McKesson Reports Fiscal 2014 Fourth-Quarter and Full-Year Results

• Revenues of $38.1 billion for the fourth quarter and $137.6 billion for the full year.
• Fourth-quarter GAAP earnings per diluted share from continuing operations of $1.56 and full-year GAAP earnings per diluted share from continuing operations of $5.83.
• Fourth-quarter Adjusted Earnings per diluted share of $2.55 and full-year Adjusted Earnings per diluted share of $8.35.
• Fiscal 2014 cash flow from operations of $3.1 billion.
• Fiscal 2015 Outlook: Adjusted Earnings per diluted share of $10.40 to $10.80.

SAN FRANCISCO, May 12, 2014 – McKesson Corporation (NYSE:MCK) today reported that revenues for the fourth quarter ended March 31, 2014 were $38.1 billion, up 25% compared to $30.5 billion a year ago.  On the basis of U.S. generally accepted accounting principles (“GAAP”), fourth-quarter earnings per diluted share from continuing operations was $1.56 compared to $1.11 a year ago. 

For the fiscal year, McKesson had revenues of $137.6 billion compared to $122.1 billion a year ago.  Full-year GAAP earnings per diluted share from continuing operations was $5.83 compared to $5.62 a year ago.

Fourth-quarter Adjusted Earnings per diluted share was $2.55, up 72% compared to $1.48 a year ago.  Full-year Adjusted Earnings per diluted share was $8.35, up 31% compared to $6.38 for the prior year.  The results of Celesio did not have a material impact on fourth-quarter or full-year adjusted earnings per share.  McKesson’s share of Celesio’s net income for the two months ended March 31, 2014 was offset by a charge to cost of sales associated with the reversal of a step-up to fair value of Celesio’s inventory at the date of acquisition.

“I am pleased with our fourth-quarter results led by solid execution across the Distribution Solutions and Technology Solutions segments,” said John H. Hammergren, chairman and chief executive officer. “For the full year, we had strong growth in adjusted earnings, up 31% from the prior year, and a record year for operating cash flow generated by the business.  These results were driven primarily by outstanding performance in the Distribution Solutions segment and disciplined working capital management across the company.  Additionally, during the fourth-quarter, we secured the acquisition of Celesio which marks an important step for McKesson as we expand to serve our customers and manufacturing partners with global scale.”

For the year, McKesson generated cash from operations of $3.1 billion, and ended the year with cash and cash equivalents of $4.2 billion.  During the year, McKesson spent $4.6 billion on acquisitions, paid $214 million in dividends, and had internal capital spending of $415 million. 

“The strength of our balance sheet and our ability to deliver excellent cash flow results reflect the health of our businesses, and during the fourth quarter we successfully funded the Celesio acquisition while maintaining our investment-grade rating,” Hammergren commented.  “We have a strong track record of creating long-term value for shareholders through our portfolio approach to capital deployment and plan to continue that approach through a mix of acquisitions, share repurchases, dividends and internal investments.”

Segment Results

Distribution Solutions revenues were up 26% for the fourth quarter and up 13% for the full year compared to the prior year.  North America pharmaceutical distribution and services revenues, which include results from U.S. Pharmaceutical, McKesson Canada and McKesson Specialty Health, were up 9% for the fourth quarter, primarily reflecting market growth and growth from existing customers.  For the full year, North America pharmaceutical distribution and services revenues were up 7% compared to the prior year. 

International pharmaceutical distribution and services revenues, which represent the results of Celesio for the two months ended March 31, 2014, were $4.8 billion for the fourth quarter and full year. 

Medical-Surgical distribution and services revenues were up 28% for the fourth quarter and 57% for the full year driven by the acquisition of PSS World Medical (“PSS”) and market growth. 

In the fourth quarter, Distribution Solutions GAAP operating profit was $605 million and GAAP operating margin was 1.62%.  Fourth-quarter adjusted operating profit was $905 million and the adjusted operating margin was 2.42%. For the full year, GAAP operating profit was $2.5 billion and GAAP operating margin was 1.83%.  For the full year, adjusted operating profit was $3.2 billion, up 30% from the prior year, and the adjusted operating margin was 2.39%, up 31 basis points year-over-year. 

“Distribution Solutions had another outstanding year with strong performance across the segment.  We continue to deliver tremendous value for our customers through the combination of our industry-leading service, our depth of experience in the healthcare supply chain and our global sourcing expertise,” said Hammergren.  “Distribution Solutions also has a strong track record of delivering value through acquisitions.  During the fourth quarter, we passed the one-year anniversary of the PSS acquisition and we continue to perform well against our original expectations.  We are also excited about the opportunities we see for McKesson’s future as a global healthcare leader through our acquisition of Celesio.” 

Technology Solutions products and services revenues were down 1% for the fourth quarter and up 5% for the full year.  GAAP operating profit was $118 million for the fourth quarter and GAAP operating margin was 14.59%.  Adjusted operating profit was $131 million for the fourth quarter and adjusted operating margin was 16.19%.  For the full year, GAAP operating profit was $387 million and GAAP operating margin was 12.16%.  For the full year, adjusted operating profit was $467 million, up 25% from the prior year, and the adjusted operating margin was 14.67%.

“Fourth-quarter Technology Solutions revenues were impacted by an anticipated year-over-year decline in our Horizon hospital software business.    This revenue decline was partially offset by the solid growth we experienced in our connectivity and payer-focused businesses. Our Technology businesses remain focused on innovating for important customer priorities including solutions for value-based reimbursement, business intelligence and analytics, and healthcare data interoperability,” Hammergren said.

Fiscal Year 2014 Reconciliation of GAAP Results to Adjusted Earnings

Adjusted Earnings per diluted share of $8.35 for the fiscal year ended March 31, 2014 excludes the following GAAP items:

• Amortization of acquisition-related intangible assets of 85 cents per diluted share. 
• Acquisition expenses and related adjustments of 63 cents per diluted share.
• Litigation reserve adjustments of 23 cents per diluted share.
• LIFO inventory-related adjustments of 81 cents per diluted share.

Fiscal Year 2015 Outlook

“Our Fiscal 2015 guidance reflects solid growth across our broad portfolio of businesses and McKesson’s share of the results of Celesio.  McKesson expects Adjusted Earnings per diluted share between $10.40 and $10.80 for the fiscal year ending March 31, 2015,” Hammergren concluded.

Key Assumptions for Fiscal Year 2015 Outlook

 The Fiscal 2015 outlook is based on the following key assumptions and is also subject to the Risk Factors outlined below:

• Distribution Solutions revenue growth will increase significantly driven by the acquisition of Celesio.
• North America pharmaceutical distribution and services and Medical-Surgical distribution and services will deliver mid-single digit revenue growth in Fiscal 2015 compared to Fiscal 2014.
• Branded drug price trends in Fiscal 2015 are expected to be similar to those we experienced in Fiscal 2014. 
• We expect the contribution to profit from the launch of new oral generic pharmaceuticals will increase year-over-year.
• Price trends on generic drugs outside an exclusivity period are expected to be in the high single digits in Fiscal 2015, a decline from the price trends experienced in Fiscal 2014.
• Technology Solutions revenue will decline modestly year-over-year driven by the elimination of a low-margin product line and an expected revenue decline in our Horizon hospital software business. 
• The guidance range assumes a full-year adjusted tax rate of approximately 31.5%, which may vary from quarter to quarter.
• Property acquisitions and capitalized software expenditures should be between $575 million and $625 million.
• We assume that our ownership position in Celesio will be approximately 76% for Fiscal 2015.
• The guidance range assumes an exchange rate of $1.36 per Euro.
• Weighted average diluted shares used in the calculation of earnings are expected to be approximately 236 million for the year.
• Cash flow from operations is expected to be approximately $3 billion.
• Based on acquisitions closed as of March 31, 2014:
  • We expect amortization of acquisition-related intangible assets of approximately $1.31 per diluted share. 
  • We expect acquisition expenses and related adjustments of 54 cents per diluted share.
  • We expect LIFO inventory-related charges of 86 cents per diluted share.
   
• The Fiscal 2015 guidance range does not include any potential litigation reserve adjustments, or the impact of any potential new acquisitions, divestitures, impairments or material restructurings.

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 litigation reserve adjustments, and Last-In-First-Out (“LIFO”) inventory-related adjustments.  A reconciliation of McKesson’s financial results determined in accordance with GAAP to Adjusted Earnings is provided in Schedules 2, 3 and 4 of the financial statement tables included with this release.   

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; changes in the Canadian healthcare industry and regulatory environment; changes in the European regulatory environment with respect to privacy and data protection regulations; managing foreign expansion, including the related operating, economic, political and regulatory risks; the company’s ability to successfully identify, consummate, finance and integrate acquisitions; material adverse resolution of pending legal proceedings; exposure to European economic conditions, including recent austerity measures taken by certain European governments; competition; 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; malfunction, failure or breach of sophisticated internal information systems to perform as designed; the adequacy of insurance to cover property loss or liability claims; the company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances; 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 and solutions to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; the delay or extension of our sales or implementation cycles for external software products; 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; and withdrawal from participation in multiemployer pension plans or if such plans are reported to have underfunded liabilities.  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.

The company has scheduled a conference call for 5:00 PM ET.  The dial-in number for individuals wishing to participate on the call is 719-234-7317.  Erin Lampert, senior vice president, Investor Relations, is the leader of the call, and the password to join the call is ‘McKesson’.  A 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 888-203-1112 and the pass code is 3302075.  A webcast of the conference call will also be available live and archived on the company’s Investor Relations website at http://investor.McKesson.com. 

Shareholders are encouraged to review SEC filings and more information about McKesson, which are located on the company’s website.

About McKesson

McKesson Corporation, currently ranked 14th on the FORTUNE 500, is a healthcare services and information technology company dedicated to making the business of healthcare run better.  We partner with payers, hospitals, physician offices, pharmacies, pharmaceutical companies and others across the spectrum of care to build healthier organizations that deliver better care to patients in every setting.  McKesson helps its customers improve their financial, operational, and clinical performance with solutions that include pharmaceutical and medical-surgical supply management, healthcare information technology, and business and clinical services.  For more information, visit http://www.McKesson.com.

Tables and full-text of earnings release also available for viewing and download in PDF format: McKesson Reports Fiscal 2014 Fourth-Quarter and Full-Year Results (256KB, PDF)

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