On February 2, 2021 McKesson Corporation (NYSE:MCK) reported results for the third quarter ended December 31, 2020 (Press release, McKesson, FEB 2, 2021, View Source [SID1234574502]).

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"McKesson continued to demonstrate its operational excellence and extensive healthcare supply chain expertise, as we began the distribution of COVID-19 vaccine doses to the entire U.S. in the third quarter," said Brian Tyler, chief executive officer. "McKesson’s long history of serving as the centralized distributor for the Vaccines for Children program for the Centers for Disease Control and Prevention, including during the H1N1 public health crisis, positions us well to distribute hundreds of millions of COVID-19 vaccines safely and efficiently to the right location, in the right quantity, and in the right condition. Our COVID-19 vaccine distribution has been highly successful, achieving all volume and timing requirements by the government, and I want to thank our 80,000 employees around the world for their tremendous efforts and dedication."

"While the overall environment remains challenging due to the sustained impact of the COVID-19 pandemic, we are pleased to report third-quarter adjusted earnings results ahead of our expectations. McKesson’s performance reflects strong execution and the benefits from our ongoing strategic investments in the growth areas of oncology and biopharma services. Based on our year-to-date progress and the successful execution of distributing COVID-19 vaccines and ancillary supplies in the U.S., we are raising and narrowing our guidance range for fiscal 2021 and now expect Adjusted Earnings per diluted share of $16.95 to $17.25."

Third-quarter revenues were $62.6 billion, up 6% from a year ago, driven by growth in the U.S. Pharmaceutical segment, largely due to market growth and higher specialty volumes, partially offset by branded to generic conversions.

Third-quarter Loss per diluted share of ($39.03) included a pre-tax $8.1 billion expense accrual related to opioid litigation and a pre-tax long-lived asset impairment charge of $115 million primarily related to McKesson’s retail pharmacy businesses in the International segment. Third-quarter Adjusted Earnings per diluted share does not include these charges.

Third-quarter Adjusted Earnings per diluted share was $4.60 compared to $3.81 a year ago, an increase of 21%, driven by a lower share count and growth in the Medical-Surgical Solutions segment, partially offset by a higher tax rate and the lapping of the prior year contribution from the company’s now separated investment in Change Healthcare LLC ("Change Healthcare"). Third-quarter Adjusted Earnings per diluted share also included pre-tax net gains of approximately $30 million, or $0.14 per diluted share, associated with McKesson Ventures’ equity investments.

For the first nine months of the fiscal year, McKesson returned $709 million of cash to shareholders via $500 million of common stock repurchases and $209 million of dividend payments. During the first nine months of the fiscal year, McKesson generated cash from operations of $1.2 billion, and invested $427 million internally, resulting in Free Cash Flow of $745 million.

Opioid-related charges

In the third quarter of fiscal 2021, McKesson recorded a GAAP-only pre-tax charge of $8.1 billion, $6.7 billion post-tax, related to the estimated liability for opioid-related claims of governmental entities. The Company is in ongoing, advanced discussions with state attorneys general and plaintiffs’ attorneys regarding a settlement framework under which the Company would pay its portion of a broad settlement over a period of 18 years. A loss in this amount has now been deemed probable and reasonably estimable.
U.S. Pharmaceutical Segment

Third-quarter revenues were $49.5 billion, up 7%, driven by market growth and higher specialty volumes, partially offset by branded to generic conversions.
Third-quarter Segment Operating Profit was $635 million and operating margin was 1.28%. Adjusted Segment Operating Profit was $656 million, up 2% from a year ago, driven by growth in specialty, partially offset by higher operating expenses in support of the company’s strategic growth initiatives. Adjusted operating margin was 1.33%, down 5 basis points.
International Segment

Third-quarter revenues were $9.3 billion, down 6% on a reported basis and down 10% on an FX-Adjusted basis, driven by the contribution of McKesson’s German wholesale business to a joint venture with Walgreens Boots Alliance.
Third-quarter Segment Operating Loss was ($71) million and operating margin was (0.77%), driven by a GAAP-only pre-tax long-lived asset impairment charge of $115 million primarily related to McKesson’s retail pharmacy businesses in Canada and Europe. Adjusted Segment Operating Profit was $158 million, up 9%. On an FX-Adjusted basis, Adjusted Segment Operating Profit was $150 million, up 3%. Adjusted operating margin was 1.70%, up 23 basis points. On an FX-Adjusted basis, adjusted operating margin was 1.69%, up 22 basis points.
Medical-Surgical Solutions Segment

Third-quarter revenues were $3.1 billion, up 43%, primarily driven by demand for COVID-19 tests in the Primary Care and Extended Care businesses.
Third-quarter Segment Operating Profit was $260 million and operating margin was 8.51%. Adjusted Segment Operating Profit was $279 million, up 52%, driven by demand for COVID-19 tests and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by inventory charges. Adjusted operating margin was 9.14%, up 55 basis points.
Prescription Technology Solutions Segment

Third-quarter revenues were $777 million, up 9%, driven by new brand support programs and higher volumes of existing brand support programs.
Third-quarter Segment Operating Profit was $114 million and operating margin was 14.67%. Adjusted Segment Operating Profit was $131 million, up 27%, reflecting organic growth in the segment. Adjusted operating margin was 16.86%, up from 14.43% in the prior year.
Company Updates

McKesson launched Ontada, an oncology technology and insights business within the U.S. Pharmaceutical Segment, designed to support innovation, acceleration and evidence generation to drive better outcomes for cancer patients.
McKesson’s Board of Directors authorized an additional $2.0 billion share repurchase program, demonstrating confidence in McKesson’s diversified capital allocation strategy.
Recent Sustainability and ESG Highlights

Dr. Kelvin A. Baggett joined McKesson in the newly created role of chief impact officer effective November 30, 2020.
McKesson issued its FY20 Corporate Responsibility report highlighting its strategy and action towards better health for people and the planet and has joined the United Nations Global Compact initiative, a voluntary leadership platform for the development, implementation and disclosure of responsible business practices.
For the eighth consecutive year, McKesson was recognized as one of the "Best Places to Work for LGBTQ Equality" by the Human Rights Campaign (HRC) Foundation, achieving 100 percent on the HRC’s 2021 Corporate Equality Index.
Fiscal 2021 Outlook

McKesson raised and narrowed fiscal 2021 Adjusted Earnings per diluted share guidance to $16.95 to $17.25 from the previous range of $16.00 to $16.50 to primarily reflect improved growth in the business and the contribution from McKesson’s successful distribution of COVID-19 vaccines and ancillary supplies. Fiscal 2021 Adjusted Earnings per diluted share guidance assumes $0.25 to $0.35 related to COVID-19 vaccine distribution and $0.20 to $0.30 related to the kitting and distribution of ancillary supplies for COVID-19 vaccines.

Fiscal 2021 guidance continues to assume that a full recovery of pharmaceutical prescription volumes and patient visits will not occur this fiscal year.

Other remaining businesses

As a result of the segment realignment effective in the second quarter of fiscal 2021, Other reflects equity earnings and charges for retrospective periods for the company’s previous investment in Change Healthcare, which was separated from the company during the fourth quarter of fiscal 2020.

Conference Call Details

The company has scheduled a conference call for today, Tuesday, February 2nd at 8:00 AM ET to discuss the company’s financial results. A live audio webcast of the conference call will be available on McKesson’s Investor Relations website at View Source An archive of the conference call will also be available on the company’s Investor Relations website at View Source

Upcoming Investor Events

McKesson management will be participating in the following investor conferences:

Cowen 41st Annual Health Care Conference, March 1, 2021
Webcasts will be available live and archived on the company’s Investor Relations website at View Source A complete listing of upcoming events for the investment community, including details and updates, will be available on the company’s Investor Relations website

Non-GAAP Financial Measures

GAAP refers to the U.S. generally accepted accounting principles. This press release includes GAAP financial measures as well as Non-GAAP financial measures, including Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Other Income, Adjusted Equity Income from Change Healthcare, Adjusted Income Tax Expense, Adjusted Earnings, Adjusted Earnings per Diluted Share, Adjusted Segment Operating Profit, Adjusted Segment Operating Profit Margin, Adjusted Corporate Expenses, Adjusted Operating Profit, FX-Adjusted results and Free Cash Flow which are financial measures not calculated in accordance with GAAP. Refer to the "Supplemental Non-GAAP Financial Information" section of the accompanying financial statement tables for the definitions and usefulness of the Company’s Non-GAAP financial measures and the attached schedules for reconciliations of the differences between the Non-GAAP financial measures and their most directly comparable GAAP financial measures.

The Company does not provide forward-looking guidance on a GAAP basis as McKesson is unable to provide a quantitative reconciliation of this forward-looking Non-GAAP measure to the most directly comparable forward-looking GAAP measure, without unreasonable effort, because McKesson cannot reliably forecast LIFO inventory-related adjustments, gains from antitrust legal settlements, restructuring, impairment and related charges, and other adjustments, which are difficult to predict and estimate. These items are inherently uncertain and depend on various factors, many of which are beyond the company’s control, and as such, any associated estimate and its impact on GAAP performance could vary materially.