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, 2024 previously filed with the Securities and Exchange Commission (the “SEC”) on May 8, 2024 (“2024 Annual Report”).
Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year means 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 and operations. 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 ecosystem 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, and dispensing support services, as well as 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, 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 Norway, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. Our Canadian operations deliver medicines, supplies, and information technology solutions throughout Canada and include Rexall Health retail pharmacies. Our Norwegian operations provide distribution and services to wholesale and retail customers in Norway where we own, partner, or franchise with retail pharmacies. In the second quarter of fiscal 2025, we entered into an agreement to sell our Rexall and Well.ca businesses in Canada (“Canadian retail disposal group”). These divestitures are further described in the “Canadian Divestiture Activities” section below.
Canadian Divestiture Activities
On September 5, 2024, we announced an agreement to sell our Canadian retail disposal group. The adjusted purchase price is approximately $148 million. We recorded a charge of $643 million for the three and six months ended September 30, 2024 in total operating expenses to remeasure the Canadian retail disposal group to fair value less costs to sell. The remeasurement adjustment includes a $15 million loss related to the accumulated other comprehensive loss balances associated with the disposal group. The transaction is anticipated to close in the second half of fiscal 2025, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals, as applicable.
As of September 30, 2024, we had $631 million of assets and $371 million of liabilities classified as “Assets held for sale” and “Liabilities held for sale,” respectively, in the Condensed Consolidated Balance Sheet related to the Canadian retail disposal group. Refer to Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.
Executive Summary:
The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the three and six months ended September 30, 2024:
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For the three months ended September 30, 2024 compared to the prior year period, revenues increased by 21%, gross profit increased by 6%, total operating expenses increased by 26%, and other income, net increased by $8 million;
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For the six months ended September 30, 2024 compared to the prior year period, revenues increased by 14%, gross profit increased by 5%, total operating expenses increased by 19%, and other income, net increased by $100 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 attributable to McKesson Corporation decreased to $1.87 from $4.92 for the three months ended September 30, 2024 and decreased to $8.89 from $11.95 for the six months ended September 30, 2024 compared to the respective prior year periods;
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
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In the second quarter of fiscal 2025, we onboarded a new strategic partner within our U.S. Pharmaceutical segment;
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Total operating expenses for the three and six months ended September 30, 2024 includes fair value remeasurement charges of $643 million related to our Canadian retail disposal group;
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For the three and six months ended September 30, 2024, we recorded a restructuring charge of $227 million related to an enterprise-wide initiative to drive operational efficiencies as further described in the “Restructuring Initiatives” section of “Overview of Consolidated Results” below;
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For the six months ended September 30, 2024, we recognized a net discrete tax benefit of $150 million, including $58 million related to an election to change the tax status of a foreign affiliate;
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For the six months ended September 30, 2024, we recorded a net charge of $108 million related to our estimated liability for opioid-related claims, as further described in the Opioid-Related Litigation and Claims section of “Trends and Uncertainties” below;
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For the six months ended September 30, 2024, we recognized a net gain of $100 million related to a recapitalization event of one of our investments in equity securities which resulted in an increase to the carrying value of this investment;
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For the three and six months ended September 30, 2024, we received $63 million and $153 million, 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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On September 10, 2024, we completed a public offering of 4.25% Notes due September 15, 2029 (the “2029 Notes”) in a principal amount of $500 million. Proceeds received from this note issuance, net of discounts and offering expenses were approximately $496 million;
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During the three months ended September 30, 2024, we utilized the net proceeds from the issuance of the 2029 Notes, along with cash on hand, to redeem our $500 million outstanding principal amount of 5.25% Notes due February 15, 2026 (the “2026 Notes”) prior to maturity;
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During the six months ended September 30, 2024, we returned $2.2 billion of cash to shareholders through $2.0 billion of common stock repurchases in open market transactions and $162 million of dividend payments. In July 2024, our Board of Directors (the “Board”) approved an increase of $4.0 billion in the authorization for repurchase of the Company’s common stock and raised our quarterly dividend to $0.71 from $0.62 per share of common stock. The total remaining authorization outstanding for repurchases of the Company’s common stock at September 30, 2024 was $8.6 billion; and
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On August 26, 2024, we announced a definitive agreement to acquire a 70% controlling interest in Community Oncology Revitalization Enterprise Ventures, LLC (“Core Ventures”), an internal business and administrative services organization established by Florida Cancer Specialists & Research Institute, LLC, for approximately $2.49 billion cash, subject to certain customary adjustments. Following the completion of the transaction, Core Ventures will be part of the Oncology platform, and financial results will be reported within our U.S. Pharmaceutical segment. The transaction is subject to customary closing conditions, including required regulatory clearance. On November 6, 2024, we received a request for additional information and documentary materials from the Federal Trade Commission (the “FTC”) in connection with the FTC’s review of our proposed acquisition of Core Ventures. We will respond promptly and continue to work cooperatively with the FTC staff in connection with its review of the transaction.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Trends and Uncertainties:
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. We believe we have valid legal defenses in all opioid-related matters, including claims not covered by settlement agreements, and we intend to mount a vigorous defense. Other than as to the settlements described in Financial Note 10, we have 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 our financial position, cash flows or liquidity, or results of operations.
The Company and two other national distributors have reached proposed settlements with representatives of nationwide groups of acute care hospitals and certain third-party payors.
During the three months ended September 30, 2024, we made payments totaling $500 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 $6.4 billion as of September 30, 2024, of which $775 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 Corporation (including certain of its subsidiaries, “Rite Aid”) filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. Consequently, we recorded a provision for bad debts totaling $725 million during the year ended March 31, 2024, of which $210 million was recorded in the second quarter of fiscal 2024 representing the uncollected trade accounts receivable balance from Rite Aid as of September 30, 2023.
Rite Aid's restructuring plan was approved by the court and the company successfully emerged from bankruptcy in August 2024. During the three and six months ended September 30, 2024, we reassessed our initial estimates made in conjunction with the previously reserved prepetition balances, including cash received during the period, resulting in a reversal of $203 million recorded within “Selling, distribution, general, and administrative expenses” in our Condensed Consolidated Statements of Operations and included in our U.S. Pharmaceutical segment. During the three and six months ended September 30, 2024, we released $237 million of allowance for doubtful accounts against trade accounts receivables, representing the write-off of uncollectible receivables related to the Rite Aid provision in the Condensed Consolidated Balance Sheet.
We believe the reserves maintained and expenses and credits recorded in fiscal 2025 and 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 2024 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 September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 93,651 | $ | 77,215 | 21 | % | $ | 172,934 | $ | 151,698 | 14 | % | |||||||||||||||||||||||||||||
| Gross profit | 3,248 | 3,069 | 6 | 6,400 | 6,091 | 5 | |||||||||||||||||||||||||||||||||||
| Gross profit margin | 3.47 | % | 3.97 | % | (50) | bp | 3.70 | % | 4.02 | % | (32) | bp | |||||||||||||||||||||||||||||
| Total operating expenses | $ | (2,670) | $ | (2,118) | 26 | % | $ | (4,793) | $ | (4,040) | 19 | % | |||||||||||||||||||||||||||||
| Total operating expenses as a percentage of revenues | 2.85 | % | 2.74 | % | 11 | bp | 2.77 | % | 2.66 | % | 11 | bp | |||||||||||||||||||||||||||||
| Other income, net | $ | 34 | $ | 26 | 31 | % | $ | 164 | $ | 64 | 156 | % | |||||||||||||||||||||||||||||
| Interest expense | (78) | (61) | 28 | (153) | (108) | 42 | |||||||||||||||||||||||||||||||||||
| Income before income taxes | 534 | 916 | (42) | 1,618 | 2,007 | (19) | |||||||||||||||||||||||||||||||||||
| Income tax expense | (247) | (213) | 16 | (371) | (307) | 21 | |||||||||||||||||||||||||||||||||||
| Reported income tax rate | 46.3 | % | 23.3 | % | 2,300 | bp | 22.9 | % | 15.3 | % | 760 | bp | |||||||||||||||||||||||||||||
| Net income | 287 | 703 | (59) | 1,247 | 1,700 | (27) | |||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (46) | (39) | 18 | (91) | (78) | 17 | |||||||||||||||||||||||||||||||||||
| Net income attributable to McKesson Corporation | $ | 241 | $ | 664 | (64) | % | $ | 1,156 | $ | 1,622 | (29) | % | |||||||||||||||||||||||||||||
| Diluted earnings per common share attributable to McKesson Corporation | $ | 1.87 | $ | 4.92 | (62) | % | $ | 8.89 | $ | 11.95 | (26) | % | |||||||||||||||||||||||||||||
| Weighted-average diluted common shares outstanding | 129.3 | 134.8 | (4) | % | 130.0 | 135.7 | (4) | % |
Any percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
Revenues
Revenues increased for the three and six months ended September 30, 2024 compared to the same prior year periods, primarily due to market growth in our U.S. Pharmaceutical segment, including higher volumes largely from retail national account customers and growth in specialty pharmaceuticals. Market growth includes growing drug utilization and newly launched products, partially offset by price deflation associated with branded to generic drug conversion. This revenue growth was also favorably impacted by higher pharmaceutical distribution volumes in our International segment.
Gross Profit
Gross profit increased for the three and six months ended September 30, 2024 compared to the same prior year periods primarily in our U.S. Pharmaceutical segment driven by growth of specialty pharmaceuticals and in our International segment driven by higher volumes.
We recognized gains of $63 million and $79 million for the three months ended September 30, 2024 and 2023, respectively, and $153 million and $197 million for the six months ended September 30, 2024 and 2023, 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.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Gross profit for the three and six months ended September 30, 2024 was impacted by restructuring charges of $63 million related to a broad set of initiatives to drive operational efficiencies and increase cost optimization efforts as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report. We recorded this amount related to impairment of inventories within "Cost of sales" in the Condensed Consolidated Statements of Operations within our U.S. Pharmaceutical segment.
A last-in, first out (“LIFO”) credit of $2 million and a charge of $55 million were recognized during the three months ended September 30, 2024 and 2023, respectively, and a credit of $4 million and a charge of $87 million were recognized during the six months ended September 30, 2024 and 2023, respectively, primarily due to lower expected brand inflation in the current fiscal year.
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 six months ended September 30, 2024 and 2023 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, provision for bad debts and related recoveries, remeasurement charges to fair value less costs to sell, 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.
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||||
| Selling, distribution, general, and administrative expenses | $ | 2,503 | $ | 2,092 | 20 | % | $ | 4,504 | $ | 3,962 | 14 | % | |||||||||||||||||||||||||||||
| Claims and litigation charges, net | (4) | (2) | 100 | 108 | (2) | — | |||||||||||||||||||||||||||||||||||
| Restructuring, impairment, and related charges, net | 171 | 28 | 511 | 181 | 80 | 126 | |||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 2,670 | $ | 2,118 | 26 | % | $ | 4,793 | $ | 4,040 | 19 | % | |||||||||||||||||||||||||||||
| Percent of revenues | 2.85 | % | 2.74 | % | 11 | bp | 2.77 | % | 2.66 | % | 11 | bp |
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)
For the three and six months ended September 30, 2024, total operating expenses and total operating expenses as a percentage of revenues increased 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 six months ended September 30, 2024 includes charges of $643 million to remeasure our Canadian retail disposal group to fair value less costs to sell. The remeasurement adjustment includes a $15 million loss related to the accumulated other comprehensive loss balances associated with this disposal. Of the total charges recorded during the period, $593 million are included within our International segment and $50 million are included within Corporate expenses, net;
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SDG&A for the three and six months ended September 30, 2024 includes a credit of $203 million, and for the three and six months ended September 30, 2023 includes a provision for bad debts of $210 million, related to the bankruptcy of Rite Aid in October 2023. Refer to the Rite Aid Bankruptcy Proceedings section of “Trends and Uncertainties for additional information;”
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SDG&A increased compared to the same prior year periods due to increased operating expenses to support higher volumes and gains of $48 million and $76 million recognized in the three and six months ended September 30, 2023, respectively, resulting from a fair value adjustment of our contingent consideration liability related to the Rx Savings Solutions, LLC acquisition;
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Claims and litigation charges, net primarily consists of a charge of $108 million related to our estimated liability for opioid-related claims as previously discussed in the Opioid-Related Litigation and Claims section of “Trends and Uncertainties;” and
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Restructuring, impairment, and related charges, net were $171 million and $28 million for the three months ended September 30, 2024 and 2023, respectively, and $181 million and $80 million for the six months ended September 30, 2024 and 2023, respectively, as discussed 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 2025 and fiscal 2024 did not indicate any impairment of goodwill, and no goodwill impairment charges were recorded during the three and six months ended September 30, 2024 and 2023. However, other risks, expenses, and future developments, such as 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.
Restructuring Initiatives
We recorded restructuring, impairment, and related charges of $171 million and $28 million for the three months ended September 30, 2024 and 2023, respectively, and $181 million and $80 million for the six months ended September 30, 2024 and 2023, respectively. These charges were included in “Restructuring, impairment, and related charges, net” in the Condensed Consolidated Statements of Operations.
During the second quarter of fiscal 2025, we approved enterprise-wide initiatives to modernize and accelerate our technology service operating model, which are intended to improve business continuity, compliance, operating efficiency and advance investments to streamline the organization. These initiatives will also include cost reduction efforts and support other rationalization efforts within Corporate, and the Medical-Surgical Solutions, and U.S. Pharmaceutical segments to help realize long-term sustainable growth. We anticipate total charges related to these initiatives of $650 million to $700 million, consisting primarily of employee severance and other employee-related costs as well as facility, exit and other related costs, including long-lived asset impairments. These programs are anticipated to be substantially complete in fiscal 2028. For the three and six months ended September 30, 2024, we recorded charges of $227 million related to the initiatives, which primarily includes severance and other employee-related costs as well as facility exit and other related costs, including long-lived asset impairments and a $63 million related to inventory impairments recorded within “Cost of sales” 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 included headcount reductions, primarily consisting of employee severance and other employee-related costs within our RxTS segment, and the exit or downsizing of certain facilities. For the three and six months ended September 30, 2023, we recorded charges of $3 million and $39 million related to this program, respectively, which primarily included real estate and other related asset impairments and facility costs within Corporate. This restructuring program was substantially complete in 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 increased for the three and six months ended September 30, 2024 compared to the same prior year periods primarily due to a favorable impact from interest income. Other income, net for the six months ended September 30, 2024 includes a net gain of $95 million related to our investments in equity securities of certain U.S. growth stage companies in the healthcare industry, partially offset by a loss of $43 million related to one of our equity method investments.
Interest Expense
Interest expense increased for the three and six months ended September 30, 2024 compared to the same prior year periods primarily due to increased average balances of the Company’s loan portfolio throughout the first half of the year. Interest expense for the six months ended September 30, 2024 was unfavorably impacted by a prior year gain on debt extinguishment of $9 million. 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. Refer to Financial Note 7, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Income Tax Expense
For the three months ended September 30, 2024 and 2023, we recorded income tax expense of $247 million and $213 million, respectively. For the six months ended September 30, 2024 and 2023, we recorded income tax expense of $371 million and $307 million, respectively. Our reported income tax rates were 46.3% and 23.3% for the three months ended September 30, 2024 and 2023, respectively, and 22.9% and 15.3% for the six months ended September 30, 2024 and 2023, respectively.
Fluctuations in our reported income tax rates are primarily due to non-cash charges related to the remeasurement of our Canadian retail disposal group held for sale to fair value less costs to sell, changes in our business mix of earnings between various taxing jurisdictions and discrete tax items recognized in the quarters.
During the three months ended September 30, 2024, we sold certain intellectual property between McKesson wholly-owned legal entities based in foreign tax jurisdictions. The transferor entity of the intellectual property was not subject to income tax on this transaction whereas the recipient entity of the intellectual property is entitled to amortize the fair value of the assets for tax purposes. As a result, a discrete tax benefit of $44 million was recognized in the second quarter of fiscal 2025. During the three and six months ended September 30, 2024, we recorded non-cash pre-tax charges of $643 million primarily to remeasure our Canadian retail disposal group to fair value less costs to sell, as described in Financial Note 2, “Held for Sale.” Our reported income tax rates for the three and six months ended September 30, 2024 were unfavorably impacted by these charges as no net tax benefit was recognized for these charges.
For the six months ended September 30, 2024, we recognized discrete tax benefits of $58 million related to an election to change the tax status of a foreign affiliate, $38 million related to the tax impact of share-based compensation, and $47 million related to the reduction in unrecognized tax benefits due to a change in case law, partially offset by a discrete tax expense of $37 million related to interest expense accrued on unrecognized tax benefits.
We recognized a net discrete tax benefit of $147 million in the six months ended September 30, 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.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three and six months ended September 30, 2024 and 2023 primarily represents the proportionate results of third-party equity interests in ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC, and SCRI Oncology, LLC. The increase in net income attributable to noncontrolling interests was primarily driven by higher volumes in our ClarusONE joint venture.
Net Income Attributable to McKesson Corporation
Net income attributable to McKesson Corporation was $241 million and $664 million for the three months ended September 30, 2024 and 2023, respectively, and $1.2 billion and $1.6 billion for the six months ended September 30, 2024 and 2023, respectively. Diluted earnings per common share attributable to McKesson Corporation was $1.87 and $4.92 for the three months ended September 30, 2024 and 2023, respectively, and $8.89 and $11.95 for the six months ended September 30, 2024 and 2023, respectively. Our diluted earnings per share includes 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 129.3 million and 134.8 million for the three months ended September 30, 2024 and 2023, respectively, and 130.0 million and 135.7 million for the six months ended September 30, 2024 and 2023, respectively. Weighted-average diluted shares outstanding for the three and six months ended September 30, 2024 decreased from the same prior year periods primarily due to the cumulative effect of share repurchases, as discussed in the “Share Repurchases Plans” section of this Financial Review.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Overview of Segment Results:
Segment Revenues:
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||||
| Segment revenues | |||||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical | $ | 85,726 | $ | 69,766 | 23 | % | $ | 157,441 | $ | 136,926 | 15 | % | |||||||||||||||||||||||||||||
| Prescription Technology Solutions | 1,265 | 1,140 | 11 | 2,506 | 2,384 | 5 | |||||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 2,948 | 2,834 | 4 | 5,584 | 5,445 | 3 | |||||||||||||||||||||||||||||||||||
| International | 3,709 | 3,475 | 7 | 7,400 | 6,943 | 7 | |||||||||||||||||||||||||||||||||||
| Corporate | 3 | — | — | 3 | — | — | |||||||||||||||||||||||||||||||||||
| Total revenues | $ | 93,651 | $ | 77,215 | 21 | % | $ | 172,934 | $ | 151,698 | 14 | % |
Any percentage changes displayed above which are not meaningful are displayed as zero percent.
U.S. Pharmaceutical
Three Months Ended September 30, 2024 vs. 2023
U.S. Pharmaceutical revenues for the three months ended September 30, 2024 increased $16 billion or 23% compared to the same prior year period. Within the segment, sales to pharmacies and healthcare providers increased $14.2 billion and sales to specialty practices and other increased $1.8 billion. Overall, these increases were primarily due to higher volumes from retail national account customers and growth in specialty pharmaceuticals, partially offset by branded to generic drug conversions.
Six Months Ended September 30, 2024 vs. 2023
U.S. Pharmaceutical revenues for the six months ended September 30, 2024 increased $20.5 billion or 15% compared to the same prior year period. Within the segment, sales to pharmacies and healthcare providers increased $17.1 billion and sales to specialty practices and other increased $3.4 billion. Overall, these increases were primarily due to higher volumes from retail national account customers and growth in specialty pharmaceuticals, partially offset by branded to generic drug conversions.
Prescription Technology Solutions
Three Months Ended September 30, 2024 vs. 2023
RxTS revenues for the three months ended September 30, 2024 increased $125 million or 11% compared to the same prior year period due to increased volumes from our third-party logistics and higher technology service revenues.
Six Months Ended September 30, 2024 vs. 2023
RxTS revenues for the six months ended September 30, 2024 increased $122 million or 5% compared to the same prior year period due to increased volumes from our third-party logistics and higher technology service revenues.
Medical-Surgical Solutions
Three Months Ended September 30, 2024 vs. 2023
Medical-Surgical Solutions revenues for the three months ended September 30, 2024 increased $114 million or 4% compared to the same prior year period. Within the segment, sales to primary care customers increased $106 million and sales to extended care customers increased $17 million, driven by underlying business growth. These increases were partially offset by Other sales which declined $9 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)
Six Months Ended September 30, 2024 vs. 2023
Medical-Surgical Solutions revenues for the six months ended September 30, 2024 increased $139 million or 3% compared to the same prior year period. Within the segment, sales to primary care customers increased $159 million and sales to our extended care customers increased $2 million, driven by underlying business growth. These increases were partially offset by Other sales which declined $22 million driven by lower contribution from the kitting and distribution of ancillary supplies used to administer COVID-19 vaccines.
International
Three Months Ended September 30, 2024 vs. 2023
International revenues for the three months ended September 30, 2024 increased $234 million or 7% compared to the same prior year period. Within the segment, sales in Canada increased by $272 million primarily driven by higher pharmaceutical distribution volumes and sales in Norway increased by $26 million primarily driven by growth in retail pharmacy. These increases were partially offset by unfavorable effects of foreign currency exchange fluctuations of $64 million.
Six Months Ended September 30, 2024 vs. 2023
International revenues for the six months ended September 30, 2024 increased $457 million or 7% compared to the same prior year period. Within the segment, sales in Canada increased by $520 million primarily driven by higher pharmaceutical distribution volumes and sales in Norway increased by $66 million primarily driven by growth in retail pharmacy. These increases were partially offset by unfavorable effects of foreign currency exchange fluctuations of $129 million.
Corporate
Three Months Ended September 30, 2024 vs. 2023
Corporate reflects revenues from services derived in the U.S. related to certain technology operations. The increase compared to the prior year was immaterial.
Six Months Ended September 30, 2024 vs. 2023
Corporate reflects revenues from services derived in the U.S. related to certain technology operations. The increase compared to the prior year was immaterial.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Segment Operating Profit and Corporate Expenses, Net:
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||||
| Segment operating profit (loss) (1) | |||||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical (2) | $ | 1,075 | $ | 593 | 81 | % | $ | 1,856 | $ | 1,420 | 31 | % | |||||||||||||||||||||||||||||
| Prescription Technology Solutions (3) | 205 | 238 | (14) | 408 | 469 | (13) | |||||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions(4) | 89 | 244 | (64) | 277 | 471 | (41) | |||||||||||||||||||||||||||||||||||
| International (5) | (508) | 66 | (870) | (418) | 123 | (440) | |||||||||||||||||||||||||||||||||||
| Subtotal | 861 | 1,141 | (25) | 2,123 | 2,483 | (14) | |||||||||||||||||||||||||||||||||||
| Corporate expenses, net (6) | (249) | (164) | 52 | (352) | (368) | (4) | |||||||||||||||||||||||||||||||||||
| Interest expense | (78) | (61) | 28 | (153) | (108) | 42 | |||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 534 | $ | 916 | (42) | % | $ | 1,618 | $ | 2,007 | (19) | % | |||||||||||||||||||||||||||||
| Segment operating profit margin | |||||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical | 1.25 | % | 0.85 | % | 40 | bp | 1.18 | % | 1.04 | % | 14 | bp | |||||||||||||||||||||||||||||
| Prescription Technology Solutions | 16.21 | 20.88 | (467) | 16.28 | 19.67 | (339) | |||||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 3.02 | 8.61 | (559) | 4.96 | 8.65 | (369) | |||||||||||||||||||||||||||||||||||
| International | (13.70) | 1.90 | (1,560) | (5.65) | 1.77 | (742) |
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 credit of $203 million for the three and six months ended September 30, 2024 due to the reassessment of our initial estimates made in conjunction with the previously reserved prepetition balances owed by Rite Aid. We recognized a provision for bad debts of $210 million for the three and six months ended September 30, 2023, which represented the uncollected trade accounts receivable balance as of September 30, 2023 due from Rite Aid as discussed in the “Trends and Uncertainties” section;
-
cash receipts for our share of antitrust legal settlements of $63 million and $79 million for the three months ended September 30, 2024 and 2023, respectively, and $153 million and $197 million for the six months ended September 30, 2024 and 2023, respectively;
-
a credit of $2 million and a charge of $55 million related to the LIFO method of accounting for inventories for the three months ended September 30, 2024 and 2023, respectively and a credit of $4 million and a charge of $87 million for the six months ended September 30, 2024 and 2023, respectively;
-
restructuring charges of $64 million for the three and six months ended September 30, 2024 for restructuring initiatives as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net;”
-
a charge of $57 million for the six months ended September 30, 2024 related to our estimated liability for opioid-related claims as discussed previously in the “Trends and Uncertainties” section; and
-
a loss of $43 million for the six months ended September 30, 2024 related to one of the Company’s equity method investments.
(3)Operating profit for our RxTS segment for the three and six months ended September 30, 2023 includes gains of $48 million and $76 million, respectively, resulting from fair value adjustments of our contingent consideration liability related to the Rx Savings Solutions, LLC acquisition completed in November 2022.
(4)Operating profit for our Medical-Surgical Solutions segment for the three and six months ended September 30, 2024 includes restructuring charges of $144 million related to a broad set of initiatives to drive operational efficiencies and increase cost optimization efforts as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
(5)Operating profit (loss) for our International segment includes a charge of $593 million for the three and six months ended September 30, 2024 to remeasure the assets and liabilities of the Canadian retail disposal group to fair value less costs to sell, as discussed in Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
(6)Corporate expenses, net includes the following:
-
a charge of $50 million for the three and six months ended September 30, 2024 related to the effect of accumulated other comprehensive loss components from our Canadian retail disposal group, as discussed in Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;
-
a net gain of $95 million for the six months ended September 30, 2024 related to our investments in equity securities of certain U.S. growth stage companies in the healthcare industry, as discussed in Financial Note 9, “Fair Value Measurements,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;
-
a net charge of $51 million for the six months ended September 30, 2024 related to our estimated liability for opioid-related claims as discussed previously in the “Trends and Uncertainties” section; and
-
a restructuring charge of $46 million for the six months ended September 30, 2023 for restructuring initiatives as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
U.S. Pharmaceutical
Three Months Ended September 30, 2024 vs. 2023
Operating profit for this segment increased for the three months ended September 30, 2024 compared to the same prior year period primarily due to a prior year provision for bad debts of $210 million and a fiscal 2025 credit of $203 million related to the reassessment of our initial estimates made in conjunction with the previously reserved prepetition balances owed by Rite Aid, and growth in specialty pharmaceuticals, partially offset by an increase in operating expenses to support higher volumes, and a decrease from net cash proceeds received representing our share of antitrust legal settlements.
Six Months Ended September 30, 2024 vs. 2023
Operating profit for this segment increased for the six months ended September 30, 2024 compared to the same prior year period primarily due to a prior year provision for bad debts of $210 million and a fiscal 2025 credit of $203 million related to the reassessment of our initial estimates made in conjunction with the previously reserved prepetition balances owed by Rite Aid, and growth in specialty pharmaceuticals, offset by an increase in operating expenses to support higher volumes, a charge of $57 million related to our estimated liability for opioid-related claims, a loss related to one of our equity method investments, and a decrease from net cash proceeds received representing our share of antitrust legal settlements.
Prescription Technology Solutions
Three Months Ended September 30, 2024 vs. 2023
Operating profit for this segment decreased for the three months ended September 30, 2024 compared to the same prior year period driven by the gain of $48 million recognized in the prior year resulting from a fair value adjustment of our contingent consideration liability related to the Rx Savings Solutions, LLC acquisition, and higher operating expenses, partially offset by contributions from technology services.
Six Months Ended September 30, 2024 vs. 2023
Operating profit for this segment decreased for the six months ended September 30, 2024 compared to the same prior year period driven by the gain of $76 million recognized in the prior year resulting from a fair value adjustment of our contingent consideration liability related to the Rx Savings Solutions, LLC acquisition, and higher operating expenses, partially offset by contributions from technology services.
Medical-Surgical Solutions
Three Months Ended September 30, 2024 vs. 2023
Operating profit for this segment decreased for the three months ended September 30, 2024 compared to the same prior year period primarily due to higher restructuring charges recorded in fiscal 2025.
Six Months Ended September 30, 2024 vs. 2023
Operating profit for this segment decreased for the six months ended September 30, 2024 compared to the same prior year period due to higher restructuring charges recorded in fiscal 2025, a decline in our core primary care business, and a lower contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
International
Three Months Ended September 30, 2024 vs. 2023
Operating (loss) for this segment for the three months ended September 30, 2024 compared to an operating profit for the same prior year period was largely due to remeasurement charges related to our Canadian retail disposal group held for sale, as discussed in Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
Six Months Ended September 30, 2024 vs. 2023
Operating (loss) for this segment for the six months ended September 30, 2024 compared to an operating profit for the same prior year period was largely due to remeasurement charges related to our Canadian retail disposal group held for sale, as discussed in Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report, partially offset by higher pharmaceutical distribution volumes across the segment.
Corporate Expenses, Net
Three Months Ended September 30, 2024 vs. 2023
Corporate expenses, net increased for the three months ended September 30, 2024 compared to the same prior year period primarily due to remeasurement charges related to our Canadian retail disposal group held for sale, as discussed in Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report, and higher restructuring charges recorded in the second quarter of fiscal 2025 compared to the same prior year period.
Six Months Ended September 30, 2024 vs. 2023
Corporate expenses, net decreased for the six months ended September 30, 2024 compared to the same prior year period primarily due to a net gain of $95 million related to our investments in equity securities of certain U.S. growth stage companies in the healthcare industry and lower restructuring charges recorded in the first half of fiscal 2025 compared to the same prior year period, partially offset by remeasurement charges related to our Canadian retail disposal group held for sale, as discussed in Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report, and a net charge of $51 million related to our estimated liability for opioid-related claims.
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.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
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 September 30, 2024, 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:
| Six Months Ended September 30, | |||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | Change | ||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 720 | $ | (87) | $ | 807 | |||||||||||
| Investing activities | (373) | (315) | (58) | ||||||||||||||
| Financing activities | (2,408) | (1,752) | (656) | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 1 | (1) | 2 | ||||||||||||||
| Change in cash, cash equivalents, and restricted cash classified as Assets held for sale | (14) | — | (14) | ||||||||||||||
| Net change in cash, cash equivalents, and restricted cash | $ | (2,074) | $ | (2,155) | $ | 81 | |||||||||||
Operating Activities
Operating activities provided cash of $720 million and used cash of $87 million during the six months ended September 30, 2024 and 2023, 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 six months ended September 30, 2024 were affected by net income of $1.2 billion, adjusted for non-cash items, including charges of $643 million to remeasure the assets and liabilities of our Canadian retail disposal group to fair value less cost to sell, as well as increases in accounts payable of $6.2 billion, receivables of $3.5 billion, and inventories of $3.3 billion, all primarily driven by higher revenues and timing. Our litigation liabilities decreased by $386 million due to payments made in the second quarter of fiscal 2025 associated with various settlement agreements for opioid-related claims of states, subdivisions, and Native American tribes, partially offset by an accrual in the first quarter of fiscal 2025 related to a proposed settlement with third party payors as discussed in Financial Note 10, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
Operating activities for the six months ended September 30, 2023 were affected by net income of $1.7 billion, adjusted for non-cash items, as well as increases in drafts and accounts payable of $4.3 billion, receivables of $3.2 billion, and inventories of $2.3 billion, all primarily driven by higher revenues and timing. Our litigation liabilities also decreased by $529 million due to payments made during the second quarter of fiscal 2024 associated with various settlement agreements for opioid-related claims of states, subdivisions, and Native American tribes.
Investing Activities
Investing activities used cash of $373 million and $315 million during the six months ended September 30, 2024 and 2023, respectively. Investing activities for the six months ended September 30, 2024 and 2023 includes $385 million and $264 million, respectively, in capital expenditures for property, plant, and equipment and capitalized software. Investing activities for the six months ended September 30, 2024 was also impacted by the receipt of proceeds of $92 million related to the sale of equity securities, as discussed in Financial Note 9, “Fair Value Measurements,” to the accompanying condensed consolidated financial statements included in this Quarterly Report.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Financing Activities
Financing activities used cash of $2.4 billion and $1.8 billion during the six months ended September 30, 2024 and 2023, respectively. On September 10, 2024, we completed a public offering of 4.25% Notes due September 15, 2029 in a principal amount of $500 million. Proceeds received from this note issuance, net of discounts and offering expenses, were approximately $496 million. We utilized the net proceeds from this note issuance along with cash on hand to redeem our $500 million outstanding principal amount of 5.25% Notes due February 15, 2026 prior to maturity at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest through the settlement date.
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 then outstanding 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 our then outstanding 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, 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 became due, and of the principal amount of those 2024 Notes on their March 15, 2024 maturity date.
Financing activities for the six months ended September 30, 2024 and 2023 includes $2.0 billion and $1.5 billion of cash paid for share repurchases, as well as $162 million and $149 million of cash paid for dividends, respectively. Financing activities also includes cash receipts and cash repayments each of $6.9 billion and $2.0 billion for the six months ended September 30, 2024 and 2023, respectively, related to short-term borrowings of commercial paper.
Cash used for other financing activities generally includes the cash value of shares surrendered for tax withholding and payments to noncontrolling interests.
Share Repurchase Plans
The Board has authorized the repurchase of common stock. We may repurchase common stock from time-to-time through open market transactions, privately negotiated transactions, accelerated share repurchase 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, cash generated from operations, and market and economic conditions.
During the three months ended September 30, 2024, we repurchased 2.9 million shares of common stock for $1.5 billion through open market transactions at an average price per share of $533.46, of which $22 million was accrued within “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheets for share repurchases that were executed in late September 2024 and settled in early October 2024. During the three months ended June 30, 2024, we repurchased 1.0 million shares of common stock for $528 million through open market transactions at an average price per share of $548.20.
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, of which $23 million was accrued within “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheets for share repurchases that were executed in late September 2023 and settled in early October 2023. 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.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
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 Inflation Reduction Act of 2022. 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 our remaining authorization for the repurchase of common stock. Excise taxes of $15 million and $8 million were incurred and accrued for shares repurchased during the three months ended September 30, 2024 and 2023, respectively. Excise taxes of $16 million and $12 million were incurred and accrued for shares repurchased during the six months ended September 30, 2024 and 2023, respectively. As of September 30, 2024 and March 31, 2024, the amounts accrued for excise taxes were $41 million and $25 million, respectively, within “Other accrued liabilities” in our Condensed Consolidated Balance Sheets.
In July 2024, the Board approved an increase of $4.0 billion in the authorization for the repurchase of common stock. The total remaining authorization outstanding for repurchases of common stock at September 30, 2024 was $8.6 billion.
Selected Measures of Liquidity and Capital Resources
| (Dollars in millions) | September 30, 2024 | March 31, 2024 | ||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 2,511 | $ | 4,585 | ||||||||||
| Working capital | (5,430) | (4,387) | ||||||||||||
| Debt to capital ratio (1) | 158.8 | % | 124.0 | % |
(1)This ratio describes the relationship and changes within our capital resources, and is computed as the sum of total debt divided by the sum of 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. 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 September 30, 2024 and March 31, 2024 included approximately $1.7 billion and $1.6 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. Working capital also includes net assets and liabilities classified as held for sale which have increased in fiscal 2025 as a result of the expected divestiture of our Canadian retail disposal group. 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 September 30, 2024 compared to March 31, 2024 primarily due to an increase in drafts and accounts payable from increased purchasing driven by increased sales and timing, and a decrease in cash and cash equivalents, partially offset by an increase in receivables, net and inventories, net, driven by higher sales and timing, an increase in net current assets held for sale related to our Canadian retail disposal group, and a decrease in other accrued liabilities.
Our debt to capital ratio increased for the six months ended September 30, 2024 due to share repurchases and dividend payments, partially offset by net income attributable to McKesson for fiscal 2025.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONCLUDED)
(UNAUDITED)
In July 2024, we raised our quarterly dividend from $0.62 to $0.71 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.
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 $6.4 billion as of September 30, 2024 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 proposed acquisition or disposition transactions, 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 2024 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. 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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