McKesson Corporation — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016. Although the request identifies “2015 Q4,” this filing reports FY2016; it also provides fourth-quarter FY2016 results. Amounts are in U.S. dollars unless otherwise noted.
Business context
McKesson is a healthcare distribution and information technology company operating through Distribution Solutions and Technology Solutions. Distribution Solutions generated approximately 98% of consolidated revenue. The filing was signed May 5, 2016.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $190.884 billion | $179.045 billion |
| Gross profit | $11.416 billion | $11.411 billion |
| Gross margin | 5.98% | 6.37% |
| Operating income | $3.545 billion | $2.968 billion |
| Income from continuing operations | $2.342 billion | $1.842 billion |
| Net income attributable to McKesson | $2.258 billion | $1.476 billion |
| Diluted EPS | $9.70 | $6.27 |
| Cash from operating activities | $3.672 billion | $3.112 billion |
| Cash and cash equivalents at year-end | $4.048 billion | $5.341 billion |
| Working capital | $3.366 billion | $3.173 billion |
| Total debt, including capital lease obligations | $8.154 billion | $9.844 billion |
| Debt-to-capital ratio | 43.7% | 50.3% |
FY2016 investing cash outflow was $1.557 billion and financing cash outflow was $3.453 billion. Capital expenditures for property, plant and equipment were $488 million. The company reported $8.147 billion of total debt on its debt schedule, including $1.612 billion due within one year. Its $3.5 billion revolving credit facility had no borrowings outstanding at year-end; the company reported compliance with its covenants.
FY2016 fourth-quarter revenue was $46.678 billion, income from continuing operations after tax was $465 million, net income attributable to McKesson was $431 million, and diluted EPS was $1.88. The quarter included $229 million of pre-tax restructuring charges.
Material changes versus the prior year
- Revenue rose 6.6%; excluding a 2% unfavorable foreign-exchange effect, revenue increased 9%. Growth was principally in North American pharmaceutical distribution, driven by market growth and higher volume with existing customers.
- Gross profit was essentially flat, while gross margin declined 39 basis points. Lower sell margins on large-customer volume and weaker generic pricing weighed on results; higher buy margins, lower LIFO charges, and $76 million in antitrust settlement proceeds partly offset the pressure.
- Income from continuing operations increased 27% and diluted continuing-operations EPS increased 31%. Lower operating expenses and a lower effective tax rate contributed. The effective tax rate was 27.9%, compared with 30.7%.
- Technology Solutions revenue declined 6%, primarily reflecting lower hospital software revenue and divestitures/transitions of businesses. International distribution revenue declined 11% as reported, largely due to foreign exchange; excluding currency effects, it increased 1%.
- Operating cash flow increased to $3.672 billion. Debt and the debt-to-capital ratio declined, while cash balances fell, in part reflecting share repurchases, debt repayment, and other financing needs.
Outlook, commentary, risks and unusual items
- Outlook: The filing refers investors to a May 5, 2016 Form 8-K for FY2017 outlook; specific EPS or revenue guidance is not provided in the supplied filing text. Management expected weaker generic pharmaceutical pricing trends to continue in FY2017.
- Cost Alignment Plan: Announced March 2016, with workforce reductions and process initiatives to be substantially implemented by the end of 2019. FY2016 included $229 million of pre-tax charges; total charges were estimated at $270 million to $290 million. Estimated FY2017 savings were $200 million to $220 million.
- Acquisitions and capital commitments: Biologics and Vantage acquisitions closed April 1, 2016, after year-end. The proposed Rexall Health acquisition was approximately C$3 billion and remained subject to regulatory approval. Sainsbury and UDG transactions were also pending or subject to regulatory review at year-end. The filing states approximately $3.4 billion was anticipated to be paid in 2017 for agreed acquisitions.
- Brazil divestiture: The Brazilian pharmaceutical distribution business was classified as discontinued operations and was expected to be sold in the first half of 2017, subject to approvals. Management expected an additional after-tax charge of approximately $80 million to $100 million on disposition.
- Legal and regulatory matters: McKesson recorded a $150 million charge in FY2015 for an agreement in principle with the DEA and DOJ concerning suspicious controlled-substance order reporting. The contemplated settlement also included remedial measures and temporary suspension of certain controlled-substance registrations at specified distribution centers. Several other lawsuits and investigations remained unresolved; the company generally could not estimate reasonably possible losses for those proceedings.
- Concentration and market risks: The ten largest customers, including GPOs, represented 52.4% of revenue; CVS alone represented 20.3%. Risks also include customer consolidation, pricing and reimbursement changes, generic-drug price volatility, foreign exchange, acquisition integration, cybersecurity, privacy regulation, and healthcare compliance requirements.
- Other contingencies: Recorded environmental remediation reserves included approximately $8.1 million for five sites and $26 million for 15 Superfund sites. The company noted that ultimate costs could differ from reserves. It also disclosed $409 million of liabilities for uncertain tax positions, excluding related interest and penalties.
Most important facts for investors to verify
- Review the referenced May 5, 2016 Form 8-K for the actual FY2017 guidance and its assumptions.
- Track generic-drug pricing, distribution margins, LIFO effects, and customer-volume economics, particularly for major accounts.
- Confirm completion, financing, integration costs, and realized benefits of the announced acquisitions and the Brazil sale.
- Monitor the final terms and operational effects of the controlled-substance settlement, plus developments in unresolved litigation and regulatory matters.
- Assess the $200 million to $220 million estimated FY2017 savings against restructuring costs, execution progress, and potential business disruption.
- Evaluate liquidity needs against acquisition spending, near-term debt maturities, share repurchases, and the concentration of cash held outside the United States.