McKesson Corporation — FY2015 Form 10-K Summary
Business context and reporting period
Fiscal year ended March 31, 2015; fourth quarter ended the same date. McKesson distributes pharmaceuticals and medical-surgical products and provides healthcare technology. Distribution Solutions generated about 98% of annual revenue. FY2015 includes a full year of Celesio results following its February 2014 acquisition; prior-year comparisons are therefore affected by acquisition timing.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $179.0 billion | $137.4 billion |
| Gross profit / gross margin | $11.411 billion / 6.37% | $8.352 billion / 6.08% |
| Income from continuing operations | $1.842 billion | $1.414 billion |
| Net income attributable to McKesson | $1.476 billion | $1.263 billion |
| Diluted EPS, total / continuing operations | $6.27 / $7.54 | $5.41 / $6.08 |
| Cash from operating activities | $3.112 billion | $3.136 billion |
| Cash and cash equivalents, year-end | $5.341 billion | $4.193 billion |
| Total debt, including capital leases | $9.844 billion | $10.594 billion |
| Working capital | $3.173 billion | $3.221 billion |
Net debt was $4.503 billion, down from $6.401 billion. Debt-to-capital was 55.2% and net debt-to-net capital employed was 36.0%, compared with 55.4% and 42.9%, respectively. The company reported $33.497 billion of current liabilities against $36.670 billion of current assets. Capital expenditures for property were $376 million; capitalized software expenditures were $169 million.
For Q4 FY2015, revenue was $44.925 billion, income from continuing operations after tax was $411 million, net income attributable to McKesson was $132 million, and diluted EPS was $0.56. The quarter included a $235 million after-tax impairment related to the planned sale of the Brazilian distribution business and a $150 million charge for controlled-substance claims.
Material changes versus the prior comparable period
- Revenue increased 30%, primarily reflecting Celesio and market growth, including higher drug utilization and newly launched Hepatitis C drugs. Distribution Solutions revenue rose 31%; Technology Solutions revenue declined 8%.
- Gross profit increased 37%; consolidated gross margin rose 29 basis points. Higher buy margins and acquisition mix contributed, while sell-margin pressure and LIFO inventory charges were offsets. LIFO charges were $337 million versus $311 million.
- Income from continuing operations increased 30%, and diluted continuing-operations EPS rose 24%. Net income attributable to McKesson rose 17%; total diluted EPS also reflected a larger discontinued-operations loss.
- Discontinued-operations loss increased to $299 million from $156 million, including a $241 million pretax, noncash Brazilian-business impairment. The company also classified two smaller businesses for sale.
- Operating cash flow was nearly flat year over year. Increased receivables and inventory tied to revenue growth were substantially offset by higher drafts and accounts payable.
- Technology Solutions revenue fell amid lower software/services sales, a planned product-line elimination, and reduced workforce-business revenue. The workforce business was to transition to another provider in Q1 FY2016.
Outlook, risks, contingencies and unusual items
- The 10-K directs investors to a May 12, 2015 Form 8-K for FY2016 outlook; it does not state numerical guidance in the provided filing text.
- Management expects operating cash flow, cash balances, receivables facilities, revolving credit and commercial paper access to fund foreseeable needs, while noting capital-market disruption could constrain liquidity or raise borrowing costs.
- In March 2015, McKesson reached an agreement in principle with the DEA, DOJ and U.S. Attorneys to pay $150 million, implement remedial measures, and accept specified suspensions of DEA registrations at four distribution centers. Final settlement agreements remained to be executed.
- Other principal exposures include intense distribution and technology competition, customer concentration (top ten customers accounted for 44% of revenue; CVS 15%), supplier concentration, reimbursement and regulatory changes, cybersecurity and privacy, foreign-exchange exposure, acquisition integration, and unresolved litigation. The filing says it cannot estimate reasonably possible losses for certain unresolved proceedings.
- Foreign-currency translation adjustments reduced comprehensive income by $1.855 billion in FY2015. Separately, the company recorded $189 million of losses on foreign-exchange contracts not designated for hedge accounting; it said these were largely offset by changes in underlying intercompany loans.
- Celesio’s domination agreement created recurring compensation obligations to minority shareholders and put rights over their shares. Redeemable noncontrolling interests were $1.386 billion at year-end; timing and amount of any future cash payments are uncertain.
- The company reported effective internal control over financial reporting; Deloitte issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Review the May 12, 2015 Form 8-K for FY2016 guidance and assumptions.
- Track finalization and implementation of the controlled-substance settlement, including distribution-center restrictions and any operational effects.
- Assess the Brazilian business sale price and final loss against the recorded impairment, and monitor the other planned divestitures.
- Evaluate Celesio integration, foreign-exchange movements, minority-shareholder put rights, and the resulting cash and debt requirements.
- Monitor working-capital trends, especially receivables, inventory, and supplier payment terms, alongside cash conversion and net debt.
- Consider the concentration of revenue and receivables among large customers and the effect of generic-drug pricing, branded price inflation, and reimbursement changes on margins.