Edgar Filing: MCKESSON CORP

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Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

MCK_10K_3.31.2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2015



	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-13252

McKESSON CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		94-3207296
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Post Street, San Francisco, California		94104
(Address of principal executive offices)		(Zip Code)

(415) 983-8300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



(Title of each class)		(Name of each exchange on which registered)
Common stock, $0.01 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 30, 2014, was approximately $45.0 billion.

Number of shares of common stock outstanding on April 30, 2015: 231,553,531

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

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McKESSON CORPORATION

TABLE OF CONTENTS



	Item	Page

	PART I

1.	Business	3

1A.	Risk Factors	11

1B.	Unresolved Staff Comments	24

2.	Properties	24

3.	Legal Proceedings	24

4.	Mine Safety Disclosures	24

	Executive Officers of the Registrant	25

	PART II

5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26

6.	Selected Financial Data	28

7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

7A.	Quantitative and Qualitative Disclosures About Market Risk	50

8.	Financial Statements and Supplementary Data	51

9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	111

9A.	Controls and Procedures	111

9B.	Other Information	111

	PART III

10.	Directors, Executive Officers and Corporate Governance	112

11.	Executive Compensation	112

12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	112

13.	Certain Relationships and Related Transactions and Director Independence	114

14.	Principal Accounting Fees and Services	114

	PART IV

15.	Exhibits and Financial Statement Schedule	115

	Signatures	116

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McKESSON CORPORATION

PART I


Item 1.	Business.

General

McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns), currently ranked 15th on the Fortune 500, delivers pharmaceuticals, medical supplies and healthcare information technology that make healthcare safer while reducing costs.

The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year.

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act,”) are available free of charge on our website (www.mckesson.com under the “Investors — Financial Information — SEC Filings” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC” or the “Commission”). The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.

The public may also read or copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The address of the website is www.sec.gov.

Business Segments

We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs and equipment and health and beauty care products throughout North America and internationally. This segment includes our International pharmaceutical distribution and services business which reflects the results of operations of Celesio AG (“Celesio”), which we acquired in February 2014. Celesio supplies pharmaceuticals and other healthcare-related products through its pharmaceutical wholesale business and retail pharmacies.

The Distribution Solutions segment provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, and practice management, technology, clinical support and business solutions to oncology and other specialty practices operating in the community setting. It also provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers through a network of distribution centers within the U.S. In addition, this segment sells financial, operational and clinical solutions for pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing and other services.

The Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain and strategic management software solutions, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations.

Net revenues for our segments for the last three years were as follows:



	Years Ended March 31,
(Dollars in billions)	2015				2014				2013
Distribution Solutions	$	176.0	98	%	$	134.1	98	%	$	119.0	97	%
Technology Solutions	3.1		2		3.3		2		3.2		3
Total	$	179.1	100	%	$	137.4	100	%	$	122.2	100	%

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McKESSON CORPORATION

Distribution Solutions Segment

McKesson Distribution Solutions consists of the following businesses: North America pharmaceutical distribution and services, International pharmaceutical distribution and services and Medical Surgical distribution and services.

North America pharmaceutical distribution and services

Our North America pharmaceutical distribution and services business is comprised of the following business units: U.S. Pharmaceutical Distribution, McKesson Specialty Health, McKesson Canada, and McKesson Pharmacy Systems and Automation.

U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and/or other healthcare-related products to customers throughout the United States in three primary customer channels: (1) retail national accounts (including national and regional chains, food/drug combinations, mail order pharmacies and mass merchandisers); (2) independent retail pharmacies; and (3) institutional healthcare providers (including hospitals, health systems, integrated delivery networks, clinics and alternate site providers). This business also provides solutions and services to pharmaceutical manufacturers. This business sources materials and products from a wide-array of different suppliers, including certain generic pharmaceutical drugs produced through a contract-manufacturing program.

Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through a network of 29 distribution centers, as well as a primary redistribution center, a strategic redistribution center and two repackaging facilities, serving all 50 states and Puerto Rico. We invest in technology and other systems at all of our distribution centers to enhance safety and reliability and provide the best product availability for our customers. For example, in most of our distribution centers we use Acumax® Plus, an award-winning technology that integrates and tracks all internal inventory-related functions such as receiving, put-away and order fulfillment. Acumax® Plus uses bar code technology, wrist-mounted computer hardware and radio frequency signals to provide customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% adjusted accuracy. In addition, we offer Mobile Manager^SM, which integrates portable handheld technology with Acumax® Plus to give customers complete ordering and inventory control. We also offer McKesson Connect^SM, an internet-based ordering system that provides item lookup and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure customers have the right products at the right time for their facilities and patients.

To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology — an analytical approach that emphasizes setting high-quality objectives, collecting data and analyzing results to a fine degree in order to improve processes, reduce costs and minimize errors. We continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.

The major customer groups of our U.S. Pharmaceutical Distribution business can be categorized as retail national accounts, institutional healthcare providers and independent retail pharmacies.

Retail National Accounts — Business solutions that help national account customers increase revenues and profitability. Solutions include:


•	Central Fill^SM — Prescription refill service that enables pharmacies to more quickly refill prescriptions remotely, more accurately and at a lower cost, while reducing inventory levels and improving customer service.


•	Redistribution Centers — Two facilities totaling over 750,000 square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologics. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery.


•	McKesson SynerGx® — Generic pharmaceutical purchasing program and inventory management that helps pharmacies maximize their cost savings with a broad selection of generic drugs, low pricing and one-stop shopping.


•	EnterpriseRx® — A Software as a Service (SaaS) pharmacy management system, that allows large retail chain, health system and retail independent pharmacies to meet demand for prescriptions while maximizing profits and optimizing operations.

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•	RxPak^SM — Bulk-to-bottle repackaging service that leverages our purchasing scale and supplier relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce working capital investment.


•	Inventory Management — An integrated solution comprising forecasting software and automated replenishment technologies that reduce inventory-carrying costs.


•	ExpressRx Track™ — Pharmacy automation solution featuring state-of-the-art robotics, upgraded imaging and expanded vial capabilities, and industry-leading speed and accuracy in a radically small footprint.


•	Supplylogix® — Develops and delivers practical supply chain intelligence solutions for pharmacy and related businesses and services a wide array of healthcare providers nationwide.

Institutional Healthcare Providers — Electronic ordering/purchasing and supply chain management systems that help customers improve financial performance, increase operational efficiencies and deliver better patient care. Solutions include:


•	Fulfill-Rx^SM — Ordering and inventory management system that empowers hospitals to optimize the often complicated and disjointed processes related to unit-based cabinet replenishment and inventory management.


•	Asset Management — Award-winning inventory optimization and purchasing management program that helps institutional providers lower costs while ensuring product availability.


•	SKY Packaging — Blister-format packaging containing the most widely prescribed dosages and strengths in generic oral-solid medications. SKY Packaging enables acute care, long-term care and institutional pharmacies to provide cost-effective, uniform packaging.


•	McKesson Plasma and BioLogics — A full portfolio of plasma-derivatives and biologic products.


•	McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, low pricing and one-stop shopping.


•	McKesson 340B Solution Suite and Macro Helix® — Solutions that help providers manage, track and report on medication replenishment associated with the federal 340B Drug Pricing Program.

Independent Retail Pharmacies — Solutions for managed care contracting, branding and advertising, merchandising, purchasing, operational efficiency and automation that help independent pharmacists focus on patient care while improving profitability. Solutions include:

•

Health Mart® — Health Mart® is a national network of more than 3,500 independently-owned pharmacies and is one of the industry’s most comprehensive pharmacy franchise programs. Health Mart® provides franchisees support for managed care contracting, branding and local marketing solutions, the Health Mart private label line of products, merchandising solutions and programs for enhanced patient support.


•	AccessHealth® — Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow.


•	McKesson Reimbursement Advantage^SM (“MRA”) — MRA is one of the industry’s most comprehensive reimbursement optimization packages, comprising financial services (automated claim resubmission), analytic services and customer care.


•	McKesson OneStop Generics® — described above.


•	EnterpriseRx® — described above.


•	Sunmark® — Complete line of more than 700 products that provide retail independent pharmacies with value-priced alternatives to national brands.

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•	FrontEdge™ — Strategic planning, merchandising and price maintenance program that helps independent pharmacies maximize store profitability.


•	McKesson Sponsored Clinical Services (SCS) Network — Access to patient-support services that allow pharmacists to earn service fees and develop stronger patient relationships.

McKesson Specialty Health: This business provides solutions for oncology and other specialty practices operating in communities across the country, as well as for pharmaceutical and biotech suppliers who manufacture specialty drugs and vaccines, payers and hospitals. Through expertise in specialty drug distribution, commercialization, revenue cycle and practice management and reimbursement support, McKesson Specialty Health seeks to empower the community patient care delivery system and facilitates collaboration among community healthcare providers, drug manufacturers and payers. We provide direct-to-physician specialty distribution services, ensuring supply chain safety and delivery of specialty drugs in manufacturer recommended conditions. Third party logistics, or 3PL, are offered primarily for vaccine distribution, including our exclusive distributor relationship in the Centers for Disease Control and Prevention’s (CDC) Vaccines for Children program. When classifying a pharmaceutical product or service as “specialty,” we consider the following factors: high cost; diseases requiring complex treatment regimens such as cancer and rheumatoid arthritis; special handling, storage and delivery requirements; and, in some cases, exclusive distribution arrangements. This business also provides practice management and other consulting services to healthcare providers, pharmaceutical manufacturers and third party payers supporting the clinical research and distribution of specialty pharmaceutical products and services. Our use of the term “specialty” to define a portion of our distribution business may not be comparable to that used by other industry participants, including our competitors.

We also offer our industry leading iKnowMed^SM and iKnowMedGeneration 2Electronic Health Record, Lynx® integrated technologies, and clinical and practice management tools, all of which help community practices achieve better business health-improving inventory management and practice workflow and reimbursement processes, as well as delivering business efficiencies and clinical-decision support. McKesson Specialty Health works with manufacturers across all phases of the product development and commercialization lifecycle, including clinical research, to optimize delivery of complex medication to patients. Through custom distribution and safety programs, we help support appropriate product utilization, as well as the development and management of Risk Evaluation Mitigation Strategies reimbursement, healthcare informatics and patient access programs, and we enable manufacturers to deliver cost effective patient access to needed therapies. McKesson Specialty Health supports The US Oncology Network and US Oncology Research. The US Oncology Network is one of the nation’s largest networks of community-based oncology physicians dedicated to advancing high-quality, evidence-based cancer care. US Oncology Research is one of the nation’s largest research networks, specializing in Phase I — Phase IV oncology clinical trials.

McKesson Canada: McKesson Canada is one of the largest pharmaceutical distributors in Canada. McKesson Canada, through its network of 16 distribution centers, provides logistics and distribution for more than 900 manufacturers — delivering their products to retail pharmacies, hospitals, long-term care centers, clinics and institutions throughout Canada. Beyond pharmaceutical distribution, logistics and order fulfillment, McKesson Canada provides automation solutions to its retail and hospital customers, dispensing millions of doses each year. McKesson Canada also provides health information exchange solutions that streamline clinical and administrative communication and retail banner services that help independent pharmacists compete and grow through innovative services and operation support. In partnership with other McKesson businesses, McKesson Canada provides a full range of services to Canadian manufacturers and healthcare providers, contributing to the quality and safety of care for patients.

McKesson Pharmacy Systems and Automation: This business supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies. Its primary approach is to provide the customer with a pharmacy management system that best suits the particular needs of their business operation. This objective is achieved by offering three pharmacy management products: EnterpriseRx®, an industry-leading, Software as a Service or SaaS-based management system that intelligently integrates all workflow and communication processes within the pharmacy environment; Pharmaserv®, a fully integrated, server-based pharmacy management system that gives the customer complete control of their pharmacy data; and PharmacyRx, a cost-effective, SaaS-based pharmacy management system that can be installed quickly and makes processing prescriptions fast and easy. These offerings allow large retail chain, hospital outpatient pharmacies and small and independent pharmacies to meet the high demand for prescriptions while maximizing profits and optimizing operations.

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International pharmaceutical distribution and services

Our international pharmaceutical distribution and services business provides logistics and services to the pharmaceutical and healthcare sectors primarily in Europe. The pharmaceutical wholesale business supplies pharmaceuticals and other healthcare-related products generally to retail pharmacies and institutional customers. Its wholesale network consisting of approximately 130 branches delivers to over 65,000 pharmacies daily in ten European countries. This business functions as a vital link between manufacturers and pharmacies in supplying pharmaceuticals to patients, and generally procures the pharmaceuticals approved in each country as well as other products sold in pharmacies directly from the manufacturers. Pharmaceutical and other healthcare-related products are stored at regional wholesale branches with the support of its efficient warehousing management system. With a refined distribution system, this business strives to ensure rapid and reliable delivery directly to its pharmacy customers. The retail pharmacy business serves patients and consumers in six European countries directly through over 2,100 of its own pharmacies and almost 4,300 participant pharmacies operating under brand partnership arrangements. The retail business provides traditional prescription pharmaceuticals, non-prescription products and medical services and operates under the Lloyds Pharmacy brand in the United Kingdom, which accounted for approximately 68% of the total volume of the retail pharmacy business for the year ended March 31, 2015. In 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business, which we acquired through our February 2014 acquisition of Celesio. Refer to Financial Note 4, “Discontinued Operations” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Medical-Surgical distribution and services

This business provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers including physicians’ offices, surgery centers, extended care facilities, homecare and occupational health sites through a network of distribution centers within the U.S. This business is a leading provider of supplies to the full range of alternate-site healthcare facilities, including physicians’ offices, clinics and surgery centers (primary care), long-term care and homecare sites (extended care). Through a variety of products and services geared towards the supply chain, our Medical-Surgical Distribution business is focused on helping its customers operate more efficiently while providing one of the industry’s most extensive product offerings, including our own private label line.

Technology Solutions Segment

Our Technology Solutions segment provides a comprehensive portfolio of software and services to help healthcare organizations improve quality and patient safety, reduce the cost and variability of care and better manage their resources and revenue stream. The Technology Solutions segment markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payers.

The product portfolio for the Technology Solutions segment is designed to address a wide array of healthcare clinical and business performance needs ranging from medication safety and information access to revenue cycle management, resource utilization and physician adoption of electronic health records (“EHR”). Analytics software enables organizations to measure progress as they automate care processes for optimal clinical outcomes, business and operating results and regulatory compliance. To ensure that organizations achieve the maximum value for their information technology investment, we also offer a wide range of services to support the implementation and use of solutions as well as assist with business and clinical redesign, process re-engineering and staffing (both information technology and back-office).

Technology Solutions consists of the following businesses: McKesson Health Solutions, Connected Care and Analytics, Imaging and Workflow Solutions, Business Performance Services and Enterprise Information Solutions. The workforce business within our International Technology business will transition to another service provider during the first quarter of 2016.

McKesson Health Solutions: This suite of services and software products is designed to manage the cost and quality of care for payers, providers, hospitals and government organizations. Solution sets include:


•	InterQual® Criteria for clinical decision support and utilization management;


•	Clear Coverage^TM for point-of-care utilization management, coverage determination and network compliance;


•	Claims payment solutions to facilitate accurate and efficient medical claim payments;

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•	Business intelligence tools for measuring, reporting and improving clinical and financial performance;


•	Network management tools to enable health plans to transform the performance of their networks; and


•	RelayHealth® financial solutions to facilitate communication between healthcare providers and patients, and to aggregate data for claims management and trend analysis, and optimize revenue cycle management processes.

Connected Care and Analytics: Through our vendor-neutral RelayHealth® and its intelligent network, the Company provides health information exchange solutions that streamline clinical and administrative communication between patients, providers, payers, pharmacies, manufacturers, government entities and financial institutions. RelayHealth® helps to accelerate the delivery of high-quality care and improve financial performance through online consultation of physicians by patients, electronic prescribing by physicians, and point-of-service resolution of pharmacy claims by payers. We provide disease management programs to improve the health status and health outcomes of patients with chronic conditions, nurse advice services to provide health information and recommend appropriate levels of care, and clinical and analytical software to support utilization, case and disease management workflows and a comprehensive solution for homecare. We also provide performance management solutions designed to enhance an organization’s ability to plan and optimize quality care delivery. Enterprise visibility and performance analytics provide business intelligence that enables providers to manage capacity, outcomes, productivity and patient flow.

Imaging and Workflow Solutions: We offer medical imaging and information management systems for healthcare enterprises, including a picture archiving communications system, a radiology information system and a comprehensive cardiovascular information system. Our enterprise-wide approach to medical imaging enables organizations to take advantage of specialty-specific workstations while building an integrated image repository that manages all of the images and information captured throughout the care continuum.

Business Performance Services: We help providers focus their resources on delivering healthcare while managing their revenue cycle operations and information technology through a comprehensive suite of managed services. Services include full and partial revenue cycle outsourcing, remote hosting and business office administration. We also provide a complete solution for physician practices of all sizes, whether they are independent or employed, that includes software, revenue cycle outsourcing and connectivity services. Software solutions include practice management and EHR software for physicians of every size and specialty. Our physician practice offering includes outsourced billing, collection, data input, medical coding, billing, contract management, cash collections, accounts receivable management and extensive reporting of metrics related to the physician practice. We also offer a full suite of physician and hospital consulting services, including financial management, coding and compliance services, revenue cycle services and strategic services.

Enterprise Information Solutions: We provide comprehensive clinical and financial information systems for hospitals and health systems of all sizes. These systems are designed to improve the safety and quality of patient care and improve clinical, financial and operational performance. Clinical functionality includes a data repository, care planning, physician order entry and documentation, nursing documentation with bar-coded medication administration, pharmacy, surgical management, emergency department and ambulatory EHR systems, and a Web-based physician portal. Revenue management solutions are designed to improve financial performance by reducing days in accounts receivable, preventing insurance claim denials, reducing costs and improving productivity. Solutions include online patient billing, contract management, electronic claims processing and coding compliance checking. These solutions streamline patient access and help organizations to forecast financial responsibility for constituents before and during care, allowing providers to collect their reimbursements more quickly and at a lower cost. We also provide professional services to help customers achieve business results from their software or automation investment. A wide array of service options is available, including consulting for business and/or clinical process improvement and re-design as well as implementation, project management, technical and education services relating to all products in the Technology Solutions segment as well as providing the technical infrastructure designed to maximize application accessibility, availability, security and performance. In addition, workflow management solutions assist caregivers with staffing and maintaining labor rule continuity between scheduling, time and attendance and payroll. We also offer a comprehensive supply chain management solution that integrates enterprise resource planning applications, including financials, materials, human resources/payroll, scheduling, point of use, surgical and anesthesia services and enterprise-wide analytics.

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Business Combinations, Equity Investments and Discontinued Operations

We have undertaken additional strategic initiatives in recent years designed to further focus on our core healthcare businesses and enhance our competitive position. We expect to continue to undertake such strategic initiatives in the future. These initiatives are detailed in Financial Notes 2, 4 and 6, “Business Combinations,” “Discontinued Operations” and “Equity Investments,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Competition

In every area of healthcare distribution operations, our Distribution Solutions segment faces a highly competitive global environment with strong competition, both in price and service, from international, national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers of the segment, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by the segment. Price, quality of service, innovation and, in some cases, convenience to the customer are generally the principal competitive elements in this segment.

Our Technology Solutions segment experiences substantial competition from many firms, including other software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care management organizations, hardware vendors and internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered.

Patents, Trademarks, Copyrights and Licenses

McKesson and its subsidiaries hold patents, copyrights, trademarks and trade secrets related to McKesson products and services. We pursue patent protection for our innovation, and obtain copyrights covering our original works of authorship, when such protection is advantageous. Through these efforts, we have developed a portfolio of patents and copyrights in the U.S. and worldwide. In addition, we have registered or applied to register certain trademarks and service marks in the U.S. and in foreign countries.

We believe that, in the aggregate, McKesson’s confidential information, patents, copyrights, and trademarks are important to its operations and market position, but we do not consider any of our businesses to be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same. We cannot guarantee that our intellectual property portfolio will be sufficient to deter misappropriation, theft, or misuse of our technology, nor that we can successfully enjoin infringers. We periodically receive notices alleging that our products or services infringe on third party patents and other intellectual property rights. These claims may result in McKesson entering settlement agreements, paying damages, discontinuing use or sale of accused products, or ceasing other activities. While the outcome of any litigation or dispute is inherently uncertain, we do not believe that the resolution of any of these infringement notices would have a material adverse impact on our results of operation.

We hold inbound licenses for certain intellectual property that is used internally, and in some cases, utilized in McKesson’s products or services. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and services, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our operations and products and services are not materially dependent on any single license or other agreement with any third party.

Other Information about the Business

Customers: During 2015, sales to our ten largest customers accounted for approximately 44% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation (“CVS”), accounted for approximately 15% of our total consolidated revenues. At March 31, 2015, trade accounts receivable from our ten largest customers were approximately 36% of total trade accounts receivable. Accounts receivable from CVS were approximately 14% of total trade accounts receivable. We also have agreements with group purchasing organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers. The accounts receivables balances are with individual members of the GPOs. Substantially all of these revenues and accounts receivable are included in our Distribution Solutions segment.

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Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than approximately 7% of our purchases in 2015. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers, as a whole, are good. The ten largest suppliers in 2015 accounted for approximately 45% of our purchases.

A significant portion of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. In addition, we have certain distribution arrangements with pharmaceutical manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our existing inventory at the new higher prices. For these manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to us, could have a material adverse impact on our gross profit margin.

Research and Development: Research and development costs were $392 million, $457 million and $433 million during 2015, 2014 and 2013. These costs do not include $34 million, $40 million and $49 million of costs capitalized for software held for sale during 2015, 2014 and 2013. Development expenditures are primarily incurred by our Technology Solutions segment. Our Technology Solutions segment’s product development efforts apply computer technology and installation methodologies to specific information processing needs of hospitals and other customers. We believe that a substantial and sustained commitment to such expenditures is important to the long-term success of this business. Additional information regarding our development activities is included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Environmental Regulation: Our operations are subject to regulations under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental laws.

We are committed to maintaining compliance with all environmental laws applicable to our operations, products and services and to reducing our environmental impact across all aspects of our business. We meet this commitment through an environmental strategy and sustainability program.

We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Financial Note 23, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

The liability for environmental remediation and other environmental costs is accrued when the Company considers it probable and can reasonably estimate the costs. Environmental costs and accruals, including that related to our legacy chemical distribution operations, are presently not material to our operations or financial position. Although there is no assurance that existing or future environmental laws applicable to our operations or products will not have a material adverse impact on our operations or financial condition, we do not currently anticipate material capital expenditures for environmental matters. Other than the expected expenditures that may be required in connection with our legacy chemical distribution operations, we do not anticipate making substantial capital expenditures either for environmental issues, or to comply with environmental laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2015 and is not expected to be material in the next year.

Employees: On March 31, 2015, we employed approximately 70,400 full-time equivalent employees.

Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 26, “Significant Accounting Policies” and “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

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McKESSON CORPORATION

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report and the “Risk Factors” in Item 1A of Part I of this report, contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended. Some of these statements can be identified by use of forward-looking words such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans” or “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. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed in Item 1A of Part I of this report under “Risk Factors.” The reader should not consider the list to be a complete statement of all potential risks and uncertainties.

These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake 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.


Item 1A.	Risk Factors

The risks described below could have a material adverse impact on our financial position, results of operations, liquidity and cash flows. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed below. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider not to be material. The reader should not consider this list to be a complete statement of all risks and uncertainties.

Changes in the United States healthcare industry and regulatory environment could have a material adverse impact on our results of operations.

Many of our products and services are intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. In recent years, the healthcare industry in the United States has changed significantly in an effort to reduce costs. These changes have included cuts in Medicare and Medicaid reimbursement levels, increases in the use of managed care, consolidation of pharmaceutical and medical-surgical supply distributors and the development of large, sophisticated purchasing groups. We expect the healthcare industry in the United States to continue to change and for healthcare delivery models to evolve in the future.

Changes in the healthcare industry’s or our pharmaceutical suppliers’ pricing, selling, inventory, distribution or supply policies or practices could significantly reduce our revenues and net income. Due to the diverse range of healthcare supply management and healthcare information technology products and services that we offer, such changes could have a material adverse impact on our results of operations, while not affecting some of our competitors who offer a narrower range of products and services.

The majority of our U.S. pharmaceutical distribution business agreements with manufacturers are structured to ensure that we are appropriately and predictably compensated for the services we provide; however, failure to successfully renew these contracts in a timely and favorable manner could have a material adverse impact on our results of operations. In addition, branded pharmaceutical price inflation can be the partial economic basis of some of our distribution business agreements with pharmaceutical manufacturers. If the frequency or rate of branded price increases slows, it could have a material adverse impact on our results of operations.

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In addition, we distribute generic pharmaceuticals, which can be subject to both price deflation and price inflation. In recent years, our financial results have improved from our generic drug offerings combined with an increase in the number of generic drugs available in the marketplace. In fiscal year 2016, we anticipate the number of branded to generics conversions to increase as compared to the prior year. Continued volatility in the availability, pricing trends or reimbursement of these generic drugs, or significant fluctuations in the rate of increase in the number of generic drugs, could have a material adverse impact on our results of operations.

Generic drug manufacturers are increasingly challenging the validity or enforceability of patents on branded pharmaceutical products. During the pendency of these legal challenges, a generics manufacturer may begin manufacturing and selling a generic version of the branded product prior to the final resolution of its legal challenge over the branded product’s patent. To the extent we source, contract manufacture, and distribute such generic products, the brand-name company could assert infringement claims against us. While we generally obtain indemnification against such claims from generic manufacturers as a condition of distributing their products, there can be no assurances that these rights will be adequate or sufficient to protect us.

The healthcare industry is highly regulated and further regulation of our distribution businesses and technology-related products and services could impose increased costs, negatively impact our profit margins, and the profit margins of our customers, delay the introduction or implementation of our new products, or otherwise negatively impact our business and expose the Company to litigation and regulatory investigations.

Healthcare Fraud: We are subject to extensive and frequently changing local, state and federal laws and regulations relating to healthcare fraud, waste and abuse. Local, state and federal governments continue to strengthen their position and scrutiny over practices involving fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare programs. Our relationships with pharmaceutical and medical-surgical product manufacturers and healthcare providers, as well as our provision of products and services to government entities, subject our business to laws and regulations on fraud and abuse, which among other things: (1) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or to induce the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs; (2) impose a number of restrictions upon referring physicians and providers of designated health services under Medicare and Medicaid programs; and (3) prohibit the knowing submission of a false or fraudulent claim for payment to, and knowing retention of an overpayment by, a federal healthcare program such as Medicare and Medicaid. Many of the regulations applicable to us, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. The regulations may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could become liable for damages and suffer civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid and other federal and state healthcare programs.

Reimbursements: Both our profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals, medical treatments and related services, or changing the methodology by which reimbursement levels are determined. For example, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “Affordable Care Act”), signed into law in 2010, revised the federal upper limits for Medicaid reimbursement for multiple source generic drugs available for purchase by retail community pharmacies on a nationwide basis to a limit of not less than 175% of the weighted average (determined on the basis of utilization) of the most recently reported monthly average manufacturer price (“AMP”) using a smoothing process. The Centers for Medicare and Medicaid Services (“CMS”) has proposed new rules for calculating AMP (“Revised AMP”) and is also offering states the option to replace traditional reimbursement metrics for certain drugs with alternatives such as the average acquisition cost (“AAC”) method or the national average drug acquisition cost benchmark (“NADAC”). Under AAC and NADAC, reimbursement is based on the actual acquisition costs from invoiced amounts and from a statistically validated cost of dispensing survey. States will have the option of using any of these metrics to determine appropriate Medicaid reimbursement to pharmacies for generic or brand drugs. We expect that the use of a Revised AMP benchmark or the use of an alternative reimbursement metric, such as AAC or NADAC, would result in a reduction in the Medicaid reimbursement rates to our customers for certain pharmaceuticals, which could indirectly impact the prices that we can charge our customers and cause corresponding declines in our profitability.

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The federal government may adopt measures that could reduce Medicare and/or Medicaid spending, or impose additional requirements on healthcare entities. For example, under the terms of the Budget Control Act of 2011, an automatic 2% reduction of Medicare program payments for all healthcare providers became generally effective for services provided on or after April 1, 2013. This automatic reduction is known as “sequestration.” Medicare generally reimburses physicians for Part B drugs at the rate of average sales price (“ASP”) plus 6%. The implementation of sequestration pursuant to the Budget Control Act of 2011 has effectively reduced reimbursement below the ASP plus 6% level for the duration of sequestration (which lasts through fiscal 2024 in the absence of additional legislation). As another example, the Medicare Access and CHIP Reauthorization Act (“MACRA”), signed into law in April 2015, seeks to reform Medicare reimbursement policy for physician fee schedule services and adopts a series of policy changes affecting a wide range of providers and suppliers. Most notably, MACRA repeals the statutory Sustainable Growth Rate formula, which has called for cuts in Medicare rates in recent years, but which Congress routinely stepped in to override the full application of the formula. Instead, after a period of stable payment updates, MACRA links physician payment updates to quality and value measurements and participation in alternative payment models. MACRA also extends certain expiring Medicare and other health policy provisions, including extending the Children’s Health Insurance Program. Additionally, concerns held by federal policymakers about the federal deficit and national debt levels could result in enactment of further federal spending reductions, further entitlement reform legislation affecting the Medicare program, or both. We cannot predict what alternative or additional deficit reduction initiatives or Medicare payment reductions, if any, will ultimately be enacted into law, or the timing or affect any such initiatives or reductions will have on us.

There can be no assurance that the preceding changes would not have a material adverse impact on our results of operations.

Operating, Security and Licensure Standards: We are subject to the operating and security standards of the Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”), various state boards of pharmacy, state health departments, the U.S. Department of Health and Human Services (“HHS”), the CMS and other comparable agencies. Certain of our businesses may be required to register for permits and/or licenses with, and comply with operating and security standards of the DEA, FDA, HHS, CMS, various state boards of pharmacy, state health departments and/or comparable state agencies as well as foreign agencies and certain accrediting bodies, depending upon the type of operations and location of product development, manufacture, distribution, and sale. For example, we are required to hold valid DEA and state-level registrations and licenses, meet various security and operating standards and comply with the Controlled Substances Act and its accompanying regulations governing the sale, marketing, packaging, holding and distribution of controlled substances.

As part of these operating, security and licensure standards, we regularly receive requests for information and occasionally subpoenas from government authorities. In some instances, these can lead to monetary penalties and/or license revocation. In March 2015, we reached an agreement in principle with the DEA and Department of Justice pursuant to which we agreed to pay the sum of $150 million to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances.

Although we have enhanced our procedures to ensure compliance, there can be no assurance that a regulatory agency or tribunal would conclude that our operations are compliant with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses or any other regulatory approvals or obtain without significant delay future permits, licenses or other approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could lead to litigation and have a material adverse impact on our results of operations.

Pedigree Tracking: There have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy and departments of health and the FDA, to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated and/or mislabeled drugs into the pharmaceutical distribution system, otherwise known as pedigree tracking. In November 2013, Congress passed and the President signed into law the Drug Quality and Security Act (“DQSA”). The DQSA establishes federal standards requiring supply-chain stakeholders to participate in an electronic, interoperable, lot-level prescription drug track and trace system. The law also preempts state drug pedigree requirements.

In addition, the Food and Drug Administration Amendments Act of 2007, which went into effect on October 1, 2007, requires the FDA to establish standards and identify and validate effective technologies for the purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards may include track-and-trace or authentication technologies, such as radio frequency identification devices and other similar technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (“SNI”) guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulations in our distribution operations. The DQSA and other pedigree tracking laws and regulations could increase the overall regulatory burden and costs associated with our pharmaceutical distribution business, and could have a material adverse impact on our results of operations.

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Privacy: State, federal and foreign laws regulate the confidentiality of personal information, how that information may be used, and the circumstances under which such information may be released. These regulations govern the disclosure and use of confidential personal and patient medical record information and require the users of such information to implement specified privacy and security measures. Regulations currently in place, including regulations governing electronic health data transmissions, continue to evolve and are often unclear and difficult to apply. Although we modified our policies, procedures and systems to comply with the current requirements of applicable state, federal and foreign laws, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Health Information Technology for Economic and Clinical Health (“HITECH”) Act portion of the American Recovery and Reinvestment Act of 2009, new laws and regulations in this area could further restrict our or our customers’ ability to obtain, use or disseminate personal or patient information, or could require us to incur significant additional costs to re-design our products or systems in a timely manner, either of which could have a material adverse impact on our results of operations. In addition, the HITECH Act expanded HIPAA privacy and security requirements and increased financial penalties for violations. It also extended certain provisions of the federal privacy and security standards to us in our capacity as a business associate of our payer and provider customer. These standards may be interpreted by a regulatory authority in a manner that could require us to make a material change to our operations. Furthermore, our failure to maintain the confidentiality of personal information in accordance with applicable regulatory requirements could expose us to breach of contract claims, tort damages, fines and penalties, costs for remediation and harm to our reputation.

Healthcare Reform: The Affordable Care Act significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both governmental and private payers. While certain provisions of the Affordable Care Act took effect immediately, others have delayed effective dates. We do not currently anticipate that the Affordable Care Act or any resulting federal and state healthcare reforms will have a material impact on our financial position and results of operations. However, given the scope of the changes made and under consideration, as well as the uncertainties associated with implementation of healthcare reforms, we cannot predict their full effect on the Company at this time.

Interoperability and Meaningful Use Requirement: There is increasing demand among customers, industry groups and government authorities that healthcare software and systems provided by various vendors be compatible with each other. In 2013, in order to address this demand for interoperability we and a number of other healthcare IT companies co-founded the CommonWell Health Alliance with the aim of developing a standard for data sharing among doctors, hospitals, clinics and pharmacies. Certain federal and state agencies also are developing standards that could become mandatory for software and systems purchased by these agencies, or used by our customers. With respect to legislation addressing interoperability, MACRA promotes and defines interoperability, requires metrics to measure interoperability, and requires vendors and providers to attest that they are not blocking data. Regarding meaningful use requirements, the HITECH Act requires meaningful use of “certified” healthcare information technology products by healthcare providers in order to receive stimulus funds from the federal government.

Although several of our healthcare information technology products have received certification, rules regarding meaningful use may be changed or supplemented in the future. As a result of interoperability and meaningful requirements, we may incur increased development costs and delays in receiving certification for our products, and changing or supplementing rules also may lengthen our sales and implementation cycle. We also may incur costs in periods prior to the corresponding recognition of revenue. To the extent these requirements subsequently are changed or supplemented, or we are delayed in receiving certification for our products, customers may postpone or cancel their decisions to purchase or implement these products.

FDA Regulation of Medical Software: The FDA has increasingly focused on the regulation of medical software and health information technology products as medical devices under the federal Food, Drug and Cosmetic Act. For example, in 2011 the FDA issued a rule on medical device data systems that regulates certain software systems that electronically store, transfer or display data originating from medical devices as Class 1 medical devices (i.e., those devices deemed by the FDA to be low risk and subject to the least regulatory controls) themselves. However, in February 2015, the FDA issued guidance to inform manufacturers and distributors of medical device data systems that it did not intend to enforce compliance with regulatory controls that apply to medical device data systems, medical image storage devices, and medical image communication devices. If the FDA chooses to regulate more of our products as medical devices, or subsequently changes or reverses its guidance regarding not enforcing regulatory controls for certain medical device products, it can impose extensive requirements upon us. If we fail to comply with the applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant pre-market clearance of products, withdrawing clearances and initiating criminal prosecution. Any additional FDA regulations governing health information technology products, once issued, may increase the cost and time to market of new or existing products or may prevent us from marketing our products.

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Standards for Submission of Healthcare Claims: HHS previously adopted two rules that impact healthcare claims submitted for reimbursement. The first rule modifies the standards for electronic healthcare transactions (e.g., eligibility, claims submission and payment and electronic remittance) from Version 4010/4010A to Version 5010. The second rule updated and expanded the standard medical code sets for diagnosis and procedure coding from International Classification of Diseases, Ninth Revision (“ICD-9”) to International Classification of Diseases, Tenth Revision (“ICD-10”). As a consequence of the passage of the Protecting Access to Medicare Act of 2014, the compliance date for ICD-10 conversion has been postponed from October 1, 2014 to October 1, 2015. Updating systems to Version 5010 for electronic healthcare transactions (e.g., eligibility, claims submission and payment and electronic remittance) is required for use of the ICD-10 code set. Generally, claims submitted not using Version 5010 and ICD-10 when required will not be processed, and health plans not accepting transactions using Version 5010 and ICD-10 may experience significant increases in customer service inquiries. We may incur increased development costs and delays in delivering solutions and upgrading our software and systems to be in compliance with these new rules. In addition, these rules may lengthen our sales and implementation cycle and we may incur costs in periods prior to the corresponding recognition of revenue. Delays in providing software and systems that are in compliance with the new rules may result in postponement or cancellation of our customers’ decisions to purchase our software and systems.

Medical Billing and Coding: Medical billing, coding and collection activities are governed by numerous federal and state civil and criminal laws. In connection with these laws, we may be subjected to federal or state government investigations and possible penalties may be imposed upon us, false claims actions may have to be defended, private payers may file claims against us and we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Any such proceeding or investigation could have a material adverse impact on our results of operations.

Our foreign operations subject us to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial position and results of operations.

We have operations based in, and we source and contract manufacture pharmaceutical and medical-surgical products in, a number of foreign countries. The Company’s acquisition of Celesio significantly increases the importance of our foreign operations to our future operations and growth.

Our foreign operations expose us to a number of risks including changes in trade protection laws, policies and measures and other regulatory requirements affecting trade and investment; changes in licensing regimes for pharmacies; unexpected regulatory, social, political, or economic changes in a specific country or region; changes in intellectual property, privacy and data protection; import/export regulations and trade sanctions in both the United States and foreign countries and difficulties in staffing and managing foreign operations. Political changes, labor strikes, acts of war or terrorism and natural disasters, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location. We may also be affected by potentially adverse tax consequences and difficulties associated with repatriating cash generated or held abroad.

Foreign operations are also subject to risks of violations of laws prohibiting improper payments and bribery, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar regulations in foreign jurisdictions. The U.K. Bribery Act, for example, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that fails to prevent bribery committed by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented adequate procedures to prevent bribery. Failure to comply with these laws could subject us to civil and criminal penalties that could have a material adverse impact on our financial position and results of operations.

We also may experience difficulties and delays inherent in sourcing products and contract manufacturing from foreign countries, including but not limited to: (1) difficulties in complying with the requirements of applicable federal, state and local governmental authorities in the United States and of foreign regulatory authorities; (2) inability to increase production capacity commensurate with demand or the failure to predict market demand; (3) other manufacturing or distribution problems including changes in types of products produced, limits to manufacturing capacity due to regulatory requirements, physical limitations, or scarce or inadequate resources that could impact continuous supply; and (4) damage to our reputation due to real or perceived quality issues. For example, the FDA has conducted investigations and banned certain generics manufacturers from selling certain raw materials and drug ingredients in the U.S. from overseas plants due to quality issues. Difficulties in manufacturing or access to raw materials could result in production shutdowns, product shortages and other similar delays in product manufacturing that could have a material adverse impact on our financial position and results of operations.

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Changes in the Canadian healthcare industry and regulatory environment could have a material adverse impact on our results of operations.

Provincial governments in Canada provide partial funding for the purchase of pharmaceuticals and independently regulate the sale and reimbursement of drugs. Similar to the United States, provincial governments in Canada have introduced significant changes in recent years in an effort to reduce the costs of publicly funded health programs. For example, in 2006, the Government of Ontario considerably revised the drug reimbursement system with the passage of the Transparent Drug System for Patients Act. In recent years, to reduce the cost for taxpayers, provincial governments have taken further steps to reform the rules regarding the sale of generic drugs. These changes include the significant lowering of prices for generic pharmaceuticals and, in some provinces, the elimination or reduction of professional allowances paid to pharmacists by generic manufacturers. These reforms may adversely affect the distribution of drugs as well as the pricing for prescription drugs for the Company’s operations in Canada. Other provinces have implemented or are considering similar changes, which would also lower pharmaceutical pricing and service fees. Individually or in combination, such changes in the Canadian healthcare environment may significantly reduce our Canadian revenue and operating profit.

General European economic conditions, together with austerity measures being taken by certain European governments, could have a material adverse impact on our results of operations.

The Company’s acquisition of Celesio increased our assets and operations within Europe and, accordingly, our exposure to economic conditions in Europe. A slowdown within the European economy could affect our business in Europe by reducing the prices our customers may be able or willing to pay for our products and services. A slowdown may also reduce the demand for our products, either of which could result in a material adverse impact on our results of operations.

In addition, in many European countries the government provides or subsidizes healthcare to consumers and regulates pharmaceutical prices, patient eligibility, and reimbursement levels to control costs for the government-sponsored healthcare system. In recent years, in response to the recessionary environment and financial crisis in Europe, a number of European governments have announced or implemented austerity measures to reduce healthcare spending and constrain overall government expenditures. For example, in 2011, the French government introduced a new wholesale mark-up system that constrained distribution margins on pharmaceuticals. These measures, which include efforts aimed at reforming healthcare coverage and reducing healthcare costs, continue to exert pressure on the pricing of and reimbursement timelines for pharmaceuticals and may cause our customers to purchase fewer of our products and services and reduce the prices they are willing to pay.

Countries with existing healthcare-related austerity measures may impose additional laws, regulations, or requirements on the healthcare industry. In addition, European governments that have not yet imposed healthcare-related austerity measures may impose them in the future. New austerity measures may be similar to or vary from existing austerity measures and could have a material adverse impact on our results of operations.

Changes in the European regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations.

In Europe, we are subject to the European Union (“EU”) data protection regulations, including the EU Directive on Data Protection, which requires member states to impose minimum restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States. We may also face audits or investigations by one or more foreign government agencies relating to our compliance with these regulations that could result in the imposition of penalties or fines. The EU regulations establish several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. In addition to this EU-wide legislation, certain member states have adopted more stringent data protection standards. The Company has addressed these requirements by certification to the U.S.-EU Safe Harbor Frameworks. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit the use and adoption of our products and solutions and could have a material adverse impact on our results of operations.

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Our results of operations, which are stated in U.S. dollars, could be adversely impacted by foreign currency fluctuations.

As all of Celesio’s revenues are generated outside of the United States, the Company’s acquisition of Celesio significantly increases our exposure to foreign currency fluctuation risks. These risks include uncertainty regarding the Brazilian real, the British pound sterling, the Canadian dollar, the Euro, and the Norwegian krone that could adversely impact our results of operations and capital ratios based on the movements of the applicable foreign currency exchange rates in relation to the U.S. dollar. Fluctuating exchange rates cause the value of items on both the assets and liabilities side of the balance sheet to change, which could also negatively impact our results of operations. Our financial results and capital ratios will therefore be sensitive to movements in foreign exchange rates. A depreciation of non-U.S. dollar currencies relative to the U.S. dollar could have a material adverse impact on our results of operations.

Our business could be hindered if we are unable to complete and integrate acquisitions successfully.

An element of our strategy is to identify, pursue and consummate acquisitions that either expand or complement our business. Integration of acquisitions involves a number of significant risks, including the diversion of management’s attention to the assimilation of the operations of businesses we have acquired; difficulties in the integration of operations and systems; the realization of potential operating synergies; the assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; challenges in retaining the customers of the combined businesses. Further, acquisitions may have a material adverse impact on our operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related to potential impairment charges, assumed litigation and unknown liabilities. In addition, we may potentially require additional financing in order to fund future acquisitions, which may or may not be attainable and is subject to potential volatility in the credit markets. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our business and our growth strategies could be negatively affected.

On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio. Upon the acquisition, our ownership of Celesio’s fully diluted shares was 75.6%. Celesio is an international wholesale and retail company and provider of logistics and services to the pharmaceutical and healthcare sectors. On December 2, 2014, we obtained the ability to pursue the integration of the two companies upon the effectiveness of the domination and profit and loss transfer agreement (the “Domination Agreement”).

Achieving the anticipated benefits of our acquisition of Celesio is subject to a number of risks and uncertainties, including foreign exchange fluctuations, challenges of managing new international operations, and whether we can ensure continued performance or market growth of Celesio’s product and services. The integration process is subject to a number of uncertainties and no assurance can be given that the anticipated benefits of the transaction will be realized or, if realized, the timing of its realization. It is possible that the integration process could take longer than anticipated, and could result in the loss of employees, the disruption of each company’s ongoing businesses, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Celesio acquisition and which could have a material adverse impact on our financial position, results of operations, liquidity and cash flows.

Any significant diversion of management’s attention away from the ongoing businesses, and any difficulties encountered in the acquisition, transition and integration process, could adversely affect our financial results. Moreover, the failure to achieve the anticipated benefits of the Celesio acquisition could result in increased costs or decreases in the amount of expected revenues, and could adversely affect our future business, financial position and operating results. Events outside of our control, including the market price of Celesio shares that we did not acquire in the acquisition, changes in regulations and laws, as well as economic trends, could also adversely affect our ability to realize the expected benefits from our acquisition of Celesio.

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Our business and results of operations could be impacted if we fail to manage and complete divestitures.

We regularly evaluate our portfolio in order to determine whether an asset or business may no longer help us meet our objectives. For example, during the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business and a small business from our Distribution Solutions segment, as well as a small business from our Technology Solutions segment. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. We may also experience greater dissynergies than expected, and the impact of the divestiture on our revenue growth may be larger than projected. After reaching an agreement with a buyer, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals, which, if not satisfied or obtained, may prevent us from completing the sale. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could have a material adverse impact on our results of operations.

We are subject to legal and regulatory proceedings that could have a material adverse impact on our financial position and results of operations.

From time-to-time and in the ordinary course of our business, we and certain of our subsidiaries may become involved in various legal and regulatory proceedings involving false claims, healthcare fraud and abuse, antitrust, commercial, employment, environmental, intellectual property, licensing, tort and other various claims. All such legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or injunctive relief that may affect how we operate our business or we may enter into settlements of claims for monetary payments. In some cases, substantial non-economic remedies or punitive damages may be sought. For some complaints filed against the Company, we are currently unable to estimate the amount of possible losses that might be incurred should these legal proceedings be resolved against the Company.

The outcome of litigation and other legal matters is always uncertain and outcomes that are not justified by the evidence or existing law can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or any combination of more than one legal matter could result in a material adverse impact on our financial position or results of operations.

Litigation is costly, time-consuming and disruptive to normal business operations. The defense of these matters could also result in continued diversion of our management’s time and attention away from business operations, which could also harm our business. Even if these matters are not resolved against us, the uncertainty and expense associated with unresolved legal proceedings could harm our business and reputation.

Competition may erode our profit.

In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition, both in price and service, from international, national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers of the segment, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by the segment. Price, quality of service, and in some cases, convenience to the customer are generally the principal competitive elements in this segment.

In recent years, pharmaceutical suppliers have been subject to increasing consolidation. As a result, a small number of very large companies control a significant share of the market. Accordingly, we depend on fewer suppliers for our products and therefore we may be less able to negotiate price terms with suppliers. Many healthcare organizations that purchase our products and services have also consolidated to create larger healthcare enterprises with greater market power. If this consolidation trend continues, it could reduce the number of market participants and give the resulting enterprises greater bargaining power, which may lead to erosion of the prices for our products and services. In addition, when healthcare organizations combine they often consolidate infrastructure including IT systems, which in turn may erode the diversity of our customer and revenue base.

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A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as substantial defaults in payment by a large customer or group purchasing organization, could have a material adverse impact on our financial position and results of operations.

In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2015, sales to our ten largest customers accounted for approximately 44% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation (“CVS”), accounted for approximately 15% of our total consolidated revenues. At March 31, 2015, trade accounts receivable from our ten largest customers were approximately 36% of total trade accounts receivable. Accounts receivable from CVS were approximately 14% of total trade accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements with group purchasing organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. A material default in payment, change in our customer mix, reduction in purchases, or the loss of a large customer or GPO could have a material adverse impact on our financial position and results of operations.

We generally sell our products and services to customers on credit that is short-term in nature and unsecured. Any adverse change in general economic conditions can adversely reduce sales to our customers, affect consumer buying practices or cause our customers to delay or be unable to pay accounts receivable owed to us, which may in turn materially reduce our revenue growth and cause a material decrease in our profitability and cash flow. Further, interest rate fluctuations and changes in capital market conditions may also affect our customers’ ability to obtain credit to finance their business under acceptable terms, which in turn may materially reduce our revenue growth and cause a decrease in our profitability.

Contracts with foreign and domestic government entities and their agencies pose additional risks relating to future funding and compliance.

Contracts with foreign and domestic government entities and their agencies are subject to various uncertainties, restrictions and regulations, including oversight audits by various government authorities. Government contracts also are exposed to uncertainties associated with funding. Contracts with the U.S. federal government, for example, are subject to the uncertainties of Congressional funding. Governments are typically under no obligation to maintain funding at any specific level, and funds for government programs may even be eliminated. As a result, our government clients may terminate our contracts for convenience or decide not to renew our contracts with little or no prior notice. The loss of such contracts could have a material adverse impact on our results of operations.

In addition, because government contracts are subject to specific procurement regulations and a variety of other socio-economic requirements, we must comply with such requirements. For example, for contracts with the U.S. federal government, with certain exceptions, we must comply with the Federal Acquisition Regulation, the Truth in Negotiations Act, and the Cost Accounting Standards. We must also comply with various other government regulations and requirements as well as various statutes related to employment practices, environmental protection, recordkeeping and accounting. These regulations and requirements affect how we transact business with our clients and, in some instances, impose additional costs on our business operations. Government contracts also contain terms that expose us to higher levels of risk and potential liability than non-government contracts.

We also are subject to government audits, investigations, and proceedings. For example, government agencies routinely review and audit government contractors to determine whether allowable costs are in accordance with applicable government regulations. These audits can result in adjustments to the amount of contract costs we believe are reimbursable by the agencies and the amount of our overhead costs allocated to the agencies.

If we violate these rules or regulations, fail to comply with a contractual or other requirement or do not satisfy an audit, a variety of penalties can be imposed by a government including disallowance of costs claimed, monetary damages and criminal and civil penalties. In addition, any or all of our government contracts could be terminated or we could be suspended or debarred from all government contract work. The occurrence of any of these actions could harm our reputation and could have a material adverse impact on our results of operations.

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Our future results could be materially affected by a number of public health issues whether occurring in the United States or abroad.

Public health issues, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of suppliers or customers, or have a broader adverse impact on consumer spending and confidence levels that would negatively affect our suppliers and customers. We have developed contingency plans to address infectious disease scenarios and the potential impact on our operations, and we will continue to update these plans as necessary. However, there can be no assurance that these plans will be effective in eliminating the negative impact of any such diseases on the Company’s operating results. We may be required to suspend operations in some or all of our locations, which could have a material adverse impact on our financial position and results of operations.

We are dependent upon sophisticated information systems. The malfunction, failure or breach of these systems to perform as designed could have a material adverse impact on our results of operations.

Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including protected health information, financial information and other sensitive information relating to our customers, company and workforce. We also rely on sophisticated information systems in our business to obtain, rapidly process, analyze and manage data to: (1) facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers; (2) receive, process and ship orders and handle other product and services on a timely basis; (3) manage the accurate billing and collections for thousands of customers; and (4) process payments to suppliers. In Europe, Celesio outsources a significant part of its IT infrastructure to an external service provider. If these systems are interrupted, damaged or breached by an unforeseen event or actions of a third party, including a cyber attack, or fail for any extended period of time, it could have a material adverse impact on our results of operations.

If we sustain cyber attacks or other privacy or data security incidents that result in security breaches, we could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm and other serious negative consequences.

We routinely process, store and transmit large amounts of data in our operations, including sensitive personal information as well as proprietary or confidential information relating to our business or third parties. Some of the data we process, store and transmit may be outside of the U.S. due to our information technology systems and international business operations. We may be subject to breaches of the information technology systems we use. Experienced computer programmers and hackers may be able to penetrate our layered security controls and misappropriate or compromise sensitive personal information or proprietary or confidential information, create system disruptions or cause shutdowns. They also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or otherwise exploit any security vulnerabilities. Our systems and the data we store on those systems may also be vulnerable to security incidents or security attacks; acts of vandalism or theft; coordinated attacks by activist entities; misplaced or lost data; human errors; or other similar events that could negatively affect our systems and our and our customer’s data.

The costs to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers. In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal information or proprietary information or confidential information about us or our customers or other third parties, could expose our customers’ private information and our customers to the risk of financial or medical identity theft, or expose us or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business.

We could experience losses or liability not covered by insurance.

In order to provide prompt and complete service to our major Distribution Solutions segment’s customers, we maintain significant product inventory at certain of our distribution centers. While we seek to maintain property insurance coverage in amounts sufficient for our business, there can be no assurance that our property insurance will be adequate or available on acceptable terms. One or more large casualty losses caused by fire, earthquake or other natural disaster in excess of our coverage limits could have a material adverse impact on our results of operations.

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Our business exposes us to risks that are inherent in the distribution, manufacturing, dispensing and administration of pharmaceuticals and medical-surgical supplies, the provision of ancillary services, the conduct of our payer businesses (which include care management programs and our nurse advice services) and the provision of products that assist clinical decision-making and relate to patient medical histories and treatment plans. If customers or individuals assert liability claims against our products and/or services, any ensuing litigation, regardless of outcome, could result in a substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products. We attempt to limit our liability to customers by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by contract, such as a claim directly by a patient. We also maintain general liability coverage; however, this coverage may not continue to be available on acceptable terms, may not be available in sufficient amounts to cover one or more large claims against us and may include larger self-insured retentions or exclusions for certain products. In addition, the insurer might disclaim coverage as to any future claim. A successful product or professional liability claim not fully covered by our insurance could have a material adverse impact on our results of operations.

The acquisition of Celesio exposes us to additional risks related to providing pharmacy services. Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. Although Celesio maintains liability insurance, the coverage may not be adequate to protect us against future claims. If Celesio’s insurance coverage proves to be inadequate or unavailable or Celesio suffers reputational harm as a result of an error or omission, it could have a material adverse impact on our results of operations.

The failure of our healthcare technology businesses to attract and retain customers due to challenges in software product integration or to keep pace with technological advances may significantly reduce our results of operations.

Our healthcare technology businesses, the bulk of which resides in our Technology Solutions segment, deliver enterprise‑wide and single entity clinical, patient care, financial, supply chain and strategic management software solutions to hospitals, physicians, homecare providers, retail and mail order pharmacies and payers. Challenges integrating software products could impair our ability to attract and retain customers and could have a material adverse impact on our consolidated results of operations and a disproportionate impact on the results of operations of our Technology Solutions segment.

Future advances in the healthcare information systems industry could lead to new technologies, products or services that are competitive with the technology products and services offered by our various businesses. Such technological advances could also lower the cost of such products and services or otherwise result in competitive pricing pressure or render our products obsolete.

The success of our technology businesses will depend, in part, on our ability to be responsive to technological developments, pricing pressures and changing business models. To remain competitive in the evolving healthcare information systems marketplace, our technology businesses must also develop new products on a timely basis. The failure to develop competitive products and to introduce new products on a timely basis could curtail the ability of our technology businesses to attract and retain customers, and thereby could have a material adverse impact on our results of operations.

Proprietary protections may not be adequate and products may be found to infringe the rights of third parties.

We rely on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect our proprietary rights in our products and solutions. There can be no assurance that these protections will be adequate or that our competitors will not independently develop products or solutions that are equivalent or superior to ours. In addition, despite protective measures, we may be subject to unauthorized use of our technology due to copying, reverse-engineering or other infringement. Although we believe that our products, solutions and services do not infringe the proprietary rights of third parties, from time to time third parties have asserted infringement claims against us and there can be no assurance that third parties will not assert infringement claims against us in the future. If we were found to be infringing others’ rights, we may be required to pay substantial damage awards and forced to develop non-infringing products or technology, obtain a license or cease selling or using the products that contain the infringing elements. Additionally, we may find it necessary to initiate litigation to protect our trade secrets, to enforce our patent, copyright and trademark rights and to determine the scope and validity of the proprietary rights of others. These types of litigation can be costly and time consuming. These litigation expenses, damage payments or costs of developing replacement products or technology could have a material adverse impact on our results of operations.

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System errors or failures of our products to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our results of operations.

The software and technology services that we sell or operate are complex. As with complex systems offered by others, our software and technology services may contain errors, especially when first introduced. For example, our Technology Solutions segment’s systems are intended to provide information to healthcare professionals in the course of delivering patient care. Therefore, users of our software and technology services have a greater sensitivity to errors than the general market for software products. If our software and technology services lead to faulty clinical decisions or injury to patients, we could be subject to claims or litigation by our clients, clinicians or patients. In addition, such failures could damage our reputation and could negatively affect future sales.

Failure of a customer’s system to perform in accordance with our documentation could constitute a breach of warranty and could require us to incur additional expense in order to make the system comply with the documentation. If such failure is not remedied in a timely manner, it could constitute a material breach under a contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid or assert claims for significant damages.

Various risks could interrupt customers’ access to their data residing in our service center, exposing us to significant costs.

We provide remote hosting services that involve operating both our software and the software of third-party vendors for our customers. The ability to access the systems and the data that we host and support on demand is critical to our customers. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (1) power loss and telecommunications failures; (2) fire, flood, hurricane and other natural disasters; (3) software and hardware errors, failures or crashes; and (4) cyber attacks, computer viruses, hacking and other similar disruptive problems. We attempt to mitigate these risks through various means including disaster recovery plans, separate test systems and change controls, information security procedures, and continued development and enhancement of our cyber security, but our precautions may not protect against all risks. If customers’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims, particularly if the access interruption is associated with problems in the timely delivery of medical care. If customers’ access is interrupted from failure or breach of our operational or information security systems, or those of our contractors or third party service providers, we could suffer reputational harm or be exposed to liabilities arising from the unauthorized and improper use or disclosure of confidential or proprietary information. We must maintain disaster recovery and business continuity plans that rely upon third-party providers of related services and if those vendors fail us at a time that our center is not operating correctly, we could incur a loss of revenue and liability for failure to fulfill our contractual service commitments. Any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services.

The length of our sales and implementation cycles for our Technology Solutions segment could have a material adverse impact on our future results of operations.

Many of the solutions offered by our Technology Solutions segment have long sales and implementation cycles, which could range from a few months to two years or more from initial contact with the customer to completion of implementation. How and when to implement, replace, or expand an information system, or modify or add business processes, are major decisions for healthcare organizations. Many of the solutions we provide typically require significant capital expenditures and time commitments by the customer. Any decision by our customers to delay or cancel implementation could have a material adverse impact on our results of operations. Furthermore, delays or failures to meet milestones established in our agreements may result in a breach of contract, termination of the agreement, damages and/or penalties as well as a reduction in our margins or a delay in our ability to recognize revenue.

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We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired.

We are required under U.S. generally accepted accounting principles (“GAAP”) to test our goodwill for impairment, annually or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry, or economic trends or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time. In addition, we periodically review our intangible assets for impairment when events or changes in circumstances, such as a divestiture indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include slower growth rates the loss of a significant customer, or divestiture of a business or asset for below its carrying value. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined. This could have a material adverse impact on our results of operations. There are inherent uncertainties in management’s estimates, judgments and assumptions used in assessing recoverability of goodwill and intangible assets. Any changes in key assumptions, including failure to meet business plans, a further deterioration in the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.

Tax legislation initiatives or challenges to our tax positions could have a material adverse impact on our results of operations.

We are a large multinational corporation with operations in the United States and international jurisdictions. As such, we are subject to the tax laws and regulations of the United States federal, state and local governments and of many international jurisdictions. From time-to-time, legislation may be enacted that could adversely affect our tax positions. There can be no assurance that our effective tax rate and the resulting cash flow will not be adversely affected by these changes in legislation. For example, if legislation is passed to repeal the LIFO (last-in, first-out) method of inventory accounting for income tax purposes, it would adversely impact our cash flow. Additionally, if legislation is passed to change the current U.S. taxation treatment of income from foreign operations, or if legislation is passed at the state level to establish or increase taxation on the basis of our gross revenues, it may adversely impact our tax expense. The tax laws and regulations of the various countries where we have major operations are extremely complex and subject to varying interpretations. For example, we operate in various countries which collect value added taxes (“VAT”). The determination of the manner in which a VAT applies to our foreign operations is subject to varying interpretations arising from the complex nature of the tax laws and regulations. Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that these tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Even if we are successful in maintaining our positions, we may incur significant expense in defending challenges to our tax positions by tax authorities that could have a material impact on our financial position and results of operations.

Volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit, our cost of credit and the financial soundness of our customers and suppliers.

Volatility and disruption in the global capital and credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by other financial institutions, decreased liquidity and increased costs in the commercial paper market and the reduced market for securitizations, may adversely affect the availability and cost of credit already arranged and the availability, terms and cost of credit in the future, including any arrangements to renew or replace our current credit or financing arrangements. Although we believe that our operating cash flow, financial assets, current access to capital and credit markets, including our existing credit and sales facilities, will give us the ability to meet our financing needs for the foreseeable future, there can be no assurance that volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.

Our business could also be negatively impacted if our customers or suppliers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy. As a result, customers may modify, delay or cancel plans to purchase or implement our products or services and suppliers may increase their prices, reduce their output or change their terms of sale. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of accounts receivable owed to us and suppliers may restrict credit, impose different payment terms or be unable to make payments due to us for fees, returned products or incentives. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms may have a material adverse impact on our results of operations and cash flow.

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Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”), the International Accounting Standards Board (“IASB”) or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Within our financial statements, we consolidate the results of Celesio, which are subject to the application of International Financial Reporting Standards or IFRS. From time-to-time we or Celesio are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB, IASB and the SEC. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse impact on our financial position and results of operations.

We could face significant liability if we withdraw from participation in one or more multiemployer pension plans in which we participate or one or more multiemployer plans in which we participate is reported to have underfunded liabilities.

We participate in various multiemployer pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make additional cash contributions to the plans in installments. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s funding of vested benefits. The multiemployer plans could have significant unfunded vested liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies. The occurrence of any of these events could have a material adverse impact on our consolidated financial position, results of operations or cash flows.


Item 1B.	Unresolved Staff Comments.

None.


Item 2.	Properties.

Because of the nature of our principal businesses, our plant, warehousing, retail pharmacies, office and other facilities are operated in widely dispersed locations, primarily throughout North America and Europe. The warehouses and retail pharmacies are typically owned or leased on a long-term basis. We consider our operating properties to be in satisfactory condition and adequate to meet our needs for the next several years without making capital expenditures materially higher than historical levels. Information as to material lease commitments is included in Financial Note 21, “Lease Obligations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.


Item 3.	Legal Proceedings.

Certain legal proceedings in which we are involved are discussed in Financial Note 23, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.


Item 4.	Mine Safety Disclosures.

Not applicable.

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Executive Officers of the Registrant

The following table sets forth information regarding the executive officers of the Company, including their principal occupations during the past five years. The number of years of service with the Company includes service with predecessor companies.

There are no family relationships between any of the executive officers or directors of the Company. The executive officers are elected on an annual basis generally and their term expires at the first meeting of the Board of Directors (“Board”) following the annual meeting of stockholders, or until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner.



Name	Age	Position with Registrant and Business Experience

John H. Hammergren	56	Chairman of the Board since July 2002; President and Chief Executive Officer since April 2001; and a director since July 1999. Service with the Company — 19 years.

James A. Beer	54	Executive Vice President and Chief Financial Officer since October 2013; Executive Vice President and Chief Financial Officer, Symantec Corporation from 2006 to October 2013; Senior Vice President and Chief Financial Officer, AMR Corporation and its principal subsidiary, American Airlines, Inc., from 2004 to 2006, Service with the Company — 1 year, 7 months.

Patrick J. Blake	51	Executive Vice President and Group President since June 2009; President of McKesson Specialty Care Solutions (now McKesson Specialty Health) from April 2006 to June 2009. Service with the Company — 19 years.

Jorge L. Figueredo	54	Executive Vice President, Human Resources since May 2008; Service with the Company — 7 years.

Paul C. Julian	59	Executive Vice President and Group President since April 2004. Service with the Company — 19 years.

Bansi Nagji	50	Executive Vice President, Corporate Strategy and Business Development since February 2015; Principal, Deloitte Consulting, LLP and Global Leader, Monitor Deloitte (which was formed by the global merger of Monitor Group with Deloitte) from January 2013 to February 2015; President, Monitor Group from July 2012 to January 2013; Partner, Monitor Group from 2001 to January 2013. Service with the Company — 3 months.

Lori A. Schechter	53	Executive Vice President, General Counsel and Chief Compliance Officer since June 2014; Associate General Counsel from January 2012 to June 2014; Litigation Partner, Morrison & Foerster LLP from January 1995 to December 2011. Service with the Company — 3 years.

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PART II


Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.


(a)	Market Information: The principal market on which the Company’s common stock is traded is the New York Stock Exchange (“NYSE”).

The following table sets forth the high and low sales prices for our common stock as reported on NYSE for each quarterly period of the two most recently completed fiscal years:



	2015				2014
	High		Low		High		Low
First quarter	$	192.03	$	162.90	$	119.32	$	102.68
Second quarter	$	200.00	$	185.66	$	133.33	$	113.26
Third quarter	$	214.37	$	178.28	$	166.57	$	128.84
Fourth quarter	$	232.69	$	205.72	$	188.02	$	159.45


(b)	Holders: The number of record holders of the Company’s common stock at March 31, 2015 was approximately 6,488.


(c)	Dividends: In July 2013, the Company’s quarterly dividend was raised from $0.20 to $0.24 per common share for dividends declared after such date, until further action by the Company’s Board of Directors (the “Board”). The Company declared regular cash dividends of $0.96 and $0.92 per share in the years ended March 31, 2015 and 2014.

The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors.


(d)	Securities Authorized for Issuance under Equity Compensation Plans: Information relating to this item is provided under Part III, Item 12, to this Annual Report on Form 10-K.

(e)

Share Repurchase Plans: Stock repurchases may be made from time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.

In 2015, we repurchased 1.5 million shares for $340 million at an average price of $226.55 per share. In 2014, we made no share repurchases. In 2013, we repurchased 13 million shares for $1,159 million at an average price of $100.82 per share.

The following table provides information on the Company’s share repurchases during the fourth quarter of 2015:



	Share Repurchases ⁽¹⁾
(In millions, except price per share)	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
January 1, 2015 - January 31, 2015	—	$	—	—	$	340
February 1, 2015 - February 28, 2015	1.5	226.55		1.5	—
March 1, 2015 - March 31, 2015	—	—		—	—
Total	1.5			1.5	$	—


(1)	This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax-withholding obligations in connection with employee equity awards.

In May 2015, the Board authorized the repurchase of up to $500 million of the Company’s common stock.

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(f)

Stock Price Performance Graph*: The following graph compares the cumulative total stockholder return on the Company’s common stock for the periods indicated with the Standard & Poor’s 500 Index, Value Line Healthcare Sector Index and the S&P 500 Health Care Index. The S&P 500 Health Care Index will replace the Value Line Healthcare Sector Index in the stock price performance graph below beginning in 2016. The S&P 500 Health Care Index was selected as a comparator because it is generally available to investors and broadly used by other companies in our same industry.



	March 31,
	2010		2011		2012		2013		2014		2015
McKesson Corporation	$	100.00	$	121.58	$	136.33	$	169.13	$	278.43	$	358.37
S&P 500 Index	$	100.00	$	115.65	$	125.53	$	143.05	$	174.32	$	196.51
S&P 500 Health Care Index	$	100.00	$	105.14	$	122.34	$	153.13	$	197.88	$	249.65
Value Line Healthcare Sector Index	$	100.00	$	107.07	$	122.07	$	152.91	$	196.59	$	243.18

* Assumes $100 invested in McKesson Common Stock and in each index on March 31, 2010 and that all dividends are reinvested.

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Item 6.	Selected Financial Data.

FIVE-YEAR HIGHLIGHTS



	As of and for the Years Ended March 31,
(In millions, except per share data and ratios)		2015			2014			2013			2012			2011
Operating Results
Revenues		$	179,045		$	137,392		$	122,196		$	122,453		$	111,804
Percent change		30.3		%	12.4		%	(0.2		)%	9.5		%	3.1		%
Gross profit		$	11,411		$	8,352		$	6,881		$	6,435		$	5,828
Income from continuing operations before income taxes		2,657			2,171			1,950			1,915			1,600
Income (loss) after income taxes
Continuing operations		1,842			1,414			1,363			1,394			1,097
Discontinued operations		(299		)	(156		)	(25		)	9			105
Net income		1,543			1,258			1,338			1,403			1,202
Net loss (income) attributable to noncontrolling interests ⁽¹⁾		(67		)	5			—			—			—
Net income attributable to McKesson Corporation		1,476			1,263			1,338			1,403			1,202

Financial Position
Working capital		$	3,173		$	3,221		$	1,813		$	1,917		$	3,631
Days sales outstanding for: ⁽²⁾
Customer receivables		26			29			26			24			25
Inventories		31			33			33			31			31
Drafts and accounts payable		54			54			51			49			47
Total assets		$	53,870		$	51,759		$	34,786		$	33,093		$	30,886
Total debt, including capital lease obligations		9,844			10,594			4,873			3,980			4,004
Total McKesson stockholders’ equity ⁽³⁾		8,001			8,522			7,070			6,831			7,220
Property acquisitions		376			278			241			221			233
Acquisitions, net of cash and cash equivalents acquired		170			4,634			1,873			1,051			292

Common Share Information
Common shares outstanding at year-end		232			231			227			235			252
Shares on which earnings per common share were based
Diluted		235			233			239			251			263
Basic		232			229			235			246			258
Diluted earnings (loss) per common share attributable to McKesson Corporation⁽⁴⁾
Continuing operations		$	7.54		$	6.08		$	5.69		$	5.56		$	4.17
Discontinued operations		(1.27		)	(0.67		)	(0.10		)	0.04			0.40
Total		6.27			5.41			5.59			5.60			4.57
Cash dividends declared		226			214			192			202			188
Cash dividends declared per common share		0.96			0.92			0.80			0.80			0.72
Book value per common share ^{(4) (5)}		34.49			36.89			31.15			29.07			28.65
Market value per common share - year-end		226.20			176.57			107.96			87.77			79.05

Supplemental Data
Capital employed ⁽⁶⁾		$	17,845		$	19,116		$	11,943		$	10,811		$	11,224
Debt to capital ratio ⁽⁷⁾		55.2		%	55.4		%	40.8		%	36.8		%	35.7		%
Net debt to net capital employed ⁽⁸⁾		36.0		%	42.9		%	25.5		%	10.8		%	5.1		%
Average McKesson stockholders’ equity ⁽⁹⁾		$	8,703		$	7,803		$	7,294		$	7,108		$	7,105
Return on McKesson stockholders’ equity ⁽¹⁰⁾		17.0		%	16.2		%	18.3		%	19.7		%	16.9		%

Footnotes to Five-Year Highlights:


(1)	Primarily reflects guaranteed dividends and annual recurring compensation that McKesson became obligated to pay to the noncontrolling shareholders of Celesio AG upon the effectiveness of the Domination Agreement in December 2014.


(2)	Based on year-end balances and sales or cost of sales for the last 90 days of the year.


(3)	Excludes noncontrolling and redeemable noncontrolling interests.


(4)	Certain computations may reflect rounding adjustments.


(5)	Represents McKesson stockholders’ equity divided by year-end common shares outstanding.


(6)	Consists of the sum of total debt and McKesson stockholders’ equity.


(7)	Ratio is computed as total debt divided by capital employed.


(8)	Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt and McKesson stockholders’ equity.


(9)	Represents a five-quarter average of McKesson stockholders’ equity.


(10)	Ratio is computed as net income attributable to McKesson Corporation divided by a five-quarter average of McKesson stockholders’ equity.

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McKESSON CORPORATION

FINANCIAL REVIEW


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

Certain statements in this report constitute forward-looking statements. See Item 1 - Business - Forward-Looking Statements in Part I of this Annual Report on Form 10-K for additional factors relating to these statements; also see Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for a list of certain risk factors applicable to our business, financial condition and results of operations.

We conduct our business through two operating segments: McKesson Distribution Solutions and McKesson Technology Solutions. See Financial Note 26, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for a description of these segments.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

RESULTS OF OPERATIONS

Overview:



(Dollars in millions, except per share data)	Years Ended March 31,									Change
(Dollars in millions, except per share data)	2015			2014			2013			2015		2014

Revenues	$	179,045		$	137,392		$	122,196		30	%	12		%

Gross Profit	$	11,411		$	8,352		$	6,881		37	%	21		%

Operating Expenses	$	8,443		$	5,913		$	4,534		43	%	30		%

Income from Continuing Operations Before Income Taxes	$	2,657		$	2,171		$	1,950		22	%	11		%
Income Tax Expense	(815		)	(757		)	(587		)	8		29
Income from Continuing Operations	1,842			1,414			1,363			30		4
Loss from Discontinued Operations, Net of Tax	(299		)	(156		)	(25		)	92		524
Net Income	1,543			1,258			1,338			23		(6	)
Net Loss (Income) Attributable to Noncontrolling Interests	(67		)	5			—			—		—
Net Income Attributable to McKesson Corporation	$	1,476		$	1,263		$	1,338		17	%	(6	)	%

Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	7.54		$	6.08		$	5.69		24	%	7		%
Discontinued Operations	(1.27		)	(0.67		)	(0.10		)	90		570
Total	$	6.27		$	5.41		$	5.59		16	%	(3	)	%

Weighted Average Diluted Common Shares	235			233			239			1	%	(3	)	%

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.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 operations were $7.54, $6.08 and $5.69 and diluted loss per common share attributable to McKesson Corporation from discontinued operations were $1.27, $0.67 and $0.10 in 2015, 2014 and 2013.

On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the “Acquisition”). Upon the Acquisition, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesio’s fully diluted common shares was 75.6%. We owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares at March 31, 2014. Financial results for Celesio are included within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment, since the date of Acquisition.

On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary, McKesson Deutschland GmbH & Co. KGaA (“McKesson Deutschland,” formerly known as Dragonfly GmbH & Co. KGaA), entered into the Domination Agreement. On July 15, 2014, the Domination Agreement was approved at the general shareholders’ meeting of Celesio. On December 2, 2014, the Domination Agreement became effective upon its registration in the commercial register of Celesio at the local court of Stuttgart, Germany. Upon the effectiveness of the Domination Agreement, the noncontrolling shareholders of Celesio no longer participate in their percentage ownership of Celesio’s profits and losses. Instead, McKesson became obligated to pay a one-time $50 million dividend (“Guaranteed Dividend”) for their fiscal year ended December 31, 2014, and an annual recurring compensation amount of €0.83 per Celesio share (effective January 1, 2015) to the noncontrolling shareholders of Celesio. The recurring compensation amount is recognized ratably during the applicable annual period. For fiscal 2016, the estimated annual recurring compensation is $44 million based on the Euro to U.S. dollar exchange rate and shares owned by the noncontrolling interests at April 1, 2015.

In addition, upon effectiveness of the Domination Agreement, the noncontrolling interests in Celesio became redeemable as a result of a put right. Accordingly, the carrying value of noncontrolling interests related to Celesio of $1.5 billion was reclassified in the third quarter of 2015 from “Total Equity” to “Redeemable Noncontrolling Interests” on our consolidated balance sheet. The balance of redeemable noncontrolling interests will be reported at the greater of its carrying value or its maximum redemption value at each reporting date. At March 31, 2015, the carrying value of redeemable noncontrolling interests amounted to $1.4 billion, which exceeded the maximum redemption value of $1.2 billion.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Revenues:



	Years Ended March 31,						Change
(Dollars in millions)	2015		2014		2013		2015			2014
Distribution Solutions
North America pharmaceutical distribution & services	$	143,711	$	123,929	$	115,443	16		%	7	%
International pharmaceutical distribution & services	26,358		4,485		—		488			—
Medical-Surgical distribution & services	5,907		5,648		3,603		5			57
Total Distribution Solutions	175,976		134,062		119,046		31			13

Technology Solutions - products and services	3,069		3,330		3,150		(8	)		6
Total Revenues	$	179,045	$	137,392	$	122,196	30		%	12	%

Revenues for 2015 increased 30% to $179.0 billion from 2014 and revenues for 2014 increased 12% to $137.4 billion from 2013. Increases in our revenues were primarily driven by our Distribution Solutions segment, which accounted for approximately 98% of our consolidated revenues.

Distribution Solutions

North America pharmaceutical distribution and services revenues increased over the last two years primarily due to market growth and our mix of business. Market growth reflects growing drug utilization, which includes newly launched drugs and price increases. In particular, our 2015 revenues benefited from newly launched drugs for the treatment of Hepatitis C. These increases were partially offset by price deflation associated with brand to generic drug conversions.

International pharmaceutical distribution and services revenues were $26.4 billion and $4.5 billion in 2015 and 2014, representing revenues from Celesio, which was acquired in February 2014.

Medical-Surgical distribution and services revenues increased over the last two years primarily due to market growth. Additionally, revenues increased in 2014 as a result of our February 2013 acquisition of PSSI.

Technology Solutions

Technology Solutions revenues decreased in 2015 compared to 2014 primarily due to a decline in software products and services revenues, the planned elimination of a product line and lower revenues from the workforce business within our International Technology business, which we will transition to another service provider during the first quarter of 2016. These decreases were partially offset by higher volume in our transaction processing businesses.

Technology Solutions revenues increased in 2014 compared to 2013 primarily due to small business acquisitions and higher volumes in our transaction processing businesses, partially offset by a decrease in software products and services revenues.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Gross Profit:



	Years Ended March 31,									Change
(Dollars in millions)	2015			2014			2013			2015			2014
Gross Profit
Distribution Solutions ⁽¹⁾	$	9,937		$	6,745		$	5,435		47		%	24	%
Technology Solutions	1,474			1,607			1,446			(8	)		11
Total	$	11,411		$	8,352		$	6,881		37		%	21	%

Gross Profit Margin
Distribution Solutions	5.65		%	5.03		%	4.57		%	62		bp	46	bp
Technology Solutions	48.03			48.26			45.90			(23	)		236
Total	6.37			6.08			5.63			29			45

bp - basis points


(1)	Gross profit for our Distribution Solutions segment for 2015, 2014 and 2013 includes LIFO-related inventory charges of $337 million, $311 million and $13 million.

Consolidated gross profit and gross profit margin increased in 2015 and 2014 primarily due to an increase in our Distribution Solutions segment.

Distribution Solutions

Distribution Solutions gross profit margin increased over the last two years primarily reflecting our business acquisitions and higher buy margin within our North American distribution business, partially offset by a decrease in sell margin primarily driven by higher sales volume, and an increase in LIFO-related inventory charges. Buy margin primarily reflects volume and timing of compensation we receive from pharmaceutical manufacturers. Gross profit margin for 2015 was also unfavorably affected by the increased sales associated with newly launched drugs for the treatment of Hepatitis C. Gross profit margin for 2014 was also favorably affected by growth in sales of higher margin generic drugs.

Our LIFO-related inventory expense was $337 million in 2015, $311 million in 2014 and $13 million in 2013. Our North American distribution business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business’ practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price-related inventory losses. A LIFO expense is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our annual LIFO expense is affected by expected changes in year-end inventory quantities, product mix and manufacturer pricing practices, which may be influenced by market and other external influences. Changes to any of the above factors could have a material impact to our annual LIFO expense.

As a result of cumulative net price deflation, at March 31, 2013, pharmaceutical inventories at LIFO were $60 million more than market and, accordingly, a $60 million lower-of-cost or market (“LCM”) reserve reduced inventories to market. In 2015 and 2014, we experienced net inflation in our pharmaceutical inventories and LIFO-related charges were incurred, and in 2014, the $60 million LCM reserve was fully released resulting in an increase in gross profit. As of March 31, 2015 and 2014, pharmaceutical inventories at LIFO did not exceed market. Additional information regarding our LIFO accounting is included under the caption “Critical Accounting Policies and Estimates,” included in this Financial Review.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Technology Solutions

Technology Solutions gross profit margin decreased in 2015 primarily due to a $34 million pre-tax charge representing a catch-up in depreciation and amortization expense not recognized in 2014 when certain assets were classified as held-for-sale and our mix of business. These decreases were partially offset by the planned elimination of a product line and lower product alignment charges. Gross profit margin increased in 2014 compared to 2013 primarily due to growth in higher margin revenues, partially offset by higher product alignment charges.

In 2014, we committed to a plan to sell our International Technology and Hospital Automation businesses from our Technology Solutions segment. As required, we classified the results of operations and cash flows of these businesses as discontinued operations for all periods presented in our consolidated financial statements in 2014 and depreciation and amortization expense was not recognized as the assets were held-for-sale. During the first quarter of 2015, we decided to retain the workforce business within our International Technology business. As a result, we reclassified the workforce business, which had been designated as a discontinued operation during 2014, as a continuing operation for all periods presented. Additionally, we recorded a pre-tax charge of $34 million as a catch-up of depreciation and amortization expense not recognized in 2014 when the assets were classified as held-for-sale.

In 2014, the segment recorded pre-tax charges totaling $57 million. These charges primarily consisted of $35 million of product alignment charges, $15 million of integration-related expenses and $7 million of reduction-in-workforce severance charges. Included in the total charge was $35 million for severance for employees primarily in our research and development, customer services and sales functions, and $15 million for asset impairments which primarily represents the write-off of deferred costs for a product that will no longer be developed. Charges were recorded in our consolidated statement of operations as follows: $34 million in cost of sales and $23 million in operating expenses.

In 2013, this segment recorded $46 million of non-cash pre-tax impairment charges. These charges were the result of a significant decrease in estimated revenues for a software product. The charge included a $36 million goodwill impairment to reduce the carrying value of goodwill within the applicable reporting unit to its implied fair value. In addition, the goodwill had a nominal tax basis. This impairment charge was recorded in operating expenses within our consolidated statement of operations. The balance of the charge represents a $10 million impairment to reduce the carrying value of the unamortized capitalized software held for sale costs for this product to its net realizable value. We concluded that the estimated future undiscounted revenues, net of estimated related costs, were insufficient to recover its carrying value. This impairment charge was recorded in cost of sales within our consolidated statement of operations.

Operating Expenses:



	Years Ended March 31,									Change
(Dollars in millions)	2015			2014			2013			2015			2014
Operating Expenses
Distribution Solutions	$	6,938		$	4,301		$	3,068		61		%	40		%
Technology Solutions	1,039			1,161			1,120			(11	)		4
Corporate	466			451			346			3			30
Total	$	8,443		$	5,913		$	4,534		43		%	30		%

Operating Expenses as a Percentage of Revenues
Distribution Solutions	3.94		%	3.21		%	2.58		%	73		bp	63		bp
Technology Solutions	33.85			34.86			35.56			(101	)		(70	)
Total	4.72			4.30			3.71			42			59

Operating expenses increased over the last two years primarily due to our Distribution Solutions segment, which includes our Celesio and PSSI business acquisitions.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Distribution Solutions

Distribution Solutions segment’s operating expenses and operating expenses as a percentage of revenues 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 DEA, DOJ and various U.S. Attorney’s offices, and 2014 and 2013 operating expenses included $68 million and $72 million of charges associated with our AWP litigation. Additionally, operating expenses for 2013 were negatively impacted by a $40 million charge for a legal dispute in our Canadian business.

During the fourth quarter of 2015, the Company reached an agreement in principle with the DEA, DOJ and various U.S. Attorney’s offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances. The global settlement with the DEA and DOJ is subject to the execution of final settlement agreements. Under the terms of the agreement in principle, the Company has agreed to pay the sum of $150 million, implement certain remedial measures and the suspension of four distribution centers’ DEA registrations for the specified products and time periods. Accordingly, during the fourth quarter of 2015, we recorded a pre-tax and after-tax charge of $150 million in operating expenses within our Distribution Solutions segment. Refer to Financial Note 23, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements in this Annual Report on Form 10-K for further information on the controlled substance distribution claim and the AWP litigation matter.

Technology Solutions

Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenue in 2015 decreased compared to 2014 primarily due to lower research and development expenses, and integration-related expenses and severance charges recorded in 2014.

The segment’s operating expenses increased in 2014 compared to 2013 primarily due to small business acquisitions, integration-related expenses, reduction-in-workforce severance charges, and continued investment in research and development activities. These increases were partially offset by a $36 million goodwill impairment charge incurred in 2013. The segment’s operating expenses as a percentage of revenues decreased in 2014 compared to 2013 primarily reflecting an increase in revenue.

Corporate

Corporate expenses increased in 2015 compared to 2014 primarily due to higher compensation and benefit costs and asset impairments, partially offset by lower acquisition-related expenses and lower costs associated with corporate initiatives. Corporate expenses increased in 2014 primarily due to higher compensation and benefit costs and higher acquisition-related expenses. Additionally, 2013 corporate expenses include a non-cash pre-tax gain of $81 million gain ($51 million after-tax) related to our purchase of the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California.

Acquisition Expenses and Related Adjustments

Acquisition expenses and related adjustments, which include transaction and integration expenses that are directly related to acquisitions by the Company and gains and losses related to business combinations were $224 million, $218 million and $1 million in 2015, 2014 and 2013. Expenses for 2015 and 2014 primarily related to our acquisitions and integrations of Celesio and PSSI. Additionally, expenses for 2013 include an $81 million pre-tax gain on business combination resulting from our acquisition of the remaining 50% ownership interest in our corporate headquarters building.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)



	Years Ended March 31,
(Dollars in millions)	2015		2014		2013
Cost of Sales	$	1	$	3	$	—
Operating Expenses
Transaction closing expenses	6		39		16
Restructuring, severance and relocation	57		43		30
Outside service fees	66		27		1
Other	94		46		24
Gain on business combination	—		—		(81		)
Total	223		155		(10		)
Other Income, Net	—		14		—
Interest Expense - bridge loan fees	—		46		11
Total Acquisition Expenses and Related Adjustments	$	224	$	218	$	1

Acquisition expenses and related adjustments by segment were as follows:



	Years Ended March 31,
(Dollars in millions)	2015		2014		2013
Cost of Sales	$	1	$	3	$	—
Operating Expenses
Distribution Solutions	211		120		47
Technology Solutions	—		15		7
Corporate	12		20		(64		)
Total	223		155		(10		)
Corporate - Other Income, Net	—		14		—
Corporate - Interest Expense	—		46		11
Total Acquisition Expenses and Related Adjustments	$	224	$	218	$	1

During 2015 and 2014, we incurred $109 million and $129 million of acquisition-related expenses for our acquisition of Celesio. During 2015, 2014 and 2013, we incurred $110 million, $68 million and $55 million in acquisition-related expenses for our acquisition of PSSI. These expenses primarily include restructuring, severance and relocation expenses, employee retention incentives, outside service fees and other costs to integrate the business, and bridge loan fees. Additionally, our acquisition-related expenses for our PSSI acquisition include amounts associated with distribution center rationalization and information technology conversions to common platforms.

Amortization Expenses of Acquired Intangible Assets

Amortization expenses of acquired intangible assets purchased in connection with acquisitions recorded in operating expenses were $483 million, $308 million and $196 million in 2015, 2014 and 2013. The increases in amortization expense primarily reflect our business acquisitions.

Amortization expense by segment was as follows:



	Years Ended March 31,
(Dollars in millions)	2015		2014		2013
Distribution Solutions	$	442	$	255	$	146
Technology Solutions	40		52		49
Corporate	1		1		1
Total	$	483	$	308	$	196

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Other Income, Net:



	Years Ended March 31,						Change
(Dollars in millions)	2015		2014		2013		2015		2014
Distribution Solutions	$	48	$	28	$	19	71	%	47		%
Technology Solutions	3		2		4		50		(50	)
Corporate	12		2		11		500		(82	)
Total	$	63	$	32	$	34	97	%	(6	)	%

Other income, net increased for 2015 from 2014 primarily due to our Celesio acquisition including higher equity investment income. Additionally, 2014 other income, net included a loss on a foreign exchange option relating to our acquisition of Celesio.

Impairment of an Equity Investment:

In 2013, we committed to a plan to sell our 49% equity interest in Nadro, S.A. de C.V. (“Nadro”) and in the fourth quarter of 2013 recorded a pre-tax impairment charge of $191 million reducing the investment’s carrying value to its estimated fair value. The charge was recorded in impairment of an equity investment in the consolidated statements of operations within our Distribution Solutions segment. In September 2013, we completed the sale of our equity interest in Nadro. Under the terms of the agreement, we received $41 million in total cash consideration resulting in no material gain or loss.

Segment Operating Profit, Corporate Expenses, Net and Interest Expense:



	Years Ended March 31,												Change
(Dollars in millions)	2015				2014				2013				2015			2014
Segment Operating Profit⁽¹⁾
Distribution Solutions	$	3,047			$	2,472			$	2,195			23		%	13	%
Technology Solutions	438				448				330				(2	)		36
Subtotal	3,485				2,920				2,525				19			16
Corporate Expenses, Net	(454		)		(449		)		(335		)		1			34
Interest Expense	(374		)		(300		)		(240		)		25			25
Income From Continuing Operations Before Income Taxes	$	2,657			$	2,171			$	1,950			22		%	11	%

Segment Operating Profit Margin
Distribution Solutions	1.73			%	1.84			%	1.84			%	(11	)	bp	—	bp
Technology Solutions	14.27				13.45				10.48				82			297


(1)	Segment operating profit includes gross profit, net of operating expenses, plus other income (loss), net, for our two operating segments.

Segment Operating Profit:

Distribution Solutions: Operating profit increased over the last two years primarily reflecting growth in our business and our business acquisitions. Operating profit margin for 2015 decreased from 2014 primarily due to our acquisition of Celesio and the unfavorable impact from the newly launched drugs for Hepatitis C, partially offset by our other mix of business. Operating profit margin in 2014 was flat compared to 2013 primarily reflecting an increase in gross profit margin and the $191 million impairment charge on an equity investment incurred in 2013, partially offset by higher operating expenses as a percentage of revenues, which included the effects of our acquisitions. In 2015, 2014 and 2013, operating profit and operating profit margin were also impacted by $150 million, $68 million and $72 million of reserve adjustments for estimated probable losses related to our controlled substance distribution claims and Average Wholesale Price litigation.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Technology Solutions: Operating profit decreased slightly in 2015 and increased in 2014 compared to the prior years. Operating profit margin increased in 2015 primarily due to lower operating expenses as a percentage of revenues, partially offset by a decline in gross profit margin. Operating profit margin increased in 2014 primarily due to an increase in gross profit margin and a decrease in operating expenses as a percentage of revenues. In 2015, 2014 and 2013, operating profit and operating profit margin were impacted by $34 million, $57 million and $46 million of charges associated with a depreciation and amortization catch-up related to the prior year, and product alignment and impairment charges.

Corporate: Corporate expenses, net, increased in 2015 and 2014 primarily due to higher operating expenses, partially offset by higher other income. Corporate expenses, net, for 2013 also included the $81 million gain on business combination.

Interest Expense: Interest expense increased over the last two years primarily due to the March 2014 issuance of $4.1 billion of new debt to fund the acquisition of Celesio and due to interest on Celesio’s debt. Interest expense for 2014 also included $46 million of bridge loan fees associated with the initial funding of the acquisition of Celesio. Partially offsetting these increases, interest expense benefited from the repayment of term debt in the fourth quarters of 2014 and 2013. Interest expense fluctuates based on timing, amounts and interest rates of term debt that is repaid and new term debt issued, as well as amounts incurred for bridge loan fees. Refer to our discussion under the caption “Credit Resources” within this Financial Review for additional information regarding our financing activities.

Income Taxes

Our reported income tax rates were 30.7%, 34.9% and 30.1% in 2015, 2014 and 2013. Fluctuations in our reported income tax rates are primarily due to changes within our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates and discrete items. Income tax expense included net discrete tax benefits of $33 million in 2015, net discrete tax expenses of $94 million in 2014 and net discrete tax benefits of $29 million in 2013. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues.

We have received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of 2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003 through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter and do not expect it to have a material impact to income tax expense.

During 2015, we reached an agreement with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to years 2003 through 2006 and recognized discrete tax benefits of $55 million to record previously unrecognized tax benefits and related interest.

Loss from Discontinued Operations, Net of Tax

Losses from discontinued operations, net of tax, were $299 million, $156 million and $25 million in 2015, 2014 and 2013.

During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business and a small business from our Distribution Solutions segment, as well as a small business from our Technology Solutions segment. As a result, we recorded $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 the Brazilian business to its estimated fair value, less cost to sell. The ultimate loss from the sale of the business may be higher or lower than our current assessment of the business’ fair value.

In 2014, we committed to a plan to sell our International Technology and our Hospital Automation businesses from our Technology Solutions segment and certain businesses from our Distribution Solutions segment. As a result, we recorded a pre-tax and after-tax $80 million non-cash impairment charge to reduce the carrying value of the International Technology business to its estimated fair value, less cost to sell. A portion of this business was sold in 2015 for nominal proceeds. Our Hospital Automation business was sold in 2014 for net cash proceeds of $55 million which approximated the business’ net book value.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

As required, we classified the results of operations and cash flows of these businesses as discontinued operations for all periods presented in our consolidated financial statements.

Net Income (Loss) Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests for 2015 primarily represents the $50 million guaranteed dividend and $12 million associated with the quarterly accrual of the annual recurring compensation that we are obligated to pay to the noncontrolling shareholders of Celesio under the Domination Agreement. Net loss attributable to noncontrolling interests for 2014 primarily represents the portion of Celesio’s net loss that was not allocable to McKesson Corporation.

Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was $1,476 million, $1,263 million and $1,338 million in 2015, 2014 and 2013 and diluted earnings per common share were $6.27, $5.41 and $5.59.

Weighted Average Diluted Common Shares Outstanding: Diluted earnings per common share was calculated based on a weighted average number of shares outstanding of 235 million, 233 million and 239 million for 2015, 2014 and 2013. Weighted average diluted common shares outstanding is impacted by the exercise and settlement of share-based awards and in 2014 the cumulative effect of share repurchases.

Foreign Operations

Foreign operations accounted for approximately 20%, 11% and 8% of 2015, 2014 and 2013 consolidated revenues. Foreign operations are subject to certain risks, including currency fluctuations. We monitor our operations and adopt strategies responsive to changes in the economic and political environment in each of the countries in which we operate. Additional information regarding our foreign operations is also included in Financial Note 26, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Business Combinations

Fiscal 2014

On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio AG (“Celesio”) and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the “Acquisition”). Upon the Acquisition, our ownership of Celesio’s fully diluted common shares was 75.6% and, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares. The Acquisition was funded by utilizing a senior bridge loan, our existing accounts receivable sales facility and cash on hand. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The Acquisition of Celesio expands our global geographic area; the combined company will be one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide. Financial results for Celesio are included within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment, since the date of the Acquisition.

Fiscal 2013

In addition to our April 2012 acquisition of the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California, on February 22, 2013, we acquired all of the outstanding shares of PSSI for $29.00 per share plus the assumption of PSSI’s debt, or approximately $1.9 billion in aggregate, consisting of cash consideration of $1.3 billion, net of cash acquired, and the assumption of long-term debt with a fair value of $0.6 billion. The cash paid at acquisition was funded from cash on hand and the issuance of long-term debt. PSSI markets and distributes medical products and services throughout the United States. The acquisition of PSSI expanded our existing Medical-Surgical business. Financial results for PSSI since the acquisition date are included in the results of operations within our Medical-Surgical distribution and services business, which is part of our Distribution Solutions segment.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

During the last three years, we also completed a number of other smaller acquisitions within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.

Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. The pro forma results of operations for our business acquisitions and the results of operations for these acquisitions since the acquisition date have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.

Refer to Financial Notes 2 and 15, “Business Combinations” and “Debt and Financing Activities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

2016 Outlook

Information regarding the Company’s 2016 outlook is contained in our Form 8-K dated May 12, 2015. This Form 8-K should be read in conjunction with the sections Item 1 - Business - Forward-Looking Statements and Item 1A - Risk Factors in Part 1 of this Annual Report on Form 10-K.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters that were uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial condition or results from operations. Below are the estimates that we believe are critical to the understanding of our operating results and financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to customers who purchase our products and services. Other customer financing primarily relates to guarantees provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing to certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate the receivables for which we do not expect full collection based on historical collection rates and specific knowledge regarding the current creditworthiness of our customers and record an allowance in our consolidated financial statements for these amounts.

In determining the appropriate allowance for doubtful accounts, which includes portfolio and specific reserves, the Company reviews accounts receivable aging, industry trends, customer financial strength, credit standing, historical write-off trends and payment history to assess the probability of collection. If the frequency and severity of customer defaults due to our customers’ financial condition or general economic conditions change, our allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding receivables and other customer financing and adjust allowances for accounts where collection may be in doubt. During 2015, sales to our ten largest customers accounted for approximately 44% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation (“CVS”), accounted for approximately 15% of our total consolidated revenues. At March 31, 2015, trade accounts receivable from our ten largest customers were approximately 36% of total trade accounts receivable. Accounts receivable from CVS were approximately 14% of total trade accounts receivable. As a result, our sales and credit concentration is significant. A default in payments, a material reduction in purchases from these, or any other large customer or the loss of a large customer could have a material adverse impact on our financial condition, results of operations and liquidity.

Reserve methodologies are assessed annually based on historical losses and economic, business and market trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present. We believe the reserves maintained and expenses recorded in 2015 are appropriate and consistent with historical methodologies employed. At this time, we are not aware of any internal process or customer issues that might lead to a significant increase in the foreseeable future in our allowance for doubtful accounts as a percentage of net revenue.

At March 31, 2015, trade and notes receivables were $13,275 million prior to allowances of $141 million. In 2015, 2014 and 2013, our provision for bad debts was $67 million, $36 million and $28 million. At March 31, 2015 and 2014, the allowance as a percentage of trade and notes receivables was 1.1% and 0.9%. An increase or decrease of a hypothetical 0.1% in the 2015 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $13 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios. Additional information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report on Form 10-K.

Inventories: We report inventories at the lower of cost or market (“LCM”). Inventories for our Distribution Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment, the majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign locations is based on weighted average purchase price using the first-in, first-out method (“FIFO”). Technology Solutions segment inventories consist of computer hardware with cost generally determined by the standard cost method, which approximates average cost. Rebates, cash discounts and other incentives received from vendors relating to the purchase or distribution of inventory are considered as product discounts and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is sold. Total inventories were $14.3 billion and $13.0 billion at March 31, 2015 and 2014.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

The LIFO method was used to value approximately 73% and 67% of our inventories at March 31, 2015 and 2014. If we had used the FIFO method of inventory valuation, which approximates current replacement costs, inventories would have been approximately $768 million and $431 million higher than the amounts reported at March 31, 2015 and 2014. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. In 2015, 2014, and 2013, we recognized net LIFO expense of $337 million, $311 million and $13 million within our consolidated statements of operations. A LIFO expense is recognized when the net effect of price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines and shifts towards generic pharmaceuticals, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines and shifts towards generic pharmaceuticals exceeds the impact of price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory.

We believe that the average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Due to cumulative net price deflation from 2005 to 2013, we had a lower-of-cost or market (“LCM”) reserve of $60 million at March 31, 2013 which reduced pharmaceutical inventories at LIFO to market. During 2014, the LCM reserve of $60 million was released, resulting in an increase in gross profit. As of March 31, 2014 and 2015, inventories at LIFO did not exceed market.

In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that could affect the value of our inventories. We write down inventories which are considered excess and obsolete as a result of these reviews. These factors could make our estimates of inventory valuation differ from actual results.

Business Combinations: We account for acquired businesses using the acquisition method of accounting, which requires that once control is obtained of a business, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.

Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Refer to Financial Note 2, “Business Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information regarding our acquisitions.

Goodwill and Intangible Assets: As a result of acquiring businesses, we have $9,817 million and $9,927 million of goodwill at March 31, 2015 and 2014 and $3,441 million and $4,871 million of intangible assets, net at March 31, 2015 and 2014. We maintain goodwill assets on our books unless the assets are considered to be impaired. We perform an impairment test on goodwill balances annually in the fourth quarter or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time.

Impairment testing is conducted at the reporting unit level, which is generally defined as a component — one level below our Distribution Solutions and Technology Solutions operating segments, for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

The first step in goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. This step may be performed utilizing either a qualitative or quantitative assessment. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is necessary. If the carrying value of the reporting unit is higher than its estimated fair value, the second step must be performed to measure the amount of impairment loss. Under the second step, the implied fair value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any unrecognized intangibles assets, from the fair value of the reporting unit calculated in the first step of the impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess.

To estimate the fair value of our reporting units, we use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the fair values.

Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approach include the selection of appropriate guideline companies, the determination of market value multiples for both the guideline companies and the reporting unit, the determination of applicable premiums and discounts based on any differences in marketability between the business and the guideline companies and for the income approach, the required rate of return used in the discounted cash flow method, which reflects capital market conditions and the specific risks associated with the business. Other estimates inherent in both the market and income approaches include long-term growth rates, projected revenues and earnings and cash flow forecasts for the reporting units.

Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair value may materially impact our results of operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including failure to meet business plans, a further deterioration in the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge. In 2015 and 2014, we concluded that there were no impairments of goodwill as the fair value of each reporting unit exceeded its carrying value. In 2013, we recorded a goodwill impairment charge of $36 million in our Technology Solutions segment.

Currently, all of our intangible assets are subject to amortization and are amortized based on the pattern of their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to thirty-eight years. We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. There were no material impairments of intangibles in 2015, 2014 or 2013. Our ongoing consideration of all the factors described previously could result in impairment charges in the future, which could adversely affect our net income.

Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in factual circumstances. As of March 31, 2015 and 2014, supplier reserves were $167 million and $181 million. The ultimate outcome of any outstanding claims may be different from our estimate. All of the supplier reserves at March 31, 2015 and 2014 pertain to our Distribution Solutions segment. An increase or decrease in the supplier reserve as a hypothetical 0.1% of trade payables at March 31, 2015 would result in an increase or decrease in the cost of sales of approximately $25 million in 2015. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax provision and in evaluating income tax uncertainties. We review our tax positions at the end of each quarter and adjust the balances as new information becomes available.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative net operating losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. We had deferred income tax assets (net of valuation allowances) of $1,189 million and $1,286 million at March 31, 2015 and 2014 and deferred tax liabilities of $3,791 million and $4,075 million. Deferred tax assets primarily consist of timing differences on our compensation and benefit related accruals and net operating loss and credit carryforwards. Deferred tax liabilities primarily consist of basis differences for inventory valuation (including inventory valued at LIFO) and intangible assets. We established valuation allowances of $229 million and $200 million for 2015 and 2014 against certain deferred tax assets, which primarily relate to state and foreign net operating loss carryforwards for which the ultimate realization of future benefits is uncertain. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, including those laws pertaining to LIFO, our cash flows could be materially impacted.

In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax regulations across multiple global jurisdictions where we conduct our operations. We recognize liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual settlement with the tax authorities. These estimates may change due to changing facts and circumstances; however, due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that differs from our current estimate of tax liabilities and related interest. If our current estimate of tax and interest liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax expense may be recognized.

If our assumptions and estimates described above were to change, an increase/decrease of 1% in our effective tax rate as applied to income from continuing operations would have increased/decreased tax expense by approximately $27 million, or $0.11 per diluted share, for 2015.

Loss Contingencies: We are subject to various claims, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimate.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our accounts receivable sales facilities, revolving credit facilities and commercial paper issuance, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, we may access the long-term debt capital markets from time-to-time.

Net cash flow from operating activities was $3,112 million in 2015 compared to $3,136 million in 2014 and $2,483 million in 2013. Operating activities for 2015 were affected by an increase in drafts and accounts payable reflecting longer payment terms for certain purchases and increases in receivables and inventories primarily associated with our revenue growth. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements and vendor payment terms.

Operating activities for 2014 were primarily affected by an increase in drafts and accounts payable reflecting longer payment terms for certain purchases and increases in receivables and inventories primarily associated with our revenue growth. Operating activities for 2013 were primarily affected by $483 million of payments for litigation settlements.

Net cash used in investing activities was $677 million in 2015 compared to $5,046 million in 2014 and $2,209 million in 2013. Investing activities for 2015 include $170 million of net cash payments for acquisitions, $376 million and $169 million in capital expenditures for property acquisitions and capitalized software, and $15 million of net cash proceeds from sales of businesses.

Investing activities for 2014 included $4,634 million of net cash payments for acquisitions, including $4,497 million for our acquisition of Celesio. Investing activities in 2014 also included $278 million and $141 million in capital expenditures for property acquisitions and capitalized software, and $97 million of cash proceeds from sales of our automation business and an equity investment.

Investing activities for 2013 included $1,873 million of net cash payments for acquisitions, including $1,299 million for our acquisition of PSSI. Investing activities in 2013 also included $241 million and $159 million in capital expenditures for property acquisitions and capitalized software.

Financing activities utilized $968 million of cash in 2015, generated net cash of $3,619 million in 2014 and utilized $956 million of cash in 2013. Financing activities for 2015 include cash receipts of $3,100 million and payments of $3,152 million from short-term borrowings. Long-term debt repayments in 2015 were primarily cash paid on promissory notes. Financing activities in 2015 also reflect a cash payment of $32 million to acquire approximately 1 million additional common shares of Celesio through the tender offers we completed in 2015. Additionally, financing activities for 2015 include $340 million of cash paid for stock repurchases and $227 million of dividends paid.

Financing activities for 2014 include cash receipts of $6,080 million and cash paid of $6,132 million from short-term borrowings, which includes $4,957 million in borrowings under a senior bridge loan facility in connection with our acquisition of Celesio and $400 million under our accounts receivable sales facility in February 2014. These borrowings were fully repaid in March 2014. Financing activities for 2014 also include cash receipts of $4,124 million from the issuance of long-term debt in March 2014 and cash paid of $348 million for repayments of long-term debt, primarily consisting of $350 million paid on the maturity of our 6.50% Notes due in February 2014. Additionally, financing activities for 2014 included $130 million of cash payments for stock repurchases and $214 million of dividends paid.

Financing activities for 2013 included cash receipts of $1,325 million and cash paid of $1,725 million from short-term borrowings. In addition, in connection with our acquisition of PSSI, we borrowed $900 million for bridge financing in February 2013, which was fully repaid in March 2013. Financing activities for 2013 also include cash receipts of $1,798 million for the issuance of long-term debt and cash paid of $1,143 million for repayments of long-term debt. In December 2012, we issued $500 million of 0.95% Notes due 2015 and $400 million of 2.70% Notes due 2022. In March 2013, we issued $500 million of 1.40% Notes due 2018 and $400 million of 2.85% Notes due 2023. Long-term debt repayments include $500 million paid on the maturity of our 5.25% Notes due in March 2013 and $635 million paid to redeem the debt acquired on the acquisition of PSSI. Additionally, financing activities for 2013 included $1,214 million of cash paid for stock repurchases and $194 million of dividends paid.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

The Company’s Board has authorized the repurchase of McKesson’s common stock from time-to-time in open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.

The Board authorized the repurchase of up to $500 million of the Company’s common stock in January 2013. In 2015 and 2013, we repurchased 1.5 million and 13 million of our shares through an ASR program and open market repurchases:



	Years Ended March 31,
(In millions, except per share data)	2015		2014		2013
Number of shares repurchased ⁽¹⁾	1.5		—		13
Average price paid per share	$	226.55	$	—	$	100.82
Total value of shares repurchased ⁽¹⁾	$	340	$	—	$	1,159


(1)	Excludes shares surrendered for tax withholding.

At March 31, 2015, no authorized amounts remain available for future repurchases of the Company’s common stock under the January 2013 Board approved share purchase plan.

In May 2015, the Board authorized the repurchase of up to $500 million of the Company’s common stock.

During the fourth quarter of 2013, we retired approximately 2 million shares repurchased for $217 million by the Company. The retired shares constitute authorized but unissued shares. We elected to allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. As such, $195 million was recorded as a decrease to retained earnings.

We believe that our operating cash flow, financial assets and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.

Selected Measures of Liquidity and Capital Resources:



	March 31,
(Dollars in millions)	2015			2014			2013
Cash and cash equivalents	$	5,341		$	4,193		$	2,456
Working capital	3,173			3,221			1,813
Debt, net of cash and cash equivalents	4,503			6,401			2,417
Debt to capital ratio ⁽¹⁾	55.2		%	55.4		%	40.8		%
Net debt to net capital employed ⁽²⁾	36.0			42.9			25.5
Return on McKesson stockholders’ equity ⁽³⁾	17.0			16.2			18.3


(1)	Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests.


(2)	Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt and McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests (“net capital employed”).


(3)	Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests.

Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound sterling.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.

Our cash and equivalents balance as of March 31, 2015 included approximately $2.3 billion of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash in foreign operations as well as to fund certain research and development activities for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to U.S. federal, state and local income tax.

Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and accounts payable, short-term borrowings, current portion of long-term debt, deferred revenue and other current liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.

Consolidated working capital decreased at March 31, 2015 compared to March 31, 2014 primarily due to increases in drafts and accounts payable, partially offset by increases in receivables and inventories. Consolidated working capital increased at March 31, 2014 compared to March 31, 2013 primarily due to increases in cash and cash equivalents and increases in receivables and inventories partially offset by increases in current portion of long-term debt associated with our acquisition of Celesio.

Our ratio of net debt to net capital employed decreased at March 31, 2015 compared to March 31, 2014 primarily due to a decrease in total debt, partially offset by the decrease in total McKesson stockholders’ equity. Our ratio of net debt to net capital employed increased at March 31, 2014 compared to March 31, 2013 primarily due to the increase in debt associated with our Celesio acquisition.

In July 2013, the quarterly dividend was raised from $0.20 to $0.24 per common share for dividends declared after such date, until further action by the Board. Dividends were $0.96 per share in 2015, $0.92 per share in 2014 and $0.80 per share in 2013. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors. In 2015, 2014 and 2013, we paid total cash dividends of $227 million, $214 million and $194 million. Additionally, as required under the Domination Agreement, we are obligated to pay an annual recurring compensation amount of €0.83 per Celesio share (effective January 1, 2015) to the noncontrolling shareholders of Celesio.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Contractual Obligations:

The table and information below presents our significant financial obligations and commitments at March 31, 2015:



			Years
(In millions)	Total		Within 1		Over 1 to 3		Over 3 to 5		After 5
On balance sheet
Long-term debt⁽¹⁾	$	9,709	$	1,529	$	2,705	$	1,493	$	3,982
Other⁽²⁾	535