Why did Adjusted EPS decline in the fourth quarter even though revenue and GAAP EPS grew?

Q4 Adjusted EPS fell 14% to $6.18 mainly because of a higher tax rate. GAAP income tax expense rose to $340 million from $106 million, and the adjusted tax effects were also unfavorable. The lower share count and growth in U.S. Pharmaceutical partly offset this. GAAP EPS rose 5% to $6.02, helped by a $246 million pre-tax LIFO inventory benefit that was excluded from adjusted results.

Why is there such a large gap between GAAP and Adjusted EPS for the full year?

The full-year GAAP EPS of $22.39 is about $5 below Adjusted EPS of $27.44. The largest excluded item is a $725 million pre-tax provision for bad debts related to the bankruptcy of customer Rite Aid, which management says is not reflective of normal-course allowances. Other excluded items include $149 million of Q4 opioid-related claims charges, $244 million of antitrust settlement gains, $115 million of restructuring and impairment charges, and $249 million of acquisition-related amortization.

What does the fiscal 2025 guidance mean for investors?

Management guided to fiscal 2025 Adjusted EPS of $31.25 to $32.05, which implies 14% to 17% growth from $27.44. McKesson does not give GAAP EPS guidance because it cannot reasonably forecast LIFO adjustments, litigation contingencies, and restructuring or impairment charges. Investors should therefore expect GAAP results to diverge from the adjusted outlook, and the earnings call is expected to provide additional modeling considerations.

Is McKesson's cash generation weakening?

Operating cash flow fell 16% to $4.3 billion in FY24 from $5.2 billion, and free cash flow declined 21% to $3.6 billion. Receivables grew by about $2.95 billion, partly reflecting higher revenue, and the $725 million Rite Aid provision was non-cash in the period. Cash and equivalents were roughly flat at $4.6 billion. Despite the decline, free cash flow still covered $3.3 billion of shareholder returns, funded mainly by buybacks and dividends.

MCK 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed May 7, 2024. Cited figures are marked; the original filing is the authoritative source.

McKesson reported preliminary fiscal 2024 fourth-quarter and full-year results for the period ended March 31, 2024.

Fourth-quarter revenue rose 11% to $76.4 billion^a, driven by U.S. Pharmaceutical volume growth, including specialty products, retail national accounts, and GLP-1 medications. GAAP diluted EPS from continuing operations was $6.02, up $0.31 year over year. Adjusted EPS fell 14% to $6.18, reflecting a higher tax rate that more than offset a lower share count and U.S. Pharmaceutical growth.

For the full year, revenue grew 12% to $309.0 billion^b and Adjusted EPS grew 6% to $27.44, while GAAP EPS from continuing operations fell 11% to $22.39. The GAAP decline reflects a $725 million pre-tax Rite Aid bad-debt provision that management excluded from adjusted results, along with other items. Cash generation remained solid.

Operating cash flow was $4.3 billion^c and free cash flow was $3.6 billion, down from $4.6 billion a year earlier. McKesson returned $3.3 billion to shareholders, including $3.0 billion in buybacks and $314 million in dividends. For fiscal 2025, management guided to Adjusted EPS of $31.25 to $32.05, implying 14% to 17% growth.

The company does not provide GAAP EPS guidance because it cannot reliably forecast items such as LIFO adjustments and litigation contingencies. Investors should focus on the adjusted-to-GAAP gap, the tax rate trajectory, and whether the Rite Aid charge and opioid-related claims recur.

02—Key points

Key Highlights

Q4 FY24 revenue of $76.4 billion rose 11%, led by U.S. Pharmaceutical (revenue $68.8 billion, up 12%) on higher specialty, retail national account, and GLP-1 volumes.
Q4 Adjusted EPS of $6.18 fell 14% year over year due to a higher tax rate (Q4 income tax expense was $340 million versus $106 million a year earlier), partially offset by a lower share count.
Full-year Adjusted EPS rose 6% to $27.44, while GAAP EPS from continuing operations fell 11% to $22.39, with the gap driven by excluded items including a $725 million Rite Aid bad-debt provision.
Full-year operating cash flow of $4.3 billion and free cash flow of $3.6 billion, down from $5.2 billion and $4.6 billion respectively in FY23.
Capital returns of $3.3 billion in FY24, including $3.0 billion in share repurchases, while diluted weighted-average shares fell 6% to 134.1 million.
FY25 Adjusted EPS guidance of $31.25 to $32.05 implies 14% to 17% growth; no GAAP EPS guidance is provided.
Specialty and oncology/biopharma services momentum, including CoverMyMeds helping patients save more than $8.8 billion on brand and specialty medications, and Prescription Technology Solutions full-year adjusted segment profit up 23%.

03—Questions

Frequently Asked Questions

Why did Adjusted EPS decline in the fourth quarter even though revenue and GAAP EPS grew?
Q4 Adjusted EPS fell 14% to $6.18 mainly because of a higher tax rate. GAAP income tax expense rose to $340 million from $106 million, and the adjusted tax effects were also unfavorable. The lower share count and growth in U.S. Pharmaceutical partly offset this. GAAP EPS rose 5% to $6.02, helped by a $246 million pre-tax LIFO inventory benefit that was excluded from adjusted results.
Why is there such a large gap between GAAP and Adjusted EPS for the full year?
The full-year GAAP EPS of $22.39 is about $5 below Adjusted EPS of $27.44. The largest excluded item is a $725 million pre-tax provision for bad debts related to the bankruptcy of customer Rite Aid, which management says is not reflective of normal-course allowances. Other excluded items include $149 million of Q4 opioid-related claims charges, $244 million of antitrust settlement gains, $115 million of restructuring and impairment charges, and $249 million of acquisition-related amortization.
What does the fiscal 2025 guidance mean for investors?
Management guided to fiscal 2025 Adjusted EPS of $31.25 to $32.05, which implies 14% to 17% growth from $27.44. McKesson does not give GAAP EPS guidance because it cannot reasonably forecast LIFO adjustments, litigation contingencies, and restructuring or impairment charges. Investors should therefore expect GAAP results to diverge from the adjusted outlook, and the earnings call is expected to provide additional modeling considerations.
Is McKesson's cash generation weakening?
Operating cash flow fell 16% to $4.3 billion in FY24 from $5.2 billion, and free cash flow declined 21% to $3.6 billion. Receivables grew by about $2.95 billion, partly reflecting higher revenue, and the $725 million Rite Aid provision was non-cash in the period. Cash and equivalents were roughly flat at $4.6 billion. Despite the decline, free cash flow still covered $3.3 billion of shareholder returns, funded mainly by buybacks and dividends.

04—Continue

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