McKesson 2016 Annual Report Download - page 43

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues for 2016 and 2015 increased 7% and 30% compared to the same periods a year ago. Excluding
unfavorable foreign currency effects of 2%, revenues increased 9% for 2016. Revenues benefited from market
growth and expanded volume with existing customers within our North America pharmaceutical distribution
businesses. Revenues for 2015 also increased as a result of our February 2014 acquisition of Celesio AG
(“Celesio”). Market growth reflects growing drug utilization, which includes newly launched drugs and price
increases, partially offset by price deflation associated with brand to generic drug conversions.
Gross profit was flat in 2016 and increased 37% in 2015 compared to the same periods a year ago.
Excluding unfavorable foreign currency effects of 4%, gross profit increased 4% in 2016. Gross profit margin
decreased in 2016 primarily due to a lower sell margin within our North America distribution business driven by
increased customer sales volume with some of our largest customers, partially offset by higher buy margin
including benefits from our global procurement arrangements, lower LIFO-related inventory charges and
$76 million in cash receipts representing our share of antitrust legal settlements. Additionally, this business has
been experiencing weaker generic pharmaceutical pricing trends, which are expected to continue in 2017. Gross
profit margin increased in 2015 primarily due to our Celesio acquisition, higher buy margin including the effects
of generic price increases and our mix of business, partially offset by lower sell profit. Gross profit included
LIFO-related inventory charges of $244 million, $337 million and $311 million in 2016, 2015 and 2014.
Operating expenses decreased 7% and increased 43% in 2016 and 2015 compared to the same periods a year
ago. Excluding unfavorable foreign currency effects of 5%, operating expenses decreased 2% in 2016 primarily
due to pre-tax gains of $103 million from the sale of two businesses and lower acquisition-related expenses,
partially offset by pre-tax restructuring charges of $203 million, as further discussed below. Additionally, 2015
operating expenses 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.
On March 14, 2016, the Company committed to a restructuring plan to lower its operating costs (“Cost
Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce and business process
initiatives that will be substantially implemented prior to the end of 2019. During the fourth quarter of 2016, we
recorded $229 million of pre-tax restructuring charges primarily representing severance and employee-related
costs. The charges were included in our results as follows: $26 million in cost of sales and $203 million in
operating expenses.
Operating expenses increased in 2015 primarily due to our business acquisitions, including increases in
acquisition-related expenses and intangible asset amortization, and higher compensation and benefit costs.
Additionally, operating expenses for 2015 included the $150 million settlement charge and for 2014, included
$68 million of pre-tax charges associated with our Average Wholesale Price (“AWP”) litigation.
Income from continuing operations before income taxes increased in 2016 compared with the prior year
primarily due to lower operating expenses, and increased in 2015 primarily due to higher gross profit, partially
offset by higher operating and interest expense.
Our reported income tax rates were 27.9%, 30.7% and 34.9% in 2016, 2015 and 2014. Income tax expense
for 2014 included a charge of $122 million relating to our litigation with the Canadian Revenue Agency
(“CRA”).
Net income attributable to noncontrolling interests for 2016 and 2015 primarily reflects the recurring annual
compensation and the guaranteed dividends that McKesson is obligated to pay to the noncontrolling shareholders
of Celesio under the domination and profit and loss transfer agreement (the “Domination Agreement”), which
became effective in December 2014.
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