OREANDA-NEWS.  McKesson Corporation (NYSE:MCK) today reported that revenues for the fourth quarter ended March 31, 2016 were $46.7 billion, up 4% compared to $44.9 billion a year ago. On a constant currency basis, revenues increased 5% over the prior year. On the basis of U.S. generally accepted accounting principles (“GAAP”), fourth-quarter earnings per diluted share from continuing operations was $1.97 compared to $1.69 a year ago. Fourth-quarter Adjusted Earnings per diluted share was $2.44, down 17% compared to the prior year.

For the fiscal year, McKesson had revenues of $190.9 billion, up 7% compared to $179.0 billion a year ago. On a constant currency basis, revenues increased 9% over the prior year. Full-year GAAP earnings per diluted share from continuing operations was $9.84 compared to $7.54 a year ago, up 31% year-over-year. Full-year Adjusted Earnings per diluted share was $12.08, up 9% compared to the prior year.

Full-year GAAP and Adjusted Earnings include pre-tax charges totaling $229 million, or 73 cents per diluted share, related to the company’s cost alignment plan as disclosed in March 2016 (the “Cost Alignment Plan”). Full-year GAAP and Adjusted Earnings also include pre-tax gains of $103 million, or 29 cents per diluted share, related to the sale of two businesses earlier in Fiscal 2016. Excluding the Cost Alignment Plan charges and the gains on the sale of two businesses from Adjusted Earnings, full-year results per diluted share was $12.52, up 14% on a constant currency basis, year-over-year.

“I am pleased with our fourth-quarter results, driven by solid execution across both our Distribution Solutions and Technology Solutions segments,” said John H. Hammergren, chairman and chief executive officer. “Fiscal 2016 was a year of growth at McKesson, and I am encouraged by the many new and expanded customer relationships throughout our businesses. McKesson’s focus on driving value and innovation in our daily interactions with our customers, built on a deep foundation of operational excellence, will continue to propel our company going forward as we look to Fiscal 2017 and beyond.”

For the full year, McKesson generated cash from operations of $3.7 billion, repaid approximately $1.6 billion in long-term debt and ended the year with cash and cash equivalents of $4.0 billion. During the year, McKesson had internal capital spending of $677 million, spent $40 million on acquisitions, repurchased approximately $1.5 billion of its common stock and paid $244 million in dividends.

“We delivered strong cash flow results for Fiscal 2016, which exceeded our original expectations,” Hammergren commented. “In Fiscal 2016, we executed across the full range of our portfolio approach to capital deployment, which included capital investments in support of growth of our businesses, more than $4.0 billion in announced acquisitions, which will contribute to McKesson’s growth in Fiscal 2017 and beyond, $1.5 billion in share repurchases, and $244 million in dividends paid. I am exceptionally proud of our disciplined approach to capital deployment and our track record of creating long-term value for our shareholders.”

Segment Results

Distribution Solutions revenues were $45.9 billion for the quarter, up 4% on a reported basis and 5% on a constant currency basis. For the full year, Distribution Solutions revenues were $188.0 billion, up 7% on a reported basis and 9% on a constant currency basis, compared to the prior year. 

North America pharmaceutical distribution and services revenues were $38.7 billion for the quarter, up 5% on a reported basis and 6% on a constant currency basis, primarily reflecting market growth and growth from existing customers. For the full year, North America pharmaceutical distribution and services revenues were $158.5 billion, up 10% on a reported basis and 11% on a constant currency basis, compared to the prior year.

International pharmaceutical distribution and services revenues were $5.8 billion for the quarter, down 1% on a reported basis and up 2% on a constant currency basis, driven by market growth. For the full year, International pharmaceutical distribution and services revenues were $23.5 billion, down 11% on a reported basis and up 1% on a constant currency basis, compared to the prior year.

Medical-Surgical distribution and services revenues were up modestly for the fourth quarter and full year, driven by market growth, partially offset by the sale of our ZEE Medical business in the second quarter.

Fourth-quarter Distribution Solutions GAAP operating profit was $811 million and GAAP operating margin was 1.77%. On a constant currency basis, fourth-quarter adjusted operating profit was $970 million and adjusted operating margin was 2.09%.

For the full year, Distribution Solutions GAAP operating profit was $3.6 billion and GAAP operating margin was 1.89%. On a constant currency basis, full-year adjusted operating profit was $4.4 billion, up 5% compared to the prior year, and adjusted operating margin was 2.28%. Distribution Solutions fourth-quarter and full-year results include $161 million in pre-tax charges related to the Cost Alignment Plan.

“Distribution Solutions concluded another solid year with good performance within the segment. During Fiscal 2016, we expanded our global pharmaceutical sourcing and procurement scale, grew our Health Mart franchise to more than 4,600 members, delivered strong growth in our Specialty Health and Canadian businesses, and continued to successfully execute on our planned Celesio acquisition synergies,” said Hammergren.

Technology Solutions products and services revenues were down 5% for the fourth quarter and down 6% for the full year. Fourth-quarter and full-year Technology Solutions revenues were impacted by an anticipated year-over-year decline in our hospital software business and the sale of our nurse triage business in the first quarter. This revenue decline was partially offset by growth in our other technology businesses.

In the fourth quarter, GAAP operating profit was $93 million and GAAP operating margin was 12.67%. Fourth-quarter adjusted operating profit was $99 million and adjusted operating margin was 13.45% on a constant currency basis.

For the full year, GAAP operating profit was $519 million and GAAP operating margin was 17.99%. For the full year, adjusted operating profit was $542 million and adjusted operating margin was 18.72% on a constant currency basis. Technology Solutions fourth-quarter and full-year results include $51 million in pre-tax charges related to the Cost Alignment Plan.

“Our Technology Solutions segment had strong performance in Fiscal 2016. Over the past few years, we have made significant progress in shaping the focus of our Technology Solutions portfolio and have delivered meaningful improvements in our core, adjusted operating margin rate for the segment,” added Hammergren.

Fiscal Year 2016 Reconciliation of GAAP Results to Adjusted Earnings

Adjusted Earnings per diluted share of $12.08 for the fiscal year ended March 31, 2016 excludes the following GAAP items:

  • Amortization of acquisition-related intangible assets of $1.27 per diluted share;
  • Acquisition expenses and related adjustments of 34 cents per diluted share; and
  • LIFO inventory-related adjustments of 63 cents per diluted share.

Fiscal Year 2017 Outlook

For the fiscal year ending March 31, 2017, McKesson expects $13.30 to $13.80 per diluted share, which excludes approximately 12 to 15 cents in expected charges from Adjusted Earnings related to the Cost Alignment Plan.

“Our Fiscal 2017 outlook balances solid growth across our businesses and growth from capital deployment, with the negative impact from customer consolidation and generic pharmaceutical pricing trends in the United States,” concluded Hammergren.

Key Assumptions for Fiscal Year 2017 Outlook

          The Fiscal 2017 outlook is based on the following key assumptions and is also subject to the Risk Factors outlined below:

  • Distribution Solutions revenue growth is expected to increase by high-single digits driven by market growth and acquisitions.
  • We expect North America pharmaceutical distribution and services to deliver high-single digit revenue growth in Fiscal 2017.
  • International pharmaceutical distribution and services revenues are anticipated to grow low-double digits on a constant currency basis in Fiscal 2017.
  • Medical-Surgical distribution and services is expected to deliver mid-single digit revenue growth in Fiscal 2017.
  • Technology Solutions revenues are expected to be down slightly year-over-year driven by an anticipated revenue decline in our hospital software business.
  • Fiscal 2017 branded pharmaceutical price trends in the U.S. market are expected to be modestly below those experienced in Fiscal 2016.
  • We expect a nominal contribution to our Fiscal 2017 results from generic pharmaceuticals that increase in price.
  • We expect the profit contribution from the launch of new oral generic pharmaceuticals in the U.S. market to decrease year-over-year.
  • Proceeds from anticipated antitrust litigation settlements are estimated to be $140 million, pre-tax, for Fiscal 2017, compared to $76 million, pre-tax, in Fiscal 2016.
  • Fiscal 2017 pre-tax charges associated with our Cost Alignment Plan are expected to be between $40 million and $50 million and are excluded from our Fiscal 2017 outlook of $13.30 to $13.80 per diluted share.
  • The guidance range assumes a full-year adjusted tax rate of approximately 31.0%, which may vary from quarter to quarter.
  • Property acquisitions and capitalized software expenditures are expected to be between $700 million and $800 million.
  • We assume that our ownership position in Celesio will be approximately 76% for Fiscal 2017.
  • We expect the impact of foreign currency exchange rate movements will have a net unfavorable impact of approximately 3 cents per diluted share year-over-year as modest improvements in the Euro / USD average rate will be more than offset by the GBP / Euro average rate when compared to the prior year.
  • Weighted average diluted shares used in the calculation of earnings per share are expected to be approximately 228 million for the year.
  • Cash flow from operations is expected to increase approximately 15% year-over-year, excluding approximately $270 million in cash payments expected in Fiscal 2017 related to the Cost Alignment Plan and a settlement agreement with the U.S. Drug Enforcement Administration and the U.S. Department of Justice as disclosed in April 2015.
  • Based on acquisitions announced as of March 31, 2016:
    • We expect amortization of acquisition-related intangible assets of approximately $1.36 per diluted share;
    • We expect acquisition expenses and related adjustments of 30 cents per diluted share; and
    • We expect LIFO inventory-related charges of 48 cents per diluted share.
     
  • The Fiscal 2017 guidance range does not include the impact of any potential new acquisitions or divestitures, impairments or incremental material restructuring charges, or any potential claim or litigation reserve adjustments beyond those disclosed in the Form 8-K as filed on March 18, 2016.

Adjusted Earnings

McKesson separately reports financial results on the basis of Adjusted Earnings. Adjusted Earnings is a non-GAAP financial measure defined as GAAP income from continuing operations, excluding amortization of acquisition-related intangible assets, acquisition expenses and related adjustments, certain claim and litigation reserve adjustments reflecting changes to the company’s reserves for controlled substance distribution claims and average wholesale price litigation matters, and Last-In-First-Out (“LIFO”) inventory-related adjustments. A reconciliation of McKesson’s GAAP financial results to Adjusted Earnings is provided in Schedules 2, 3 and 4 of the financial statement tables included with this release.