Group 2

HMGT 3311.001
Fall 2017
McKesson Corporation Financial Analysis
McKesson Corporation is a company that delivers pharmaceuticals, medical and healthcare products, and business
solutions to pharmacies and healthcare providers. They have two core business segments, distribution and technology solutions.
McKesson was originally founded in 1833, 184 years ago, as a therapeutic drug and chemical import and wholesale business. They
began manufacturing drugs 22 years later. In the early 1900s they acquired and merged with other wholesalers and chemical
suppliers to become the largest distributor of pharmaceutical drugs, alcoholic beverages, and chemicals. In the 1990s, McKesson
began to focus on healthcare and acquired the countrys largest distributor of medical supplies, General Medical. Since then they
have expanded into other arenas of healthcare through the acquisition of US Oncology and Celesio, a German healthcare and
pharmaceutical company. They have also been a leader in information technology innovation since the 1990s.
McKesson's headquarter is currently located in San Francisco, California with distribution locations across the United States
including Texas, Virginia, Minnesota, Pennsylvania, Massachusetts, Arizona, and Connecticut. Internationally, McKesson collaborates
with Canada, United Kingdom, Israel, Ireland, and New Zealand. McKesson caters to all individuals with no specific demographic as
they are a nationwide distributor working with pharmacys such as CVS, medical hospitals, and institutes. McKesson distributes a
third of North Americas pharmaceuticals and is considered the fourth largest pharmacy chain. McKesson is a performance leader as
it covers national and international distributions for pharmaceuticals, generics, medical equipment, vaccinations, clinical services.
McKesson is in an industry of distribution centered around medical articles such as equipment, drugs, and services.
Business is through retail pharmacies and institutional providers in the health system such as hospitals and clinics. The industry
centers its policies and practice under the Food and Drug Act of 1906, this act prevents mislabeled drugs and medicines from being
sold and requires the active ingredients to be labeled on the packaging. The Amendment by the Federal Food, Drug, and Cosmetic
Act on May 28, 1976 requires all medical devices to be classified into the classification (I, II, III). The Food and Drug Administration
Amendments Act of 2007 permits the FDA to conduct a more comprehensive review on new pharmaceuticals and equipment.
Recently McKesson has collaborated with International Business Machines (IBM) to improve sustainability and reform their supply
chain through the application of analytics.
From Fall 2016 to the beginning of January 2017 McKesson was faced with a court lawsuit by communities in West Virginia.
The communities accused McKesson for failure to detect suspicious orders of prescription pain pills, this failure resulted in
numerous of deaths in the area due to overdose of prescription drugs. The prosecutors mentioned that McKesson has also failed to
notify the DEA of the suspicious order of narcotics in retail pharmacies that were used for illegal use and abuse. Towards the end of
the trial McKesson has agreed to pay the $150 million-dollar settlement. This was not the first time McKesson has faced similar
accusations, back in 2008 McKesson had paid $13.25 million in civil penalty for similar violations.
We compared McKesson to its closest competitor, Cardinal Health, due to a lack of industry benchmark. Current ratio
shows the company's ability to pay short-term and long-term obligations. If this number is high then the company has no problem
paying off their obligations, which is great for the company. The current ratio equation is Current Liabilities/Current Assets.
According to this chart, Cardinal Health has a higher and better ratio of current assets over current liabilities current ratio for 2016
and 2017.

McKesson 2016 2017 Cardinal Health 2016 2017

Current Assets 38437 36948 Current Assets 21,956 28,345
Current Liabilities 35071 35612 Current Liabilities 19,701 21221
Current Ratio 1.10 1.04 Current Ratio 1.11 1.34
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Quick ratio shows the companys short-term liquidity, the ratio measures the companys ability to meet its short-term
obligations with its most liquid assets. Therefore, we exclude inventory from the current assets. The equation for the quick ratio is
(Current Assets - Inventory)/Current Liabilities. In this diagram, in 2016, McKesson had the slight edge over Cardinal Health, but in
2017 Cardinal Health had a huge edge over McKesson. This is because Cardinal Healths current assets increased while McKessons
decreased.
McKesson 2016 2017 Cardinal Health 2016 2017
Current Assets 38437 36948 Current Assets 21956 28345
Inventory 15335 15278 Inventory 10615 11301
Current Liabilities 35071 35612 Current Liabilities 19701 21221
Quick Ratio 0.66 0.61 Quick Ratio 0.58 0.80
Days in accounts receivable shows how quickly a company is collecting its receivables or receiving cash for good or services
provided on credit. If this number is high that indicates that the company has problems relating to its ability to collect credit and may
need to look at its policies regarding credit collection. The equation for the Days in Accounts Receivable is Net Accounts Receivable/
(Net Revenue/365). The chart below shows that McKessons Days in accounts receivable is higher than its competitors.

McKesson 2016 2017 Cardinal Health 2016 2017

Net Accounts Receivable 18215 17980 Receivable 8048 7405
Net Revenue 198553 190884 Net Revenue 129976 121546
Net Revenue/365 543.98 522.97 Net Revenue/365 356.10 333.00
Days in Accounts Receivable 33.48 34.38 Days in Accounts Receivable 22.60 22.24
Days cash on hand measures the number of days the company could continue to pay its daily cash obligations with no new
cash resources. Days cash on hand is calculated by (Cash+marketable securities+board designated funds)/((operating expenses-
depreciation)/365). Short term investments, marketable securities, and board designated funds are not present in the McKesson and
Cardinal financial analysis therefore are not used in this calculation. In the chart below, McKesson has been improving their days
cash on hand compared to the previous year. Comparing to its competitor, Cardinal Health has a higher days cash on hand due to
the higher amount of cash received in 2017.
McKesson 2016 2017 Cardinal Health 2016 2017
Cash 4048 2783 Cash 2356 6879
Operating Expenses 7871 4162 Operating Expenses* 4084 4424
Operating Expenses/365 21.56 11.40 Operating Expenses/365 11.19 12.12
Days Cash on Hand 189 244 Days Cash on Hand 211 567
The average payment period calculates the period it takes a company to pay back its creditors. It is ideal to have the days
accounts receivable less than the average payment period, meaning that the company is receiving faster than it is collecting.
Average payment period is calculated by current liabilities/((operating expenses-depreciation)/365). Depreciation was not included
in this calculation for both McKesson and Cardinal, as it is not included in operating expenses. The chart below shows that McKesson
has doubled its average payment period from 2016-2017, compared to their competitor Cardinal Health. It takes McKesson twice as
long to pay back their accounts payable than Cardinal Health, this can be due to McKessons high current liabilities.

McKesson 2016 2017 Cardinal Health 2016 2017

Current Liabilities 35069 35612 Current Liabilities 19701 21221
Operating Expenses 7871 4162 Operating Expenses* 4084 4424
Operating Expenses365 21.56 11.40 Operating Expenses/365 11.19 12.12
Average Payment Period 1626 3123 Average Payment Period 1761 1751
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*Operating expenses were calculated from the itemized list on Cardinal Healths statement of earnings 2016 Operating Expenses =
3648+25+459+21-69 =4084 2017 Operating Expenses = 3775+56+527+18+48 = 4424
The return on assets ratio demonstrates how much profit is earned for each dollar that is invested in assets. A higher
percentage of return indicates that a company is making a higher profit from their assets, meaning their assets are more valuable.
The equation for Return on Assets is Net Income/Total Assets. The chart below shows that McKessons return is much greater than
their competitors and that their return is increasing quickly, while their competitors is decreasing. This is because McKessons net
income is increasing while its total assets are decreasing, which is the opposite for Cardinal Health.

McKesson 2016 2017 Cardinal Health 2016 2017

Net Income 2310 5153 Net Income 1431 1294
Total Assets 60969 56523 Total Assets 34112 40112
Return on Assets 3.79% 9.12% Return on Assets 4.20% 3.23%
Operating margin is a measure of a companys profitability. Operating margin is calculated as operating income/total
operating revenues. The chart below shows that McKesson has doubled its operating margin from 2016 due to the increase of their
operating income. This is a major strength towards McKesson who is doing far better than their competitor Cardinal Health.
Cardinals operating margin has decreased, this may be due to its low operating income compared to their operating revenues.

McKesson 2016 2017 Cardinal Health 2016 2017

Operating Income 3545 7109 Operating Income 2459 2120
Total Operating Revenue 198553 190884 Total Operating Revenue 121546 129976
Operating Margin 1.80% 3.70% Operating Margin 2.02% 1.63%
Non-Operating Income indicates how dependent the companys income is on sources that are not related to and typical of
the companys usual activities. Looking at McKessons non-operating income ratio, the company relies very little on outside income
and gets most of its money from it sales on medical supplies and health services. This is a weakness for McKesson because they lack
a diverse income and rely solely on one revenue stream. However, this is also a strength because McKessons non-operating income
is greater that their competitors.

McKesson 2016 2017 Cardinal Health 2016 2017

Other Income 58 90 Other Income -183 -196
Operating Income 3545 7109 Operating Income 2459 2120
Nonoperating Income 0.0163611 0.01266 Nonoperating Income -0.07442 -0.09245
The Total Asset Turnover ratio measures the overall efficiency of an organizations assets in producing revenue. This ratio
indicates how many dollars of revenue are generated by one dollar in assets. If the ratio is equal to one that means that each dollar
invested in assets generates a dollar of revenue. If the ratio is higher than one that indicates that assets are generating more than
they are costing. The higher the turnover the greater the revenue generating power of the companys assets. The equation for this
ratio is Total Revenue/Total Assets. The chart below shows the Total Asset Turnover for McKesson and its competitor Cardinal
Health. McKessons ratio increased from 2016 to 2017, in contrast to their competitors. This is because McKessons total assets are
smaller in proportion to their total revenue than Cardinal Healths. McKessons total assets have decreased while revenue increased.

McKesson 2016 2017 Cardinal Health 2016 2017

Total Revenue 190884 198553 Total Revenue 121546 129976
Total Assets 60969 56523 Total Assets 34112 40112
Total Asset Turnover 3.13 3.51 Total Asset Turnover 3.56 3.24
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Debt ratio shows how much of a companys total assets are funded by debt. A lower ratio is ideal because that indicates
that assets are being funded by revenue or cash and not with debt or borrowing. McKessons debt ratio is lower than Cardinal
Healths, demonstrating that they are in better position. McKesson has more cash available to invest in assets and they do not need
to borrow money to grow their assets. In general, they also have less long-term debt than Cardinal Health.

McKesson 2016 2017 Cardinal Health 2016 2017

Long-Term Debt 6497 7305 Long-Term Debt 4952 9068
Current Portion Long-Term Debt 1617 1240 Current Portion Long-Term Debt 587 1327
Total Assets 56563 60969 Total Assets 34112 40112
Debt Ratio 0.14 0.14 Debt Ratio 0.16 0.26
Debt to equity ratio indicates a companys ability to generate enough cash when in need to fulfill its debt obligations. A
company with a higher ratio indicates it being at risk, while a company with a lower ratio may show that theyre not taking
advantage of a financial leverage. McKesson is doing well at keeping its debt to equity ratio low and at a downward trend. While its
making enough money each year to meet its obligations, it's also taking advantage of a financial advantage provided by lenders and
investors. Cardinal Health on the other isnt doing as well as McKesson, their ratio indicates they are in a higher state of risk.

McKesson 2016 2017 Cardinal Health 2016 2017

Long-Term Debt 6497 7305 Long-Term Debt 4952 9068
Total Equity 9008 11273 Total Equity 6554 6808
Debt to Equity 0.72 0.65 Debt to Equity 0.76 1.33
Equity to asset ratio tells what percentage of assets the company has are owned by its investors, if in an event of
bankruptcy, the assets that percentage of the asset would go to debt holders. Thus, the high the ratio the greater the percentage of
assets are owned by the company and its investors. As of 2016 most of the assets held by McKesson are not under its control, but
going into 2017, the company has shown an upward trend which indicates that the company is improving and gaining back more
control of its asset. Comparing the ratio to that of Cardinal Healths, McKesson is in a better standing. Cardinal Health is going in a
downward trend.

McKesson 2016 2017 Cardinal Health 2016 2017

Total Equity 9008 11273 Total Equity 6554 6808
Total Assets 56523 60969 Total Assets 34112 40112
Equity to Assets 0.16 0.18 Equity to Assets 0.19 0.17
McKesson demonstrates strength in profitability, activity, and capital structure. All those ratios are ideal when compared to
their competitors. However, McKessons liquidity ratios are all weak when compared to Cardinal Healths. This could be because
McKesson has decided to use an aggressive asset mix strategy. This decreases their liquidity because they are using their cash to
invest in assets and maximize their returns. The return on total assets ratio supports this, their return is 9% which is much greater
than Cardinal Healths. However, they are doing this at the risk of not having enough cash on hand if something were to happen.
Other reasons they have low liquidity is their high current liabilities, their extremely low cash balance, when compared to revenue
and income.
Our recommendation is that McKesson try to increase their liquidity. There are multiple ways McKesson can do this. One is
to move from an aggressive asset mix strategy to a more conservative strategy mix. If done correctly, this could allow them to still
have higher returns than their competitor, but increase the cash they have on hand. They should also look at how they are managing
their accounts receivable. McKesson's days in accounts receivable is about 10 days longer than Cardinal Health's. Our group
Group 2
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Fall 2017
recommends that McKesson look at its collection policies and determine how to increase the speed of their collections. They could
also compare their policies to Cardinal Healths and determine what Cardinal Health is doing that lessens their wait time for
payment. They should also try to find a way to decrease their payment period. Also, they should manage their working capital cycle
so that their average payment period can decrease. Another method of increasing liquidity is to look at inventory management and
determine whether there is too much inventory or if there are avoidable expenses. McKesson could also sell assets that are no
longer being used or that are no longer creating value for the company. Their high return on assets suggests that their assets are
being used in a way that creates value, but they could still have some unnecessary assets they can sell. Lastly, McKesson should
consider holding off on further acquisitions if they want to increase their liquidity. A lot of their expenses in 2017 were on the
acquisition of other companies.
References
http://financials.morningstar.com/competitors/industry-peer.action?t=MCK
https://www.reuters.com/finance/stocks/financial-highlights/MCK
http://investor.mckesson.com/sites/mckesson.investorhq.businesswire.com/files/report/file/MCK_10K_3_31_2017_FINAL.pdf
http://s1.q4cdn.com/238390398/files/doc_financials/quarterly/2017/q4/10-K-CAH.pdf
http://www.mckesson.com/about-mckesson/who-we-are/
http://www.mckesson.com/about-mckesson/our-history/
http://www.mckesson.com/about-mckesson/key-facts/
https://www.youtube.com/watch?v=NhqiD6IDMrY
http://fortune.com/2017/06/13/fortune-500-mckesson-opioid-epidemic/
http://www.mercurynews.com/2017/01/17/feds-mckesson-agrees-to-pay-150m-in-pill-shipment-case/
Financial Statements

Consolidated Statements of Earnings

(in millions, except per common share amounts) 2017 2016 2015
Revenue $ 129,976 $ 121,546 $ 102,531
Cost of products sold 123,432 115,003 96,819
Gross margin 6,544 6,543 5,712

Operating expenses:
Distribution, selling, general and administrative expenses 3,775 3,648 3,240
Restructuring and employee severance 56 25 44
Amortization and other acquisition-related costs 527 459 281
Impairments and (gain)/loss on disposal of assets, net 18 21 (19)
Litigation (recoveries)/charges, net 48 (69) 5
Operating earnings 2,120 2,459 2,161

Other (income)/expense, net (5) 5 (7)

Interest expense, net 201 178 141
Loss on extinguishment of debt 60
Earnings from continuing operations before income taxes 1,924 2,276 1,967

Provision for income taxes 630 845 755

Earnings from continuing operations 1,294 1,431 1,212

Earnings from discontinued operations, net of tax 3

Net earnings 1,294 1,431 1,215

Less: Net earnings attributable to noncontrolling interests (6) (4)

Net earnings attributable to Cardinal Health, Inc. $ 1,288 $ 1,427 $ 1,215

Basic earnings per common share attributable to Cardinal Health, Inc.:

Continuing operations $ 4.06 $ 4.36 $ 3.65
Discontinued operations 0.01
Net basic earnings per common share attributable to Cardinal Health, Inc. $ 4.06 $ 4.36 $ 3.66

Diluted earnings per common share attributable to Cardinal Health, Inc.:

Continuing operations $ 4.03 $ 4.32 $ 3.61
Discontinued operations 0.01
Net diluted earnings per common share attributable to Cardinal Health, Inc. $ 4.03 $ 4.32 $ 3.62

Weighted-average number of common shares outstanding:

Basic 317 327 332
Diluted 320 330 335

The accompanying notes are an integral part of these consolidated statements.

41 Cardinal Health | Fiscal 2017 Form 10-K

Financial Statements

Consolidated Statements of Comprehensive Income

(in millions) 2017 2016 2015
Net earnings $ 1,294 $ 1,431 $ 1,215

Other comprehensive income/(loss):

Foreign currency translation adjustments and other (25) (82) (104)
Net unrealized gain/(loss) on derivative instruments, net of tax 16 (11) 11
Total other comprehensive loss, net of tax (9) (93) (93)

Total comprehensive income 1,285 1,338 1,122

Less: comprehensive income attributable to noncontrolling interests (6) (4)

Total comprehensive income attributable to Cardinal Health, Inc. $ 1,279 $ 1,334 $ 1,122

The accompanying notes are an integral part of these consolidated statements.

Cardinal Health | Fiscal 2017 Form 10-K 42

Financial Statements

Consolidated Balance Sheets

June 30
(in millions) 2017 2016
Assets
Current assets:
Cash and equivalents $ 6,879 $ 2,356
Trade receivables, net 8,048 7,405
Inventories, net 11,301 10,615
Prepaid expenses and other 2,117 1,580
Total current assets 28,345 21,956

Property and equipment, net 1,879 1,796

Goodwill and other intangibles, net 9,207 9,426
Other assets 681 944
Total assets $ 40,112 $ 34,122

Liabilities, Redeemable Noncontrolling Interests and Shareholders Equity

Current liabilities:
Accounts payable $ 17,906 $ 17,306
Current portion of long-term obligations and other short-term borrowings 1,327 587
Other accrued liabilities 1,988 1,808
Total current liabilities 21,221 19,701

Long-term obligations, less current portion 9,068 4,952

Deferred income taxes and other liabilities 2,877 2,781

Redeemable noncontrolling interests 118 117

Shareholders equity:
Preferred shares, without par value:
Authorized500 thousand shares, Issuednone
Common shares, without par value:
Authorized755 million shares, Issued327 million shares and 364 million shares at June 30, 2017 and 2016, respectively 2,697 3,010
Retained earnings 4,967 6,419
Common shares in treasury, at cost: 11 million shares and 42 million shares at June 30, 2017 and 2016, respectively (731) (2,759)
Accumulated other comprehensive loss (125) (116)
Total Cardinal Health, Inc. shareholders' equity 6,808 6,554
Noncontrolling interests 20 17
Total shareholders equity 6,828 6,571
Total liabilities, redeemable noncontrolling interests and shareholders equity $ 40,112 $ 34,122
The accompanying notes are an integral part of these consolidated statements.

43 Cardinal Health | Fiscal 2017 Form 10-K

Financial Statements

Consolidated Statements of Shareholders' Equity

Common Shares Treasury Shares Accumulated
Other Total
Shares Retained Comprehensive Noncontrolling Shareholders
(in millions) Issued Amount Earnings Shares Amount Income/(Loss) Interests Equity
Balance at June 30, 2014 364 $ 2,980 $ 4,774 (27) $ (1,423) $ 70 $ $ 6,401
Net earnings 1,215 1,215
Other comprehensive loss, net of tax (93) (93)
Employee stock plans activity, including tax
impact of $52 million 23 4 214 237
Treasury shares acquired (13) (1,036) (1,036)
Dividends declared (471) (471)
Other 3 3
Balance at June 30, 2015 364 3,003 5,521 (36) (2,245) (23) 6,256
Net earnings 1,427 3 1,430
Other comprehensive loss, net of tax (93) (93)
Purchase of noncontrolling interests (7) (7)
Employee stock plans activity, including tax
benefit of $33 million 7 2 137 144
Treasury shares acquired (8) (651) (651)
Dividends declared (529) (529)
Other 21 21
Balance at June 30, 2016 364 3,010 6,419 (42) (2,759) (116) 17 6,571
Net earnings 1,288 2 1,290
Other comprehensive loss, net of tax (9) (9)
Purchase of noncontrolling interests (1) (1)
Employee stock plans activity, including tax
benefit of $34 million (11) 2 167 156
Treasury shares acquired (8) (600) (600)
Dividends declared (580) (580)
Other (1) 2 1
Retirement of Treasury Shares (37) (302) (2,159) 37 2,461
Balance at June 30, 2017 327 $ 2,697 $ 4,967 (11) $ (731) $ (125) $ 20 $ 6,828

The accompanying notes are an integral part of these consolidated statements.

Cardinal Health | Fiscal 2017 Form 10-K 44

Financial Statements

Consolidated Statements of Cash Flows

(in millions) 2017 2016 2015
Cash flows from operating activities:
Net earnings $ 1,294 $ 1,431 $ 1,215
Earnings from discontinued operations, net of tax (3)
Earnings from continuing operations 1,294 1,431 1,212
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation and amortization 717 641 451
Loss on extinguishment of debt 60
(Gain)/Loss on sale of other investments 4 (5)
Impairments and (gain)/loss on disposal of assets, net 18 21 (19)
Share-based compensation 96 111 110
Provision for deferred income taxes 291 87 219
Provision for bad debts 63 73 52
Change in fair value of contingent consideration obligation (5) (16) 8
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (665) (866) (870)
Increase in inventories (673) (1,179) (779)
Increase in accounts payable 564 2,815 1,948
Other accrued liabilities and operating items, net (520) (147) 153
Net cash provided by operating activities 1,184 2,971 2,540
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired (132) (3,614) (503)
Additions to property and equipment (387) (465) (300)
Purchase of available-for-sale securities and other investments (194) (200) (342)
Proceeds from sale of available-for-sale securities and other investments 228 136 206
Proceeds from maturities of available-for-sale securities 77 50 37
Proceeds from divestitures and disposal of property and equipment and held for sale assets 3 13 53
Net cash used in investing activities (405) (4,080) (849)
Cash flows from financing activities:
Payment of contingent consideration obligation (3) (25) (7)
Net change in short-term borrowings 3 26 (12)
Net purchase of noncontrolling interests (12) (10)
Reduction of long-term obligations (310) (6) (1,221)
Proceeds from interest rate swap terminations 14
Proceeds from long-term obligations, net of issuance costs 5,171 2,672
Net tax proceeds/(withholding) from share-based compensation 26 6 72
Excess tax benefits from share-based compensation 34 33 52
Dividends on common shares (577) (512) (460)
Purchase of treasury shares (600) (651) (1,036)
Net cash provided by/(used in) financing activities 3,746 (1,139) 60
Effect of exchange rates changes on cash and equivalents (2) (12)
Net increase/(decrease) in cash and equivalents 4,523 (2,260) 1,751
Cash and equivalents at beginning of period 2,356 4,616 2,865
Cash and equivalents at end of period $ 6,879 $ 2,356 $ 4,616
Supplemental Information:
Cash payments for interest $ 200 $ 174 $ 150
Cash payments for income taxes 686 635 529

The accompanying notes are an integral part of these consolidated statements.

45 Cardinal Health | Fiscal 2017 Form 10-K