When McKesson Corporation (MCK -1.35%) ended its 2018 fiscal year in March, it was abundantly clear that the giant drug distributor faced mounting pressures. The company experienced headwinds in North America as well as Europe. Going into its first quarter of fiscal 2019, investors hoped that better industry conditions in the U.S. would help improve McKesson's performance despite ongoing challenges in Europe.
The answer as to whether those hopes were realized came on Thursday morning, when McKesson announced its fiscal first-quarter results. Unfortunately, the European headwinds from the previous fiscal year continued to cause problems for the company -- and there were some new challenges as well.
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McKesson results: The raw numbers
| Metric |
Q1 2019 |
Q1 2018 |
Year-Over-Year Change |
|---|---|---|---|
|
Sales |
$52.61 billion | $51.05 billion |
3.06% |
|
Net income from continuing operations |
($138 million) | $309 million |
N/A |
|
Adjusted earnings per share |
$2.90 | $2.46 |
17.9% |
Data source: McKesson.
What happened with McKesson this quarter?
McKesson's U.S. pharmaceuticals and specialty solutions segment generates over three-quarters of the company's total revenue. Revenue from this segment increased 2% year over year to $41 billion. This meager growth was spurred in part from acquisitions.
Europe was the big question mark for McKesson heading into the first quarter. The good news was that European pharmaceutical solutions revenue jumped 9% higher than the prior-year period to $6.9 billion. The bad news was that 8% of this increase stemmed from currency fluctuations, with real year-over-year growth on a constant currency basis of only 1%.
McKesson continued to face increased competition in France. Its U.K. revenue dropped from the prior-year period due in part to the divestiture of some retail pharmacies.
The bright spot for McKesson in the first quarter was its medical-surgical solutions business. Revenue for the segment jumped 11% year over year to $1.7 billion. This increase resulted from market growth and a key acquisition. However, McKesson's medical-surgical solutions business amounts to only a drop in the bucket for the company, so this solid growth didn't help very much overall.
McKesson's other revenue -- made primarily through its McKesson Canada and McKesson prescription technology solutions businesses -- totaled nearly $3 billion in the first quarter, a 5% year-over-year increase. However, currency fluctuations accounted for most of this bump, with year-over-year growth on a constant currency basis of 1%.
With the company reporting modest top-line growth in the first quarter, why did McKesson have such a large net loss on a GAAP basis? The main culprit was a $570 million goodwill impairment charge related to U.K. reimbursement reductions that were announced last month.
Adjusted earnings per share, however, increased nicely from the prior-year period for a couple of reasons. First, McKesson benefited from a lower tax rate thanks to U.S. corporate tax reform. Second, McKesson announced a $4 billion stock buyback program in the last quarter. The company used $300 million of that authorization to repurchase shares in the fiscal 2019 first quarter.
What management had to say
CEO John H. Hammergren said:
McKesson's first-quarter adjusted earnings results were in line with our expectations. We are, however, disappointed by the recent government-initiated reimbursement cuts in the U.K. These incremental cuts create ongoing challenges in our U.K. retail pharmacy business.
He added, "During the quarter, we began executing against our multi-year strategic growth initiative, which included our acquisition of Medical Specialties Distributors. And I am pleased with the initial progress made on transforming our operating model, which will allow us to become a more efficient organization, and drive savings that will help fund investments in our priority growth areas."
Looking ahead
Despite a relatively weak performance in the first quarter, McKesson stuck with its previous full-year 2019 guidance. The company continues to expect adjusted earnings per diluted share between $13 and $13.80 for fiscal 2019, which ends on March 31, 2019.
Europe will probably continue to be a sore spot for McKesson, though. The reimbursement cuts in the U.K. will definitely hurt. McKesson already wrote off a big amount because of these cuts. There's a real possibility that the damage could be worse than expected.
Investors do have something good to look forward to, however. McKesson's board of directors approved a 15% increase to the company's dividend.
