McKesson 2015 Annual Report Download - page 40

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues increased over the last two years primarily due to our February 2014 acquisition of Celesio AG
(“Celesio”) and February 2013 acquisition of PSS World Medical, Inc. (“PSSI”), as well as due to market growth
and our mix of business. Market growth reflects growing drug utilization, which includes newly launched drugs
and price increases. Increases in revenues were partially offset by price deflation associated with brand to generic
drug conversions.
Gross profit and gross profit margin increased over the last two years primarily due to our business
acquisitions, higher buy margin and our mix of business, partially offset by a decrease in sell margin.
Additionally, gross profit was impacted by higher LIFO-related inventory charges which were $337 million,
$311 million and $13 million in 2015, 2014 and 2013.
Operating expenses increased over the last two years primarily due to our business acquisitions, including
increases in acquisition-related expenses and higher intangible asset amortization, and higher compensation and
benefit costs. Operating expenses in 2015 also included a pre-tax and after-tax $150 million charge associated
with the settlement of controlled substance distribution claims with the Drug Enforcement Administration
(“DEA”), Department of Justice (“DOJ”) and various U.S. Attorney’s offices, and in 2014 and 2013 operating
expenses included $68 million and $72 million of charges associated with our Average Wholesale Price
(“AWP”) litigation. Additionally, operating expenses for 2013 were favorably impacted by an $81 million non-
cash gain on a business combination related to our purchase of the remaining 50% ownership interest in our
corporate headquarters building.
Income from continuing operations before income taxes increased over the last two years reflecting higher
gross profit, partially offset by higher operating and interest expenses. Interest expense increased in 2015
primarily due to our acquisition of Celesio. Additionally, income from continuing operations in 2013 included a
pre-tax non-cash impairment charge of $191 million associated with the sale of our 49% equity interest in Nadro,
S.A. de C.V (“Nadro”). The impairment reduced the investment’s carrying value to its estimated fair value.
Nadro was sold in 2014 with no material gain or loss on disposition.
Our reported income tax rates were 30.7%, 34.9% and 30.1% in 2015, 2014 and 2013. Income tax expense
for 2014 included a charge of $122 million relating to our litigation with the Canadian Revenue Agency
(“CRA”).
During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution
business which we acquired through our acquisition of Celesio. Financial results for this business have been
reclassified as discontinued operations for all periods presented in our consolidated financial statements. As a
result, loss from discontinued operations, net of tax, for 2015 includes $241 million pre-tax ($235 million after-
tax) non-cash impairment charges to write-off the business’ long-lived assets and reduce the carrying value of
this business to its fair value, less costs to sell.
Loss from discontinued operations, net of tax, for 2014 included a non-cash pre-tax and after-tax impairment
charge of $80 million related to our International Technology business, which was sold in part in 2015.
Net loss attributable to noncontrolling interests for 2015 primarily reflects the $62 million of guaranteed
dividends and recurring compensation that McKesson is obligated to pay the noncontrolling shareholders of
Celesio under the domination and profit and loss transfer agreement (the “Domination Agreement”), which
became effective in December 2014 as further described below.
Net income attributable to McKesson Corporation was $1,476 million, $1,263 million and $1,338 million in
2015, 2014 and 2013. Diluted earnings per common share attributable to McKesson Corporation from continuing
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