31, 2023 compared to the same prior year period primarily as a result of remeasurement charges recorded in the prior year related to the E.U. disposal group, partially offset by lower contributions from the European operations divested in fiscal 2023.
Corporate Expenses, Net
Three Months Ended December 31, 2023 vs. 2022
Corporate expenses, net increased for the three months ended December 31, 2023 compared to the same prior year period primarily as a result of gains in the third quarter of fiscal 2023 of $126 million related to the cash payment received for the early termination of our TRA with Change, $97 million from the termination of fixed interest rate swaps accounted for as cash flow hedges, and remeasurement gains recorded in the prior year related to the E.U. disposal group.
Nine Months Ended December 31, 2023 vs. 2022
Corporate expenses, net increased for the nine months ended December 31, 2023 compared to the same prior year period primarily due to:
-
prior year remeasurement gains related to the E.U. disposal group;
-
a gain in the third quarter of 2023 related to the cash payment received for the early termination of our TRA with Change;
-
a gain in the third quarter of 2023 related to the termination of fixed interest rate swaps accounted for as cash flow hedges; and
-
higher restructuring charges recorded in fiscal 2024.
These were partially offset by a favorable impact to interest income from higher interest rates on certain of our cash balances compared to the prior year period.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Business Combinations
Refer to Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for our disclosures on business combinations.
New Accounting Pronouncements
New accounting pronouncements that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Financial Note 1, “Significant Accounting Policies,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our credit facilities, commercial paper program, and other borrowings will be sufficient to fund our short-term and long-term capital expenditures, working capital, and other cash requirements. We remain adequately capitalized, including access to liquidity from our $4.0 billion revolving credit facility. At December 31, 2023, we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future.
The following table summarizes the net change in cash, cash equivalents, and restricted cash for the periods shown:
| Nine Months Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | ||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 167 | $ | 1,834 | $ | (1,667) | |||||||||||
| Investing activities | (495) | (298) | (197) | ||||||||||||||
| Financing activities | (2,374) | (3,178) | 804 | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 6 | 15 | (9) | ||||||||||||||
| Change in cash, cash equivalents, and restricted cash classified as Assets held for sale (1) | — | 470 | (470) | ||||||||||||||
| Net change in cash, cash equivalents, and restricted cash | $ | (2,696) | $ | (1,157) | $ | (1,539) | |||||||||||
(1)The fiscal 2023 change reflects a reversal of cash, cash equivalents, and restricted cash previously classified as assets held for sale at March 31, 2022 as part of the U.K. disposal group and is offset by cash outflows primarily related to the settlement of liabilities which is reflected in operating activities.
Operating Activities
Operating activities provided cash of $167 million and $1.8 billion during the nine months ended December 31, 2023 and 2022, respectively. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers, inventory receipts, and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements, and vendor payment terms.
Operating activities for the nine months ended December 31, 2023 were affected by net income of $2.3 billion, adjusted for non-cash items, including a provision for bad debts of $725 million related to the bankruptcy of Rite Aid in October 2023, as well as increases in receivables of $4.3 billion, accounts payable of $4.2 billion, and inventories of $2.4 billion, all primarily driven by higher revenues and timing. Our litigation liabilities also decreased by $529 million due to payments made during the first nine months of fiscal 2024 associated with various settlement agreements for opioid-related claims of states, subdivisions, and Native American tribes, as discussed in more detail in Financial Note 10, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Operating activities for the nine months ended December 31, 2022 were affected by net income of $2.9 billion, adjusted for non-cash items and changes in receivables, drafts and accounts payables, and inventories classified as held for sale, as well as increases in drafts and accounts payable of $3.5 billion, receivables of $2.2 billion, and inventories of $2.2 billion, all primarily driven by higher revenues and timing. Our litigation liabilities also decreased by $1.0 billion due to payments made during the nine months of fiscal 2023 associated with various settlement agreements for opioid-related claims of states, subdivisions, and Native American tribes, as discussed in more detail in Financial Note 10, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
Investing Activities
Investing activities used cash of $495 million and $298 million during the nine months ended December 31, 2023 and 2022, respectively. Investing activities for the nine months ended December 31, 2023 and 2022 includes $418 million and $376 million, respectively, in capital expenditures for property, plant, and equipment and capitalized software.
Investing activities for the nine months ended December 31, 2022 include $856 million of net cash payments for acquisitions, including $600 million for our acquisition of RxSS and $173 million for our contribution for the formation of SCRI Oncology. Investing activities for the nine months ended December 31, 2022 reflects proceeds from sales of businesses and investments of $1.1 billion, including cash proceeds, net of cash divested, of $573 million from the completed divestiture of our E.U. disposal group, $202 million of net cash proceeds from the completed divestiture of our U.K. disposal group in April 2022, and $179 million of cash proceeds from the exit of one of our investments in equity securities in July 2022.
Financing Activities
Financing activities used cash of $2.4 billion and $3.2 billion during the nine months ended December 31, 2023 and 2022, respectively. On June 15, 2023, we completed a public offering of 4.90% Notes due July 15, 2028 in a principal amount of $400 million and 5.10% Notes due July 15, 2033 in a principal amount of $600 million, for proceeds received, net of discounts and offering expenses, of $397 million and $592 million, respectively. A portion of the net proceeds from these notes was utilized to fund the repurchase of our 2024 Notes discussed below, while the remaining net proceeds was available for general corporate purposes.
On June 16, 2023, we completed a cash tender offer for any and all of our 2024 Notes with a principal amount of $918 million, which was made concurrently with the June 15, 2023 notes offering described above. Using a portion of the proceeds from the June 15, 2023 notes offering described above, we paid an aggregate consideration of $268 million to repurchase $271 million principal amount of the 2024 Notes. Following the consummation of this tender offer, on June 16, 2023, we irrevocably deposited U.S. government obligations with the trustee under the indenture governing the 2024 Notes sufficient to fund the payment of accrued and unpaid interest of the remaining $647 million principal amount of the 2024 Notes as it becomes due, and of the principal amount of those 2024 Notes on their March 15, 2024 maturity date.
In November 2022, we entered into a term loan credit facility which provided an unsecured term loan facility up to $500 million. We drew $500 million of cash on the loan in December 2022 which was used for general corporate purposes. Also in December 2022, we retired our $400 million outstanding principal amount of 2.70% notes upon maturity using cash on hand.
Financing activities for the nine months ended December 31, 2023 and 2022 includes $2.3 billion and $3.5 billion of cash paid for share repurchases, as well as $232 million and $216 million of cash paid for dividends, respectively. Financing activities also includes cash receipts of $4.8 billion and $1.1 billion, and repayments of $4.6 billion and $483 million for the nine months ended December 31, 2023 and 2022, respectively, for short-term borrowings, primarily commercial paper.
Cash used for other financing activities generally includes the cash value of shares surrendered for tax withholding and payments to noncontrolling interests.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Share Repurchase Plans
The Board has authorized the repurchase of common stock. We may affect stock repurchases from time-to-time through open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or by combinations of such methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934 (“Exchange Act”). The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, tax implications, restrictions under our debt obligations, other uses for capital, impacts on the value of remaining shares, and market and economic conditions. The ASR programs discussed below were designed to comply with Rule 10b5-1(c).
Effective January 1, 2023, our repurchase of common stock, adjusted for allowable items, are subject to a 1% excise tax as a result of the IRA. Excise taxes incurred on share repurchases of an entity’s own common stock are direct and incremental costs to purchase treasury stock, and accordingly are included in the total cost basis of the common stock acquired and reflected as a reduction of stockholders’ equity within “Treasury shares” in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders’ Deficit. Excise taxes do not reduce the Company’s remaining authorization for the repurchase of common stock.
During the three months ended December 31, 2023, we repurchased 1.9 million shares of common stock for $868 million through open market transactions at an average price per share of $457.16, of which $41 million was accrued within “Other accrued liabilities” in our Condensed Consolidated Balance Sheet for share repurchases that were executed in late December 2023 and settled in early January 2024. During the three months ended September 30, 2023, we repurchased 2.0 million shares of common stock for $840 million through open market transactions at an average price per share of $422.39. During the three months ended June 30, 2023, we repurchased 1.8 million shares of common stock for $673 million through open market transactions at an average price per share of $379.14. Excise taxes of $8 million and $20 million were incurred for the three and nine months ended December 31, 2023, respectively, and $20 million was accrued within “Other accrued liabilities” in our Condensed Consolidated Balance Sheet for shares repurchased during the first nine months of fiscal 2024. As of March 31, 2023, we had $27 million accrued within “Other accrued liabilities” for share repurchases that were executed in late March 2023, which settled in early April 2023.
During the three months ended December 31, 2022, we repurchased 2.7 million shares of common stock for $1.0 billion through open market transactions at an average price per share of $370.13. During the three months ended September 30, 2022, we repurchased 1.5 million shares of common stock for $524 million through open market transactions at an average price per share of $355.75. There were no open market share repurchases during the three months ended June 30, 2022.
In December 2022, we entered into an ASR program with a third-party financial institution to repurchase $972 million shares of common stock. The total number of shares repurchased under this ASR program was 2.6 million shares at an average price per share of $369.20. We received 2.2 million shares as the initial share settlement, and in February 2023, we received an additional 0.4 million shares upon the completion of this ASR program.
In May 2022, we entered into an ASR program with a third-party financial institution to repurchase $1.0 billion shares of common stock. The total number of shares repurchased under this ASR program was 3.1 million shares at an average price per share of $321.05. We received 2.6 million shares as the initial share settlement, and in August 2022, we received an additional 0.5 million shares upon the completion of this ASR program.
In February 2022, we entered into an ASR program with a third-party financial institution to repurchase $1.5 billion shares of common stock. The total number of shares repurchased under this ASR program was 5.1 million shares at an average price per share of $295.16. We received 4.8 million shares as the initial share settlement in the fourth quarter of fiscal 2022, and in May 2022, we received an additional 0.3 million shares upon the completion of this ASR program.
In July 2023, the Board approved an increase of $6.0 billion in the authorization for the repurchase of common stock. The total remaining authorization outstanding for repurchases of common stock at December 31, 2023 was $7.3 billion.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Selected Measures of Liquidity and Capital Resources
| (Dollars in millions) | December 31, 2023 | March 31, 2023 | ||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 1,983 | $ | 4,679 | ||||||||||
| Working capital | (4,021) | (3,665) | ||||||||||||
| Debt to capital ratio (1) | 126.7 | % | 120.5 | % |
(1)This ratio describes the relationship and changes within our capital resources, and is computed as the sum of short-term borrowings and total debt divided by the sum of short-term borrowings, total debt, and McKesson stockholders’ deficit, which excludes noncontrolling interests and accumulated other comprehensive loss.
Cash equivalents, which are readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA-rated U.S. government money market funds, short-term deposits with financial institutions, and short-term commercial papers issued by non-financial institutions. Deposits with financial institutions are primarily denominated in U.S. dollars and the functional currencies of our foreign subsidiaries, including Canadian dollars, Euro, and British pounds sterling. Deposits could exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.
Our cash and cash equivalents balance as of December 31, 2023 and March 31, 2023 included approximately $790 million and $1.3 billion, respectively, of cash held by our subsidiaries outside of the U.S. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the majority of cash held outside the U.S. is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. We may remit foreign earnings to the U.S. to the extent it is tax efficient to do so. We do not anticipate the tax impact from remitting these earnings to be material. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes.
Working capital primarily includes cash and cash equivalents, receivables, inventories, and prepaid expenses, net of drafts and accounts payable, short-term borrowings, current portion of long-term debt, current portion of operating lease liabilities, and other accrued liabilities. Our businesses require substantial investments in working capital that are susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.
Consolidated working capital decreased at December 31, 2023 compared to March 31, 2023 primarily due to an increase in drafts and accounts payable from increased purchasing driven by increased sales and timing, a decrease in cash and cash equivalents, and an increase in short-term borrowings outstanding at December 31, 2023. These were partially offset by an increase in receivables, net and inventories, driven by higher revenues and timing, and a decrease in the current portion of long-term debt largely funded by an issuance of long-term debt in the first quarter of fiscal 2024.
Our debt to capital ratio increased for the nine months ended December 31, 2023 due to share repurchases and dividend payments as well as repayments of long-term debt, partially offset by net income attributable to McKesson for the year, issuance of new long-term debt, and net issuance of commercial paper notes during fiscal 2024.
In July 2023, we raised our quarterly dividend from $0.54 to $0.62 per share of common stock for dividends declared on or after such date by the Board. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon our future earnings, financial condition, capital requirements, legal requirements, and other factors.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONCLUDED)
(UNAUDITED)
Capital Resources
We fund our working capital requirements primarily with cash and cash equivalents, proceeds from short-term borrowings from our commercial paper issuances, and longer-term credit agreements and debt offerings. Funds necessary for future debt maturities and our other cash requirements, including any future payments that may be made related to our total estimated litigation liability of $6.6 billion as of December 31, 2023 payable under the terms of various settlement agreements for opioid-related claims, are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and future borrowings. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, are open and accessible to us should we decide to access those markets. Detailed information regarding our debt and financing activities is included in Financial Note 7, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
We believe that our future operating cash flow, financial assets, and access to capital and credit markets, including our credit facilities, give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that an increase in volatility or disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements may be identified by their use of terminology such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “projects,” “plans,” “estimates,” “targets,” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans, assumptions, expectations, or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they include, but are not limited to, the factors discussed in the “Risk Factors” section in Item 1A of Part I of the 2023 Annual Report and in our publicly available SEC filings and press releases. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to any forward-looking statements to reflect events or circumstances after the date the statements are made, or to reflect the occurrence of unanticipated events.
AVAILABLE INFORMATION
We routinely post on our company website, and via our social media channels, information that may be material to investors, including details and updates to information disclosed elsewhere, which may include business developments, earnings and financial performance, sustainability matters, and materials for presentations to investors and financial analysts. Investors are encouraged to monitor our website www.mckesson.com. Interested parties can sign up on our website, including our Investor Relations site, to receive automated e-mail alerts, such as via RSS newsfeed, when we post certain information. Interested parties can also follow our social media feed @McKesson on X, formerly known as Twitter. The content on any website or social media channel is not incorporated by reference into this report, unless expressly noted otherwise.
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