McKesson Reports Fiscal 2017 Fourth-Quarter and Full-Year Results

McKesson Reports Fiscal 2017 Fourth-Quarter and Full-Year Results

• Revenues of $48.7 billion for the fourth quarter and $198.5 billion for the full year, up 4% year-over-year.
• Fourth-quarter GAAP earnings per diluted share from continuing operations of $16.79 and full-year GAAP earnings per diluted share from continuing operations of $23.28, up 137% year-over-year.
• GAAP earnings per diluted share from continuing operations for the fourth quarter and full year include a pre-tax net gain of $3.9 billion, or $14.10 and $13.53 per diluted share, respectively, related to the previously announced creation of the Change Healthcare joint venture.
• Excluding Cost Alignment Plan charges of three cents from Adjusted Earnings, fourth-quarter results per diluted share of $3.42, up 8% year-over-year, compared to $3.18 in the prior year.
• Excluding Cost Alignment Plan charges of four cents and the second-quarter goodwill impairment charge of $1.26 from Adjusted Earnings, full-year results per diluted share of $12.91, up 3% year-over-year, compared to $12.52 in the prior year.
• Fiscal 2017 cash flow from operations of $4.7 billion, up 29% year-over-year.
• In connection with issuing our Fiscal 2018 Outlook, we have revised our definition of Adjusted Earnings.

McKesson Corporation (NYSE:MCK) today reported that revenues for the fourth quarter ended March 31, 2017, were $48.7 billion, up 4% compared to $46.7 billion a year ago. On a constant currency basis, revenues increased 5% over the prior year. For the fiscal year, McKesson had revenues of $198.5 billion, up 4% compared to $190.9 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 $16.79, compared to $1.97 a year ago. Full-year GAAP earnings per diluted share from continuing operations was $23.28 compared to $9.84 a year ago, up 137% year-over-year.

Fourth-quarter and full-year GAAP earnings included a pre-tax net gain of $3.9 billion, or $14.10 and $13.53 per diluted share, respectively, related to the creation of the Change Healthcare joint venture, as disclosed on March 2, 2017.

Fourth-quarter and full-year GAAP and Adjusted Earnings included charges of three cents and four cents per diluted share, respectively, related to the company’s cost alignment plan that was announced in March 2016 (the “Cost Alignment Plan”). Additionally, full-year GAAP and Adjusted Earnings included a non-cash, pre-tax goodwill impairment charge of $290 million, or $1.26 per diluted share, taken in the second quarter related to the company’s Enterprise Information Solutions (EIS) business within McKesson Technology Solutions (MTS).

Excluding Cost Alignment Plan charges from Adjusted Earnings, fourth-quarter results of $3.42 per diluted share, were up 8% compared to $3.18 in the prior year.

Excluding Cost Alignment Plan charges and the goodwill impairment charge taken in the second quarter from Adjusted Earnings, full-year results of $12.91 per diluted share, were up 3% compared to $12.52 in the prior year.

Fourth-quarter and full-year Fiscal 2016 GAAP and Adjusted Earnings included pre-tax charges totaling $229 million, or approximately 73 cents per diluted share, related to the Cost Alignment Plan.

Full-year Fiscal 2016 GAAP and Adjusted Earnings included pre-tax gains of $103 million, or 29 cents per diluted share, related to the sale of two businesses in the first and second quarters of Fiscal 2016.

“As we exit a challenging fiscal year, I am encouraged by our strong fourth-quarter results,” said John H. Hammergren, chairman and chief executive officer. “Our Fiscal 2017 was impacted by both company-specific and industry pressures. However, due to the actions we have taken, I believe we have positioned our businesses well to address evolving market dynamics and to capitalize on future growth opportunities.”

For the full year, McKesson generated cash from operations of $4.7 billion, and ended the year with cash and cash equivalents of $2.8 billion. During the year, McKesson paid $4.2 billion for acquisitions, repurchased $2.3 billion of its common stock, repaid approximately $1.6 billion in long-term debt, invested $562 million internally and paid $253 million in dividends.

“Despite the difficult business environment, we were able to drive record operating cash flow results in Fiscal 2017,” Hammergren continued. “As a result of our strong cash generation, McKesson was able to deploy meaningful capital during the year, closing 11 acquisitions and returning more than $2.5 billion in cash to our shareholders. We were also pleased with the creation of Change Healthcare, which we believe will drive significant value for our shareholders.”

Segment Results

Distribution Solutions revenues were $48.2 billion for the quarter, up 5% on a reported basis and 6% on a constant currency basis. For the full year, Distribution Solutions revenues were $195.9 billion, up 4% on a reported basis and 5% on a constant currency basis, compared to the prior year.

North America pharmaceutical distribution and services revenues of $40.6 billion for the quarter were up 5% both on a reported and constant currency basis, primarily reflecting market growth and acquisitions, partially offset by branded to generic conversions. For the full year, North America pharmaceutical distribution and services revenues were $164.8 billion, up 4% on a reported and constant currency basis, compared to the prior year.

International pharmaceutical distribution and services revenues were $6.1 billion for the quarter, up 5% on a reported basis and 12% on a constant currency basis, driven by acquisitions and market growth. For the full year, International pharmaceutical distribution and services revenues were $24.8 billion, up 6% on a reported basis and up 11% on a constant currency basis, compared to the prior year.

Medical-Surgical distribution and services revenues were $1.6 billion for the quarter, up 9%, driven by market growth and an acquisition. For the full year, Medical-Surgical distribution and services revenues were $6.2 billion, up 3% compared to the prior year.

Fourth-quarter Distribution Solutions GAAP operating profit was $769 million and GAAP operating margin was 1.60%. On a constant currency basis, fourth-quarter adjusted operating profit was $1.1 billion, up 10% from the prior year, and the adjusted operating margin was 2.18%.

For the full year, Distribution Solutions GAAP operating profit was $3.4 billion and GAAP operating margin was 1.72%. On a constant currency basis, full-year adjusted operating profit was $3.9 billion, down 9% from the prior year, and the adjusted operating margin was 1.99%.

Fourth quarter and full-year revenue and operating results of MTS were impacted by the creation of Change Healthcare, to which McKesson contributed the majority of its MTS businesses. As announced on March 2, 2017, McKesson will account for its equity share of Change Healthcare’s earnings on a one-month lag. Therefore, for the month of March, McKesson’s consolidated income statement contained neither the results of the MTS contributed businesses, nor any equity earnings from the new company.

MTS revenues of $0.5 billion were down 30% both on a reported and constant currency basis in the fourth quarter. For the full year, MTS revenues of $2.6 billion were down 10% on a reported basis and 9% on a constant currency basis.

Fourth-quarter MTS GAAP operating profit was $4.1 billion and full-year MTS GAAP operating profit was $4.2 billion, both driven by the recognition of a gain related to the creation of Change Healthcare. On a constant currency basis, fourth-quarter adjusted operating profit was $99 million, down 3% from the prior year, and the adjusted operating margin was 19.30%.

For the full year, MTS’ adjusted operating profit was $303 million on a constant currency basis, and the adjusted operating margin was 11.60%. Excluding the second-quarter goodwill impairment charge related to our EIS business and credits related to the company’s Cost Alignment Plan, MTS’ adjusted operating profit was $584 million for the full year, and the adjusted operating margin was 22.38%.

Fiscal Year 2017 Reconciliation of GAAP Results to Adjusted Earnings

Adjusted Earnings per diluted share of $11.61 for the fiscal year ended March 31, 2017 excludes the following GAAP items:

• Amortization of acquisition-related intangible assets of $1.39 per diluted share;
• Acquisition expenses and related adjustments of $13.03 per diluted share;
• Claim and litigation reserve credits of two cents per diluted share for average wholesale price litigation matters; and
• LIFO inventory-related credits of one cent per diluted share.

Revised Adjusted Earnings Definition and Fiscal Year 2018 Outlook

McKesson is revising its definition of Adjusted Earnings to closely align with management’s view of the company’s operating performance and portfolio of businesses. Please refer to the second 8-K filed today with the Securities and Exchange Commission for the full description of each item included in our revised Adjusted Earnings definition, as well as a recast of Fiscal 2017 results.

On this revised basis, the company’s recast Fiscal 2017 Adjusted Earnings was $12.54 per diluted share. For the fiscal year ending March 31, 2018, McKesson expects GAAP earnings per diluted share of $7.10 to $8.80 and Adjusted Earnings per diluted share of $11.75 to $12.45. “Our Fiscal 2018 outlook incorporates headwinds related to the lapping effect of the competitive customer pricing environment and branded pharmaceutical manufacturer pricing trends, partially offset by our capital deployment efforts and solid growth across our businesses,” concluded Hammergren.

Key Assumptions for Fiscal Year 2018 Outlook

The Fiscal 2018 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 mid-single digits driven by market growth and acquisitions.
• We expect North America pharmaceutical distribution and services to deliver mid-single digit revenue growth in Fiscal 2018.
• International pharmaceutical distribution and services revenues are anticipated to grow mid-single digits on a constant currency basis in Fiscal 2018.
• Medical-Surgical distribution and services is expected to deliver mid-single digit revenue growth in Fiscal 2018.
• In the U.S. market, branded pharmaceutical manufacturer percentage price increases are assumed to be in the mid-single digits in Fiscal 2018.
• We expect a nominal contribution to our Fiscal 2018 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 be nominal.
• We anticipate a full year contribution from Rite Aid of approximately $13 billion in annual revenues.
• We assume that our ownership position in Celesio will continue to be approximately 76% for Fiscal 2018.
• We expect our Distribution Solutions adjusted operating margin to be between 198 basis points and 208 basis points.
• Technology Solutions revenues, which reflects our Enterprise Information Solutions (EIS) business, are expected to be between approximately $450 million and $500 million in Fiscal 2018. As previously disclosed, McKesson is evaluating strategic alternatives for this business.
• We expect adjusted equity earnings from our investment in Change Healthcare to be between approximately $370 million and $430 million, and that our ownership position in Change Healthcare will be approximately 70% for Fiscal 2018. Equity earnings under GAAP will be reported in the income statement line “Equity income or loss from Change Healthcare”.
• Corporate expenses are expected to be between approximately $435 million and $465 million in Fiscal 2018.
• We expect our interest expense to decrease by approximately 10% compared to Fiscal 2017.
• The guidance range assumes a full-year adjusted tax rate of approximately 27.0%, which may vary from quarter to quarter.
• Income attributable to noncontrolling interests is expected to increase approximately 200% from Fiscal 2017, driven primarily by the joint sourcing agreement with Walmart.
• We expect the impact of foreign currency exchange rate movements will have a net unfavorable impact of up to 5 cents per diluted share year-over-year.
• Property acquisitions and capitalized software expenditures are expected to be between $650 million and $750 million.
• Weighted average diluted shares used in the calculation of earnings per share are expected to be approximately 213 million for the year.
• Cash flow from operations is expected to decline by approximately 10% relative to the prior year, primarily due to a very strong Fiscal 2017 close as well as the loss of the majority of MTS’ cash flow following the creation of Change Healthcare.
• Based on acquisitions announced as of March 31, 2017:
  • We expect amortization of acquisition-related intangible assets of approximately $2.40 to $2.70 per diluted share;
  • We expect acquisition expenses and related adjustments of $1.10 to $1.30 per diluted share;
  • We expect LIFO inventory-related charges of 20 cents to 60 cents per diluted share;
  • We expect antitrust legal settlement credits of up to 4 cents per diluted share; and
  • We expect restructuring charges of up to 5 cents per diluted share.
• The Fiscal 2018 guidance range does not include the impact of any potential new acquisitions and divestitures, or other adjustments, including items such as impairments, gains or losses on disposal of assets or potential claim or litigation reserve adjustments.

Risk Factors

Except for historical information contained in this press release, matters discussed may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking terminology such as “believes”, “expects”, “anticipates”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, the most significant of these risks and uncertainties are described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: changes in the U.S. healthcare industry and regulatory environment; managing foreign expansion, including the related operating, economic, political and regulatory risks; changes in the Canadian healthcare industry and regulatory environment; exposure to European economic conditions, including recent austerity measures taken by certain European governments; changes in the European regulatory environment with respect to privacy and data protection regulations; fluctuations in foreign currency exchange rates; the company’s ability to successfully identify, consummate, finance and integrate acquisitions; the performance of the company’s investment in Change Healthcare; the company’s ability to manage and complete divestitures; material adverse resolution of pending legal proceedings; competition and industry consolidation; substantial defaults in payment or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization; the loss of government contracts as a result of compliance or funding challenges; public health issues in the U.S. or abroad; cyberattack, natural disaster, or malfunction of sophisticated internal computer systems to perform as designed; the adequacy of insurance to cover property loss or liability claims; the company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others; system errors or failure of our technology products or services to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; changes in circumstances that could impair our goodwill or intangible assets; new or revised tax legislation or challenges to our tax positions; general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the company, its customers or suppliers; changes in accounting principles generally accepted in the United States of America; withdrawal from participation in multiemployer pension plans or if such plans are reported to have underfunded liabilities; inability to realize the expected benefits from the company’s restructuring and business process initiatives; difficulties with outsourcing and similar third party relationships; risks associated with the company’s retail expansion; and the company’s inability to keep existing retail store locations or open new retail locations in desirable places. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are first made. Except to the extent required by law, the company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Fiscal 2017 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, claim and litigation reserve adjustments, reflecting 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.

Constant Currency

McKesson also presents its financial results on a constant currency basis. The company conducts business worldwide in local currencies, including the Euro, British pound and Canadian dollar. As a result, the comparability of the financial results reported in U.S. dollars can be affected by changes in foreign currency exchange rates. Constant currency information is presented to provide a framework for assessing how the company’s business performed excluding the effect of foreign currency exchange rate fluctuations. The supplemental constant currency information of the company’s GAAP financial results and Adjusted Earnings (Non-GAAP) is provided in Schedule 3 of the financial statement tables included with this release.

Conference Call Details

The company has scheduled a conference call for today, Thursday, May 18^th, at 5:00 PM ET. The dial-in number for individuals wishing to participate on the call is 719-234-7317. Craig Mercer, senior vice president, Investor Relations, is the leader of the call, and the password to join the call is ‘McKesson’. The live webcast and supplementary slide presentation for the conference call can be accessed on the company’s Investor Relations website at http://investor.mckesson.com.

A telephonic replay of this conference call will be available for five calendar days. The dial-in number for individuals wishing to listen to the replay is 719-457-0820 and the pass code is 9327588.

The audio webcast and supplemental slide presentation will be archived on the company’s Investor Relations website after the conclusion of the call. Shareholders are encouraged to review the company’s filings with the Securities and Exchange Commission and the supplementary slide presentation for the conference call, which are located on the company’s website.

About McKesson Corporation

McKesson Corporation, currently ranked 5^th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information technology. McKesson partners with pharmaceutical manufacturers, providers, pharmacies, governments and other organizations in healthcare to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. United by our ICARE shared principles, our 70,000 employees across more than 16 countries work every day to innovate and deliver opportunities that make our customers and partners more successful — all for the better health of patients. McKesson has been named the “Most Admired Company” in the healthcare wholesaler category by FORTUNE, a “Best Place to Work” by the Human Rights Campaign Foundation, a top military-friendly company by Military Friendly®, and a “Best Employer for Healthy Lifestyles” by The National Business Group on Health. For more information, visit www.mckesson.com.