e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2010
OR
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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
A Delaware Corporation
I.R.S. Employer Identification Number
94-3207296
McKesson Plaza
One Post Street, San Francisco, CA 94104
Telephone (415) 983-8300
Securities registered pursuant to Section 12(b) of the Act:
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(Title of Each Class)
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(Name of Each Exchange on Which Registered) |
Common Stock, $0.01 par value
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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 þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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
þ No o
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
registrants 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. þ
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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes o No þ
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
registrants most recently completed second fiscal quarter, September 2009, was approximately
$16.1 billion.
Number
of shares of common stock outstanding on April 30, 2010:
271,391,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2010 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
McKESSON CORPORATION
TABLE OF CONTENTS
2
McKESSON CORPORATION
PART I
General
McKesson Corporation (McKesson, the Company, the Registrant or we and other similar
pronouns), is a Fortune 14 corporation that delivers medicines, pharmaceutical supplies,
information and care management products and services designed to reduce costs and improve quality
across the healthcare industry.
The Companys 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 Companys 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 Web site (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 Web site 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 SECs Public
Reference Room at 100 F Street, NW, Washington, D.C. 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 http://www.sec.gov.
Business Segments
We operate in two segments. The McKesson Distribution Solutions segment distributes ethical
and proprietary drugs, medical-surgical supplies and equipment and health and beauty care products
throughout North America. This segment also provides specialty pharmaceutical solutions for
biotech and pharmaceutical manufacturers, sells financial, operational and clinical solutions for
pharmacies (retail, hospital, long-term care) and provides consulting, outsourcing and other
services. This segment includes a 49% interest in Nadro, S.A. de C.V. (Nadro), one of the
leading pharmaceutical distributors in Mexico and a 39% interest in Parata Systems, LLC (Parata),
which sells automated pharmacy and supply management systems and services to retail and
institutional outpatient pharmacies.
The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care,
financial, supply chain, strategic management software solutions, pharmacy automation for
hospitals, as well as connectivity, outsourcing and other services, including remote hosting and
managed services, to healthcare organizations. This segment also includes our Payor group of
businesses, which includes our InterQual® claims payment solutions, medical management software
businesses and our care management programs. The segments customers include hospitals,
physicians, homecare providers, retail pharmacies and payors from North America, the United
Kingdom, Ireland, other European countries, Asia Pacific and Israel.
Net revenues for our segments for the last three years were as follows:
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(Dollars in billions) |
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2010 |
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2009 |
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2008 |
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Distribution Solutions |
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105.6 |
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97 |
% |
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$ |
103.6 |
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97 |
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$ |
98.7 |
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97 |
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Technology Solutions |
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3.1 |
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3 |
% |
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3.0 |
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3 |
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3.0 |
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3 |
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Total |
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$ |
108.7 |
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100 |
% |
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$ |
106.6 |
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100 |
% |
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$ |
101.7 |
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100 |
% |
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McKESSON CORPORATION
Distribution Solutions
McKesson Distribution Solutions consists of the following businesses: U.S. Pharmaceutical
Distribution, McKesson Canada, Medical-Surgical Distribution, McKesson Pharmacy Systems and
Automation and McKesson Specialty Care Solutions. This segment also includes our 49% interest in
Nadro and 39% interest in Parata.
U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and/or other
healthcare-related products to customers 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 long-term care
providers).
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, reliability and provide the best product availability for our customers. For example, in
all of our distribution centers we use Acumax® Plus, a Smithsonian 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 ManagerSM, which integrates portable handheld technology with Acumax®
Plus to give customers complete ordering and inventory control. We also offer McKesson
ConnectSM (formerly Supply Management OnlineSM), 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 offerings of the McKesson U.S. Pharmaceutical Distribution business, by customer
group can be categorized as retail national accounts, independent retail pharmacies and
institutional healthcare providers.
Retail National Accounts Business solutions that help national account customers increase
revenues and profitability. Solutions include:
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Central FillSM 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. |
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Redistribution Centers Two facilities totaling over 500 thousand square feet that offer
access to inventory for single source warehouse purchasing, including pharmaceuticals and
biologicals. These distribution centers also provide the foundation for a two-tiered
distribution network that supports best-in-class direct store delivery. |
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EnterpriseRxSM A fully integrated and centrally hosted pharmacy management
solution (application service provider model). Built utilizing the latest technology,
EnterpriseRxSM centralizes data, reporting, pricing and drug updates, providing the
operational control, visibility and support needed to reduce costs and streamline
administrative tasks. |
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RxPakSM 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. |
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Inventory Management An integrated solution comprising forecasting software and automated
replenishment technologies that reduce inventory-carrying costs. |
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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. |
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McKESSON CORPORATION
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:
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Health Mart® Health Mart® is a national network of more than
2,500 independently-owned pharmacies and is one of the industrys
most comprehensive pharmacy franchise programs. Health Mart®
provides franchisees with managed care that drives Pharmacy
Benefit Manager recognition, branding that drives consumer
recognition, in-store programs that drive manufacturer and payor
recognition and community advocacy programs that drive industry
recognition. Health Mart® helps franchisees grow their businesses
by focusing on the three principles of successful retailing: |
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Attract new customers; |
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Maximize the value of current customers; and |
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Enhance business efficiency. |
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AccessHealth® Comprehensive managed care and reconciliation
assistance services that help independent pharmacies save time,
access competitive reimbursement rates and improve cash flow. |
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McKesson Reimbursement AdvantageSM (MRA) MRA is one
of the industrys most comprehensive reimbursement optimization
packages, comprising financial services (automated claim
resubmission), analytic services and customer care. |
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McKesson OneStop Generics® described above |
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EnterpriseRxSM described above |
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Sunmark® Complete line of more than 1,000 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. |
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McKesson Home Health Care Comprehensive line of more than 1,800
home health care products, including durable medical equipment,
diabetes supplies, self-care supplies and disposables from
national brands and the Sunmark® line. |
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Central FillSM described above |
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:
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McKesson Pharmacy OptimizationSM An experienced group of pharmacy
professionals providing consulting services and pharmacy practice resources. McKesson
Pharmacy Optimization develops customized and quantifiable solutions that help hospitals
create and sustain financial, operational and clinical results. |
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Fulfill-RxSM Ordering and inventory management system that integrates McKesson
pharmaceutical distribution services with our automation solutions, thus empowering hospitals
to optimize the often complicated and disjointed processes related to unit-based cabinet
replenishment and inventory management. |
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Asset Management Award-winning inventory optimization and purchasing management program
that helps institutional providers lower costs while ensuring product availability. |
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SKY Packaging Blister-format packaging containing the most widely prescribed dosages and
strengths in generic oral-solid medications. SKY enables acute care, long-term care and
institutional pharmacies to provide cost-effective, uniform packaging. |
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McKesson OneStop Generics® Generic pharmaceutical purchasing program that enables acute
care pharmacies to capture the full potential of purchasing generic pharmaceuticals. The
Long-Term Care OneStop Generics program allows a long-term care pharmacy to capture savings on
generic purchases. |
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McKesson 340B Solution Suite Solutions that help providers manage, track and report on
medication replenishment associated with the federal 340B Drug Pricing Program. |
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High Performance PharmacySM Framework that identifies and categorizes hospital
pharmacy best practices to help improve clinical outcomes and financial results. The High
Performance Pharmacy Assessment tool enables hospital pharmacies to measure against comparable
institutions and chart a step-by-step path to high performance. |
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McKESSON CORPORATION
McKesson Canada: McKesson Canada, a wholly-owned subsidiary, is one of the largest
pharmaceutical distributors in Canada. McKesson Canada, through its network of 17 distribution
centers, provides logistics and distribution to more than 800 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 has automated over 2,500 retail pharmacies and is also active in hospital automation
solutions, dispensing more than 100 million doses each year. 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 Canadian patients.
MedicalSurgical Distribution: Medical-Surgical Distribution 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 29 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, occupational health facilities and
homecare sites (extended care). Through a variety of technology 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 industrys most extensive product
offerings, including our own private label line. This business also includes ZEE® Medical, one of
the most extensive product offerings in the industry of first aid, safety and training solutions,
providing services to industrial and commercial customers. This business offers an extensive line
of products and services aimed at maximizing productivity and minimizing the liability and cost
associated with workplace illnesses and injuries.
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 offering is
EnterpriseRxSM, a fully integrated and centrally hosted pharmacy management solution
(application service provider model). Built utilizing the latest technology,
EnterpriseRxSM centralizes data, reporting, pricing and drug updates, providing the
operational control, visibility and support needed to reduce costs and streamline administrative
tasks. We also own a 39% interest in Parata which sells automated pharmacy and supply management
systems and services to retail and institutional pharmacies.
McKesson Specialty Care Solutions: This business provides solutions for patients with complex
diseases and advances specialty care by facilitating collaboration among healthcare providers, drug
manufacturers and payors through our expertise in specialty drug distribution and commercialization
support. The business provides direct-to-physician specialty distribution services ensuring
specialty drugs are received in manufacturer recommended conditions. This business also offers our
industry leading Lynx® integrated technologies and clinical tools, which help provider
organizations to improve their inventory management, business efficiencies and reimbursement
processes. The business also works with manufacturers to optimize delivery of complex medication
to patients through custom distribution and safety programs that support appropriate product
utilization, as well as the development and management of reimbursement and patient access programs
that help patients to gain cost effective access to needed therapies.
Technology Solutions
Our Technology Solutions segment provides a comprehensive portfolio of software, automation,
support 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. This
segment also includes our InterQual® claims payment solutions and medical management software
businesses and our care management programs. Technology Solutions markets its products and
services to integrated delivery networks, hospitals, physician practices, home healthcare
providers, retail pharmacies and payors. Our solutions and services are sold internationally
through subsidiaries and/or distribution agreements in Canada, the United Kingdom, Ireland, other
European countries, Asia Pacific and Israel.
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McKESSON CORPORATION
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).
Key solution areas are as follows:
Clinical management: Horizon Clinicals® is built with architecture to facilitate integration
and enable modular system deployment. The solution suite includes a clinical data repository,
health care planning, physician order entry, point-of-care documentation with bar-coded medication
administration, enterprise laboratory, radiology, pharmacy, surgical management, an emergency
department solution and an ambulatory EHR system. Horizon Clinicals® also includes solutions to
facilitate physician access to patient information such as a Web-based physician portal and
wireless devices that draw on information from the hospitals information systems. In addition,
the Horizon Clinicals® suite includes a comprehensive solution for homecare, including telehealth
and hospice.
Enterprise imaging: In addition to document imaging to facilitate maintenance and access to
complete medical records, 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.
Financial management: 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. Horizon Enterprise Revenue
ManagementTM streamlines patient access and helps organizations to forecast financial
responsibility for all constituents before and during care. The system also streamlines financial
processes to allow providers to collect their reimbursement more quickly and at a lower cost.
Hospital information systems play a key role in managing the revenue cycle by automating the
operation of individual departments and their respective functions within the inpatient
environment.
Resource management: Resource management solutions are designed to enhance an organizations
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. Workforce management solutions assist caregivers with staffing and
maintaining labor rule continuity between scheduling, time and attendance and payroll. A
comprehensive supply chain management solution integrates enterprise resource planning
applications, including financials, materials, Human Resources/Payroll, with scheduling, point of
use, surgical services and enterprise-wide analytics.
Automation: Automation solutions include technologies that help hospitals re-engineer and
improve their medication use processes. Examples include centralized pharmacy automation for
dispensing unit-dose medications, unit-based cabinet technologies for secure medication storage and
rapid retrieval and an anesthesia cart for dispensing of medications in the operating room. Based
on a foundation of bar-code scanning technology, these integrated solutions are designed to reduce
errors and bring new levels of safety to patients.
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McKESSON CORPORATION
Physician practice solutions: We provide a complete solution for physician practices of all
sizes 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 also includes outsourced billing and collection services as well as
services that connect physicians with their patients, hospitals, retail pharmacies and payors.
Revenue cycle outsourcing enables physician groups to avoid the infrastructure investment and
administrative costs of an in-house billing office. Services include clinical data collection,
data input, medical coding, billing, contract management, cash collections, accounts receivable
management and extensive reporting of metrics related to the physician practice.
Connectivity: Through our vendor-neutral RelayHealth® and its intelligent network, the Company
provides health information exchange and revenue cycle management solutions that streamline
clinical, financial and administrative communication between patients, providers, payors,
pharmacies, manufacturers, government 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, point-of-service resolution of
pharmacy claims by payors, pre-visit financial clearance of patients by providers and post-visit
settlement of provider bills by payors and patients. RelayHealth® securely processes more than
12.6 billion financial and clinical transactions annually.
In addition to the product offerings described above, Technology Solutions offers a
comprehensive range of services to help organizations derive greater value, enhance satisfaction
and return on investment throughout the life of the solutions implemented. The range of services
includes:
Technology Services: Technology services supports the smooth operation of numerous
organizations information systems by providing the technical infrastructure designed to maximize
application accessibility, availability, security and performance.
Outsourcing Services: With these services, we help providers focus their resources on
healthcare while their information technology or operations are supported through managed services,
including outsourcing. Service options include remote hosting, managing hospital data processing
operations, as well as strategic information systems planning and management, revenue cycle
processes, payroll processing, business office administration and major system conversions.
Professional Services: Professional services 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.
Payor Group: The following suite of services and software products is marketed to payors,
employers and government organizations to help manage the cost and quality of care:
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Disease management programs to improve the health status and health outcomes of patients
with chronic conditions; |
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Nurse triage services to provide health information and recommend appropriate levels of
care; |
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Clinical and analytical software to support utilization, case and disease management
workflows; |
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Business intelligence tools for measuring, reporting and improving clinical and financial
performance; |
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InterQual® Criteria for clinical decision support and utilization management; and |
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Claims payment solutions to facilitate accurate and efficient medical claim payments. |
Business Combinations, Investments and Discontinued Operations
We have undertaken 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 and
7, Business Combinations and Investments and Discontinued Operations, to the consolidated
financial statements appearing in this Annual Report on Form 10-K.
8
McKESSON CORPORATION
Competition
In every area of healthcare distribution operations, our Distribution Solutions segment faces
strong competition, both in price and service, from national, regional and local full-line,
short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers
engaged in direct distribution and large payor 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.
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, payors, 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.
Intellectual Property
The principal trademarks and service marks of the Distribution Solutions segment include:
AccessHealth®, Acumax®, Central FillSM, Closed Loop DistributionSM,
CypressSM, Cypress Plus®, Edwards Medical Supply®, Empowering Healthcare®,
EnterpriseRxSM, Expect More From MooreSM, FrontEdge,
Fulfill-RxSM, Health Mart®, High Performance PharmacySM, LoyaltyScript®,
Lynx®, Max ImpactSM, McKesson®, McKesson AdvantageSM, McKesson
ConnectSM, McKesson Empowering Healthcare®, McKesson High Volume
SolutionsSM, McKesson Max Rewards®, McKesson OneStop Generics®, McKesson
Pharmacy CentralSM, McKesson Pharmacy OptimizationSM, McKesson Priority
Express OTCSM, McKesson Reimbursement AdvantageSM , McKesson Supply
ManagerSM, MediNet, Medi-Pak®, Mobile ManagerSM, Moore Medical®,
Moorebrand®, Northstarx, Onmark®, Pharma360®, PharmacyRx, Pharmaserv®, ProIntercept®, ProMed®,
ProPBM®, RX PakSM, RxOwnershipSM, ServiceFirstSM,
Staydry®, Sterling Medical Services®, Sunmark®, The Supply Experts®, Supply Management
OnlineSM, TrialScript®, Valu-Rite®, XVIII B Medi Mart®, Zee Medical Service® and ZEE®.
The substantial majority of technical concepts and codes embodied in our Technology Solutions
segments computer programs and program documentation are protected as trade secrets. The
principal trademarks and service marks for this segment are: AcuDose-Rx®, ANSOS One-Staff,
Ask-A-Nurse®, Care Fully Connected, CareEnhance®, Connect-RN, Connect-Rx®, CRMS, DataStat®,
ePremis®, Episode Profiler, E-Script, Fulfill-RxSM, HealthQuest, Horizon Admin-Rx,
Horizon Clinicals®, Horizon Enterprise Revenue ManagementTM, HorizonWP®, InterQual®,
Lytec®, MedCarousel®, Medisoft®, ORSOS One-Call, PACMED, PakPlus-Rx, Paragon®, Pathways 2000®,
Patterns Profiler, Per-Se, Per-Se Technologies®, PerYourHealth.com®, Practice Partner®, Premis®,
RelayHealth®, ROBOT-Rx®, SelfPace®, Series 2000, STAR 2000, SupplyScan, TRENDSTAR® and
WebVisit.
We also own other registered and unregistered trademarks and service marks and similar rights
used by our business segments. Many of the principal trademarks and service marks are registered
in the United States, or registrations have been applied for with respect to such marks, in
addition to certain other jurisdictions. The United States federal registrations of these
trademarks have terms of ten or twenty years, depending on date of registration, and are subject to
unlimited renewals. We believe that we have taken all necessary steps to preserve the registration
and duration of our trademarks and service marks, although no assurance can be given that we will
be able to successfully enforce or protect our rights thereunder in the event that they are subject
to third-party infringement claims. We do not consider any particular patent, license, franchise
or concession to be material to our business. We also hold copyrights in, and patents related to,
many of our products.
9
McKESSON CORPORATION
Other Information about the Business
Customers: During 2010, sales to our ten largest customers accounted for approximately 53% of
our total consolidated revenues. Sales to our two largest customers, CVS Caremark Corporation
(CVS) and Rite Aid Corporation (Rite Aid), accounted for approximately 15% and 12% of our total
consolidated revenues. At March 31, 2010, accounts receivable from our ten largest customers were
approximately 45% of total accounts receivable. Accounts receivable from CVS and Rite Aid were
approximately 14% and 10% of total accounts receivable. Substantially all of these revenues and
accounts receivable are included in our Distribution Solutions segment.
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which
accounted for more than approximately 8% of our purchases in 2010. 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 on the whole are good. The ten largest suppliers in 2010
accounted for approximately 46% 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 branded 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: Our development expenditures primarily consist of our investment in
software held for sale. We spent $451 million, $438 million and $420 million for development
activities in 2010, 2009 and 2008 and of these amounts, we capitalized 17% for each of the last
three years. Development expenditures are primarily incurred by our Technology Solutions segment.
Our Technology Solutions segments 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 regulation 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 18, 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 2010 and is not expected to be material in the next year.
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McKESSON CORPORATION
Employees: On March 31, 2010 and 2009, we employed approximately 32,500 persons compared to
32,900 in 2008.
Financial Information About Foreign and Domestic Operations: Information as to foreign and
domestic operations is included in Financial Notes 1 and 21, Significant Accounting Policies and
Segments of Business, to the consolidated financial statements appearing in this Annual Report on
Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K, including Managements 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.
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 to our operations. The
reader should not consider this list to be a complete statement of all risks and uncertainties.
We are subject to legal 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 proceedings involving antitrust, commercial,
employment, environmental, intellectual property, regulatory, 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 damages. Future court decisions and legislative activity may
increase the Companys exposure to litigation and regulatory investigations. 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 remaining amount of possible losses
that might be incurred should these legal proceedings be resolved against the Company.
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McKESSON CORPORATION
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. For example, we
are involved in a number of legal proceedings described in Financial Note 18, Other Commitments
and Contingent Liabilities, to the accompanying consolidated financial statements which could have
such an impact, including class actions and other legal proceedings alleging that we engaged in
illegal conduct that caused average wholesale prices to rise for certain prescription drugs during
specified periods.
Litigation is costly, time-consuming and disruptive to normal business operations. The
defense of these matters could also result in continued diversion of our managements 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. For additional information regarding certain
of the legal proceedings in which we are involved, see Financial Note 18, Other Commitments and
Contingent Liabilities, to the accompanying consolidated financial statements.
Changes in the United States healthcare environment could have a material adverse impact on our
results of operations.
Our products and services are primarily 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 has changed significantly in an effort to reduce costs. These
changes include increased use of managed care, cuts in Medicare and Medicaid reimbursement levels,
consolidation of pharmaceutical and medical-surgical supply distributors and the development of
large, sophisticated purchasing groups.
We expect the healthcare industry to continue to change significantly in the future. Some of
these changes, such as adverse changes in government funding of healthcare services, legislation or
regulations governing the privacy of patient information or the delivery or pricing of
pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry
participants to greatly reduce the amount of our products and services they purchase or the price
they are willing to pay for our products and services.
Changes in the healthcare industrys or our pharmaceutical suppliers pricing, selling,
inventory, distribution or supply policies or practices, or changes in our customer mix could also
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.
Generic Pharmaceuticals: Healthcare and public policy trends indicate that the number of
generic drugs will increase over the next few years as a result of the expiration of certain drug
patents. In recent years, our financial results have improved from our generic drug offering
programs. An increase or a decrease in the availability or changes in pricing or reimbursement of
these 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 to its legal challenge over the branded products patent. To the
extent we source and distribute such generic products launched at risk, 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.
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McKESSON CORPORATION
International Sourcing: We 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 or physical limitations that could impact
continuous supply and (4) damage to our reputation due to real or perceived quality issues.
Manufacturing difficulties could result in manufacturing shutdowns, product shortages and delays in
product manufacturing.
Pedigree Tracking: There have been increasing efforts by various levels of government
agencies, including state boards of pharmacy and comparable government agencies, to regulate the
pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated
and/or mislabeled drugs into the pharmaceutical distribution system (pedigree tracking). Certain
states have adopted or are considering laws and regulations that are intended to protect the
integrity of the pharmaceutical distribution system while other government agencies are currently
evaluating their recommendations. Florida has adopted pedigree tracking requirements and
California has enacted a law requiring chain of custody technology using radio frequency tagging
and electronic pedigrees, which will be effective for us in July 2016. Final regulations under the
federal Prescription Drug Marketing Act requiring pedigree and chain of custody tracking in certain
circumstances became effective December 1, 2006. This latter regulation has been challenged in a
case brought by secondary distributors. A preliminary injunction was issued by the United States
District Court for the Eastern District of New York that temporarily enjoined implementation of
this regulation. This injunction was affirmed by the Court of Appeals for the Second Circuit in
July 2008. In December 2008, both parties agreed to delay this litigation, pending the outcome of
certain U.S. congressional legislative initiatives. In addition, the U.S. Food and Drug
Administration (FDA) 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
any 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. Nonetheless, these
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.
Healthcare Fraud: We are subject to extensive and frequently changing local, state and
federal laws and regulations relating to healthcare fraud. The federal government continues to
strengthen its position and scrutiny over practices involving healthcare fraud affecting Medicare,
Medicaid and other government healthcare programs. Furthermore, our relationships with
pharmaceutical and medical-surgical product manufacturers and healthcare providers 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 for inducing 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 a federal health care program such as Medicare and Medicaid.
Legislative provisions relating to healthcare fraud and abuse give federal enforcement personnel
substantially increased funding, powers and remedies to pursue suspected fraud and abuse. 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. They 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 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.
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McKESSON CORPORATION
Claims Transmissions: Medical billing and collection activities are governed by numerous
federal and state civil and criminal laws that pertain to companies that provide billing and
collection services or that provide consulting services in connection with billing and collection
activities. 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 payors 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.
E-Prescribing: The use of our solutions by physicians for electronic prescribing, electronic
routing of prescriptions to pharmacies and dispensing is governed by federal and state law. States
have differing prescription format requirements, which we have programmed into our software. In
addition, in November 2005, the U.S. Department of Health and Human Services (the HHS) announced
regulations by the Centers for Medicare and Medicaid Services (CMS) related to E-Prescribing and
the Prescription Drug Program (E-Prescribing Regulations). These E-Prescribing Regulations were
mandated by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The
E-Prescribing Regulations set forth standards for the transmission of electronic prescriptions.
These standards are detailed and significant and cover not only transactions between prescribers
and dispensers for prescriptions but also electronic eligibility, benefits inquiries, drug
formulary and benefit coverage information. Our efforts to provide solutions that enable our
clients to comply with these regulations could be time consuming and expensive.
Reimbursements: Both our own profit margins and the profit margins of our customers may be
adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals and/or
medical treatments or services or changing the methodology by which reimbursement levels are
determined. For example, the Deficit Reduction Act of 2005 (DRA) was intended to reduce net
Medicare and Medicaid spending by approximately $11 billion over five years. Effective January 1,
2007, the DRA changed the federal upper payment limit for Medicaid reimbursement from 150% of the
lowest published price for generic pharmaceuticals (which is usually the average wholesale price)
to 250% of the lowest average manufacturer price (AMP). On July 17, 2007, CMS published a final
rule implementing these provisions and clarifying, among other things, the AMP calculation
methodology and the DRA provision requiring manufacturers to publicly report AMP for branded and
generic pharmaceuticals. On December 19, 2007, the United States District Court for the District
of Columbia issued a preliminary injunction prohibiting use of the AMP calculation in connection
with Medicaid reimbursement pending resolution of a lawsuit claiming that CMS had acted unlawfully
in adopting the rule. On July 15, 2008, the U.S. Congress enacted the Medicaid Improvements for
Patients and Providers Acts of 2008 (MIPPA,) which delayed the adoption of CMSs final rule and
prevented CMS from publishing AMP data until October 1, 2009. In addition, Medicare, Medicaid
and the SCHIP Extension Act of 2007 require CMS to adjust the calculation of the Medicare Part B drug
average sales price (ASP) to an actual sales volume basis. We expect that the use of an AMP
benchmark and the revised ASP calculations would result in a reduction in the Medicaid
reimbursement rates to our customers for certain generic pharmaceuticals, which could indirectly
impact the prices that we can charge our customers and cause corresponding declines in our
profitability. There can be no assurance that the changes under the DRA would not have a material
adverse impact on our results of operations.
Interoperability Standards: 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. This need for interoperability is leading to the development of
standards by various groups. The Certification Commission for Healthcare Information Technology
(CCHIT) has developed a set of criteria defining levels of interoperability, functionality and
security for the industry, which are still being modified and refined. Various federal, state and
foreign government agencies are also developing standards that could become mandatory for systems
purchased by these agencies. For example, the Health Information Technology for Economic and
Clinical Health (HITECH) Act portion of the American Recovery and Reinvestment Act (ARRA) of 2009
requires meaningful use of certified healthcare information technology products by healthcare
providers in order to receive stimulus funds from the federal government. We may incur increased
development costs and delays in delivering solutions if we need to upgrade our software and systems
to be in compliance with these varying and evolving standards. In addition, these changes may
lengthen our sales and implementation cycle and we may incur costs in periods prior to the
corresponding recognition of revenue. Delays in achieving certification under these evolving
standards may result in postponement or cancellation of our customers decisions to purchase our
products.
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McKESSON CORPORATION
Healthcare Industry Consolidation: In recent years, the 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 we
are less able to negotiate price terms with the suppliers. Many healthcare organizations have
consolidated to create larger healthcare enterprises with greater market power. If this
consolidation trend continues, it could reduce the size of our target market 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 and acquisition of our clients could erode our revenue base.
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 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 Companys 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 business, financial
condition and results of operations.
Changes in the Canadian healthcare environment could have a material adverse impact on our results
of operations.
Similar to the United States, the Canadian healthcare industry has undergone significant
changes in recent years to reduce costs. The provincial governments provide partial funding for
the purchase of pharmaceuticals and independently regulate the financing and reimbursement of
drugs. The Ontario government revised the drug distribution system in 2006 with the passage of the
Transparent Drug System for Patients Act and has recently announced a review of that legislation in
an attempt to further reduce costs. Some of the changes being considered would adversely affect
the distribution of drugs, pricing for prescription drugs and reduced funding for healthcare
services. Other provinces are considering similar changes, which would lower pharmaceutical
pricing and service fees. Such changes could significantly reduce our Canadian revenue and
operating profit.
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 national, regional and local full-line,
short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers
engaged in direct distribution and large payor 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.
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, payors, 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. These competitive pressures could have a material adverse impact on
our results of operations.
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McKESSON CORPORATION
Our Distribution Solutions segment is subject to inflation in branded pharmaceutical prices and
deflation in generic pharmaceutical prices, which subjects us to risks and uncertainties.
Inflation can be the partial basis of some of our U.S. pharmaceutical distribution business
agreements with branded pharmaceutical manufacturers. If the frequency or rate of branded price
increases slows, it could have a material adverse impact on our results of operations. In
addition, we also distribute generic pharmaceuticals, which are subject to price deflation. An
acceleration of the frequency or size of generic price decreases could also have a material adverse
impact on our results of operations.
Substantial defaults in payment, a material reduction in purchases or the loss of a large customer
or group purchasing organization could have a material adverse impact on our financial condition,
results of operations and liquidity.
In recent years, a significant portion of our revenue growth has been with a limited number of
large customers. During 2010, sales to our ten largest customers accounted for approximately 53%
of our total consolidated revenues. Sales to our two largest customers, CVS and Rite Aid,
represented approximately 15% and 12% of our total consolidated revenues. At March 31, 2010,
accounts receivable from our ten largest customers were approximately 45% of total accounts
receivable. Accounts receivable from CVS and Rite Aid were approximately 14% and 10% of total
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. A default in
payment, a material reduction in purchases from these, or any other large customers or the loss of
a large customer or GPO could have a material adverse impact on our financial condition, results of
operations and liquidity.
We generally sell product to our 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 would reduce our revenue growth and cause a decrease in our
profitability and cash flow. Further, interest rate fluctuations and changes in capital market
conditions may affect our customers ability to obtain credit to finance their business under
acceptable terms, which would reduce our revenue growth and cause a decrease in our profitability.
Our Distribution Solutions segment is dependent upon sophisticated information systems. The
implementation delay, malfunction, or failure of these systems for any extended period of time
could have a material adverse impact on our business.
We 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. If these systems are interrupted,
damaged by unforeseen events or fail for any extended period of time, we could have a material
adverse impact on our results of operations.
Reduced capacity in the commercial property insurance market exposes us to potential loss.
In order to provide prompt and complete service to our major Distribution Solutions segments
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 an adverse impact on our results of operations.
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McKESSON CORPORATION
We could become subject to liability claims that are not adequately covered by our insurance and
may have to pay damages and other expenses which could have a material adverse impact on our
results of operations.
Our business exposes us to risks that are inherent in the distribution, manufacturing,
dispensing of pharmaceuticals and medical-surgical supplies, the provision of ancillary services,
the conduct of our payor businesses (which include disease management programs and our nurse triage
services) and the provision of products that assist clinical decision-making and relate to patient
medical histories and treatment plans. If customers assert liability claims against our products
and/or services, any ensuing litigation, regardless of outcome, could result in a substantial cost
to us, divert managements 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. 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 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 clinical, patient care, financial, supply chain, strategic
management software solutions and pharmacy automation to hospitals, physicians, homecare providers,
retail and mail order pharmacies and payors. Challenges in 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, legislative initiatives, 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.
The loss of third party licenses utilized by our technology businesses may have a material adverse
impact on our results of operations.
We license the rights to use certain technologies from third-party vendors to incorporate in
or complement our various healthcare technology products and solutions, which are primarily offered
through our Technology Solutions segment. These licenses are generally nonexclusive, must be
renewed periodically by mutual consent and may be terminated if we breach the terms of the license.
As a result, we may have to discontinue, delay or reduce product shipments until we obtain
equivalent technology, which could hurt our business. Our competitors may obtain the right to use
any of the technology covered by these licenses and use the technology to compete directly with us.
In addition, if our vendors choose to discontinue support of the licensed technology in the
future, we may not be able to modify or adapt our own products.
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McKESSON CORPORATION
Proprietary technology 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 technologies that are substantially equivalent or
superior to our technology. 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 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 technology, obtain a license or cease selling the products that
contain the infringing technology. 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 technology could have a material adverse impact on our results of
operations.
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 software systems (systems) that we sell or operate are very complex. As
with complex systems offered by others, our systems may contain errors, especially when first
introduced. For example, our Technology Solutions segments business systems are intended to
provide information for healthcare providers in providing patient care. Therefore, users of our
systems have a greater sensitivity to errors than the general market for software products. If our
software or systems 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 clients 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) computer viruses, hacking and similar disruptive problems. We attempt to mitigate these
risks through various means including disaster recovery plans, separate test systems and change
control and system security measures, but our precautions may not protect against all problems. 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. 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.
18
McKESSON CORPORATION
Regulation of our distribution businesses and regulation of our computer-related products could
impose increased costs, delay the introduction of new products and negatively impact our business.
The healthcare industry is highly regulated. We are subject to various local, state, federal,
foreign and transnational laws and regulations, which include the operating and security standards
of the Drug Enforcement Administration (the DEA), the FDA, various state boards of pharmacy,
state health departments, the HHS, CMS and other comparable agencies. Certain of our subsidiaries
may be required to register for permits and/or licenses with, and comply with operating and
security standards of the DEA, the FDA, HHS, 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 distribution, manufacturing
and sale.
In addition, the FDA has increasingly focused on the regulation of computer products and
computer-assisted products as medical devices under the federal Food, Drug and Cosmetic Act. If
the FDA chooses to regulate any of our products as medical devices, 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 final FDA policy governing computer products, once
issued, may increase the cost and time to market new or existing products or may prevent us from
marketing our products.
We regularly receive requests for information and occasionally subpoenas from government
authorities. Although we believe that we are in compliance, in all material respects, with
applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal
would not reach a different conclusion concerning the compliance of our operations 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 have a material adverse impact on our results of
operations.
Regulations relating to confidentiality of sensitive personal information and to format and data
content standards could depress the demand for our products and impose significant product redesign
costs and unforeseen liabilities on us.
State, federal and foreign laws regulate the confidentiality of sensitive personal information
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 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 our systems are being updated and modified to
comply with the current requirements of state and foreign laws and the Federal Health Insurance
Portability and Accountability Act of 1996 (HIPAA) and the HITECH Act, evolving laws and
regulations in this area could restrict the ability of our customers to obtain, use or disseminate
patient information or could require us to incur significant additional costs to re-design our
products in a timely manner, either of which could have a material adverse impact on our results of
operations. In addition, in February 2010, certain provisions of the federal security and privacy
standards have been extended to us in our capacity as a business associate of our payor and
provider customers. Furthermore, failure to maintain confidentiality of sensitive personal
information in accordance with the applicable regulatory requirements could expose us to breach of
contract claims, fines and penalties, costs for remediation and harm to our reputation.
19
McKESSON CORPORATION
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. Recent legislation that provides incentives to
purchase health information systems imposes strict conditions on these incentives, including the
requirement that purchased systems must comply with applicable federally-endorsed standards. To
the extent these standards are narrowly construed or delayed in publication, our customers may
delay or cancel their purchase decisions. 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.
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 Companys 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 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 and the loss of a
significant customer. 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 managements 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.
Our foreign operations may subject us to a number of operating, economic, political and regulatory
risks that may have a material adverse impact on our financial condition and results of operations.
We have operations based in foreign countries, including Canada, the United Kingdom, other
European countries, Asia Pacific and Israel and we have a large investment in Mexico. In the
future, we look to continue to grow our foreign operations both organically and through
acquisitions and investments; however, increasing our foreign operations carries additional risks.
Operations outside of the United States may be affected by changes in trade protection laws,
policies, measures and other regulatory requirements affecting trade and investment; unexpected
changes in regulatory requirements for software, social, political, labor or economic conditions in
a specific country or region; import/export regulations in both the United States and foreign
countries and difficulties in staffing and managing foreign operations. Political changes 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. Additionally, foreign operations
expose us to foreign currency fluctuations that could adversely impact our results of operations
based on the movements of the applicable foreign currency exchange rates in relation to the U.S.
dollar.
Foreign operations are also subject to risks of violations of laws prohibiting improper
payments and bribery, including the U.S. Foreign Corrupt Practices Act and similar regulations in
foreign jurisdictions. Failure to comply with these laws could subject us to civil and criminal
penalties that could have a material adverse impact on our financial condition and results of
operations.
20
McKESSON CORPORATION
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, various legislative initiatives may be proposed that could adversely affect our tax
positions. There can be no assurance that our effective tax rate will not be adversely affected by
these initiatives. In addition, United States federal, state and local, as well as international,
tax laws and regulations are extremely complex and subject to varying interpretations. 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.
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 risks
including the diversion of managements 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 and a potential material adverse impact on operating results. In addition, we may
potentially require additional financing in order to fund future acquisitions, which may or may not
be attainable. 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.
Continued 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 continued or increased volatility
and disruption in the global capital and credit markets will not impair our liquidity or increase
our costs of borrowing.
Our $1.1 billion accounts receivable sales facility is generally renewed annually and will
expire in mid-May 2010. Although we did not use this facility in 2010, we have historically used
it to fund working capital requirements, as needed. We anticipate renewing this facility before
its expiration. If our use of the current accounts receivable sales facility is characterized as a
secured borrowing rather than a sale for U.S. GAAP purposes under accounting pronouncements that
will become effective for us in 2011, we may be required to consider the funds obtained by us under
this facility and the related liens in the covenant compliance calculations for certain of our
other financing arrangements. Although we believe we will be able to renew this facility, there is
no assurance that we will be able to do so.
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.
21
McKESSON CORPORATION
Changes in accounting standards issued by the Financial Accounting Standards Board (FASB) 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. Accordingly, from time-to-time we are required to adopt new or revised
accounting standards issued by recognized authoritative bodies, including the FASB 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 results of operations and financial condition.
|
|
|
Item 1B. |
|
Unresolved Staff Comments |
Not applicable.
Because of the nature of our principal businesses, our plant, warehousing, office and other
facilities are operated in widely dispersed locations, mostly throughout the U.S. and Canada. The
warehouses 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 16, 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 18, Other
Commitments and Contingent Liabilities, to our consolidated financial statements appearing in this
Annual Report on Form 10-K.
22
McKESSON CORPORATION
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
|
|
|
51 |
|
|
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 14 years. |
|
|
|
|
|
|
|
Jeffrey C. Campbell
|
|
|
49 |
|
|
Executive Vice President and Chief Financial
Officer since April 2004; Senior Vice President
and Chief Financial Officer from December 2003
to April 2004. Service with the Company 6
years. |
|
|
|
|
|
|
|
Patrick J. Blake
|
|
|
46 |
|
|
Executive Vice President and Group President
since June 2009; President of McKesson
Specialty Care Solutions from April 2006 to
June 2009; President of Customer Operations for
McKesson U.S. Pharmaceutical from October 2000
to April 2006. Service with the Company 14
years. |
|
|
|
|
|
|
|
Paul C. Julian
|
|
|
54 |
|
|
Executive Vice President and Group President since
April 2004; Senior Vice President from August
1999 to April 2004. Service with the Company
14 years. |
|
|
|
|
|
|
|
Jorge L. Figueredo
|
|
|
49 |
|
|
Executive Vice President, Human Resources since
May 2008; Senior Vice President, Human
Resources, Dow Jones, Inc. from February 2007
to January 2008; President, International, Liz
Claiborne Inc. from October 1984 to May 2006.
Service with the Company 2 years. |
|
|
|
|
|
|
|
Marc E. Owen
|
|
|
50 |
|
|
Executive Vice President, Corporate Strategy
and Business Development since April 2004;
Senior Vice President, Corporate Strategy and
Business Development from September 2001 to
April 2004. Service with the Company 9
years. |
|
|
|
|
|
|
|
Laureen E. Seeger
|
|
|
48 |
|
|
Executive Vice President, General Counsel and
Chief Compliance Officer since April 2010
(functionally has served as chief compliance
officer since March 2006); Executive Vice
President and General Counsel from July 2009 to
April 2010; Executive Vice President, General
Counsel and Secretary from March 2006 to July
2009; Vice President and General Counsel of
McKesson Provider Technologies from February
2000 to March 2006. Service with the Company
10 years. |
|
|
|
|
|
|
|
Randall N. Spratt
|
|
|
58 |
|
|
Executive Vice President, Chief Technology
Officer and Chief Information Officer since
April 2009; Executive Vice President, Chief
Information Officer from July 2005 to April
2009; Senior Vice President, Chief Process
Officer, McKesson Provider Technologies from
April 2003 to July 2005. Service with the
Company 24 years. |
23
McKESSON CORPORATION
PART II
|
|
|
Item 5. |
|
Market for the Registrants Common Equity, Related Stockholder Matters, Issuer Purchases
of Equity Securities and Stock Price Performance Graph |
(a) |
|
Market Information: The principal market on which the Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
High |
|
Low |
|
High |
|
Low |
First quarter |
|
$ |
45.27 |
|
|
$ |
33.13 |
|
|
$ |
58.78 |
|
|
$ |
51.96 |
|
Second quarter |
|
$ |
59.95 |
|
|
$ |
42.61 |
|
|
$ |
58.85 |
|
|
$ |
52.32 |
|
Third quarter |
|
$ |
64.98 |
|
|
$ |
55.82 |
|
|
$ |
52.55 |
|
|
$ |
28.60 |
|
Fourth quarter |
|
$ |
66.98 |
|
|
$ |
57.23 |
|
|
$ |
45.80 |
|
|
$ |
34.77 |
|
(b) |
|
Holders: The number of record holders of the Companys common stock at March 31, 2010, was
approximately 8,700. |
|
(c) |
|
Dividends: We declared regular cash dividends of $0.48 per share (or $0.12 per share per
quarter) in the years ended March 31, 2010 and 2009. |
|
|
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 Companys 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: The following table provides information on the Companys share
repurchases during the fourth quarter of 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Shares that May |
|
|
Total |
|
|
|
|
|
As Part of Publicly |
|
Yet Be Purchased |
|
|
Number of Shares |
|
Average Price Paid |
|
Announced |
|
Under the |
(In millions, except price per share) |
|
Purchased |
|
Per Share |
|
Program |
|
Programs |
|
January 1, 2010 January 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
531 |
|
February 1, 2010 February 28, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
531 |
|
March 1, 2010 March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
531 |
|
|
|
|
|
(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. |
24
McKESSON CORPORATION
In April 2008, the Board approved a plan to repurchase up to $1.0 billion of the
Companys common stock of which $531 million remained available for future repurchases as of March
31, 2010. During the fourth quarter of 2010, the Company did not repurchase any shares of common
stock. During 2010, the Company repurchased approximately 8 million shares of its common stock at
an average price of $41.47 for $299 million. In April 2010, the Board authorized the repurchase of
up to an additional $1.0 billion of the Companys common stock. 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.
(f) |
|
Stock Price Performance Graph*: The following graph compares the cumulative total
stockholder return on the Companys common stock for the periods indicated with the Standard &
Poors 500 Index and the Value Line Healthcare Sector Index (composed of 154 companies in the
health care industry, including the Company). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
McKesson Corporation |
|
$ |
100.00 |
|
|
$ |
138.80 |
|
|
$ |
156.61 |
|
|
$ |
140.65 |
|
|
$ |
95.11 |
|
|
$ |
179.99 |
|
S&P 500 Index |
|
$ |
100.00 |
|
|
$ |
111.73 |
|
|
$ |
124.95 |
|
|
$ |
118.60 |
|
|
$ |
73.43 |
|
|
$ |
109.97 |
|
Value Line
Healthcare Sector
Index |
|
$ |
100.00 |
|
|
$ |
111.54 |
|
|
$ |
117.82 |
|
|
$ |
111.76 |
|
|
$ |
85.43 |
|
|
$ |
118.37 |
|
|
|
|
|
* |
|
Assumes $100 invested in McKessons common stock and in each index on March 31, 2005
and that all dividends are reinvested. |
25
McKESSON CORPORATION
|
|
|
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) |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Operating Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
108,702 |
|
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
Percent change |
|
|
1.9 |
% |
|
|
4.8 |
% |
|
|
9.4 |
% |
|
|
6.9 |
% |
|
|
10.0 |
% |
Gross profit |
|
|
5,676 |
|
|
|
5,378 |
|
|
|
5,009 |
|
|
|
4,332 |
|
|
|
3,777 |
|
Income from continuing operations before income
taxes |
|
|
1,864 |
|
|
|
1,064 |
|
|
|
1,457 |
|
|
|
1,297 |
|
|
|
1,171 |
|
Income after income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
1,263 |
|
|
|
823 |
|
|
|
989 |
|
|
|
968 |
|
|
|
745 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(55 |
) |
|
|
6 |
|
Net income |
|
|
1,263 |
|
|
|
823 |
|
|
|
990 |
|
|
|
913 |
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
4,492 |
|
|
|
3,065 |
|
|
|
2,438 |
|
|
|
2,730 |
|
|
|
3,527 |
|
Days sales outstanding for: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer receivables |
|
|
25 |
|
|
|
24 |
|
|
|
22 |
|
|
|
21 |
|
|
|
22 |
|
Inventories |
|
|
34 |
|
|
|
31 |
|
|
|
33 |
|
|
|
32 |
|
|
|
29 |
|
Drafts and accounts payable |
|
|
48 |
|
|
|
43 |
|
|
|
44 |
|
|
|
43 |
|
|
|
41 |
|
Total assets |
|
|
28,189 |
|
|
|
25,267 |
|
|
|
24,603 |
|
|
|
23,943 |
|
|
|
20,961 |
|
Total debt, including capital lease obligations |
|
|
2,297 |
|
|
|
2,512 |
|
|
|
1,797 |
|
|
|
1,958 |
|
|
|
991 |
|
Stockholders equity |
|
|
7,532 |
|
|
|
6,193 |
|
|
|
6,121 |
|
|
|
6,273 |
|
|
|
5,907 |
|
Property acquisitions |
|
|
199 |
|
|
|
195 |
|
|
|
195 |
|
|
|
126 |
|
|
|
166 |
|
Acquisitions of businesses, net |
|
|
18 |
|
|
|
358 |
|
|
|
610 |
|
|
|
1,938 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at year-end |
|
|
271 |
|
|
|
271 |
|
|
|
277 |
|
|
|
295 |
|
|
|
304 |
|
Shares on which earnings per common share were
based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
273 |
|
|
|
279 |
|
|
|
298 |
|
|
|
305 |
|
|
|
316 |
|
Basic |
|
|
269 |
|
|
|
275 |
|
|
|
291 |
|
|
|
298 |
|
|
|
306 |
|
Diluted earnings per common share (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
3.17 |
|
|
$ |
2.36 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.18 |
) |
|
|
0.02 |
|
Total |
|
|
4.62 |
|
|
|
2.95 |
|
|
|
3.32 |
|
|
|
2.99 |
|
|
|
2.38 |
|
Cash dividends declared |
|
|
131 |
|
|
|
134 |
|
|
|
70 |
|
|
|
72 |
|
|
|
74 |
|
Cash dividends declared per common share |
|
|
0.48 |
|
|
|
0.48 |
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.24 |
|
Book value per common share (2) (3) |
|
|
27.79 |
|
|
|
22.87 |
|
|
|
22.10 |
|
|
|
21.26 |
|
|
|
19.43 |
|
Market value per common share year end |
|
|
65.72 |
|
|
|
35.04 |
|
|
|
52.37 |
|
|
|
58.54 |
|
|
|
52.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital employed (4) |
|
|
9,829 |
|
|
|
8,705 |
|
|
|
7,918 |
|
|
|
8,231 |
|
|
|
6,898 |
|
Debt to capital ratio (5) |
|
|
23.4 |
% |
|
|
28.9 |
% |
|
|
22.7 |
% |
|
|
23.8 |
% |
|
|
14.4 |
% |
Net debt to net capital employed (6) |
|
|
(23.5 |
)% |
|
|
6.1 |
% |
|
|
6.6 |
% |
|
|
0.1 |
% |
|
|
(24.1 |
)% |
Average stockholders equity (7) |
|
|
6,768 |
|
|
|
6,214 |
|
|
|
6,344 |
|
|
|
6,022 |
|
|
|
5,736 |
|
Return on stockholders equity (8) |
|
|
18.7 |
% |
|
|
13.2 |
% |
|
|
15.6 |
% |
|
|
15.2 |
% |
|
|
13.1 |
% |
|
|
|
|
Footnotes to Five-Year Highlights: |
|
(1) |
|
Based on year-end balances and sales or cost of sales for the last 90 days of the year. |
|
(2) |
|
Certain computations may reflect rounding adjustments. |
|
(3) |
|
Represents stockholders equity divided by year-end common shares outstanding. |
|
(4) |
|
Consists of total debt and stockholders equity. |
|
(5) |
|
Ratio is computed as total debt divided by capital employed. |
|
(6) |
|
Ratio is computed as total debt, net of cash and cash equivalents (net debt), divided by
net debt and stockholders equity (net capital employed). |
|
(7) |
|
Represents a five-quarter average of stockholders equity. |
|
(8) |
|
Ratio is computed as net income divided by a five-quarter average of stockholders equity. |
26
McKESSON CORPORATION
FINANCIAL REVIEW
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
GENERAL
Managements 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 Companys 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 Companys 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: Distribution Solutions and Technology
Solutions. See Financial Note 21, Segments of Business, to the accompanying consolidated
financial statements for a description of these segments.
RESULTS OF OPERATIONS
Overview:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share data) |
|
2010 |
|
2009 |
|
2008 |
|
Revenues |
|
$ |
108,702 |
|
|
$ |
106,632 |
|
|
$ |
101,703 |
|
Litigation Charge (Credit), Net |
|
|
(20 |
) |
|
|
493 |
|
|
|
(5 |
) |
Income from Continuing Operations
Before Income Taxes |
|
$ |
1,864 |
|
|
$ |
1,064 |
|
|
$ |
1,457 |
|
Income Tax Expense |
|
|
(601 |
) |
|
|
(241 |
) |
|
|
(468 |
) |
|
|
|
Income from Continuing Operations |
|
|
1,263 |
|
|
|
823 |
|
|
|
989 |
|
Discontinued Operations, Net |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
Net Income |
|
$ |
1,263 |
|
|
$ |
823 |
|
|
$ |
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Diluted Common Shares |
|
|
273 |
|
|
|
279 |
|
|
|
298 |
|
|
Revenues increased 2% to $108.7 billion in 2010 and 5% to $106.6 billion in 2009. The
increase in revenues primarily reflects market growth in our Distribution Solutions segment, which
accounted for approximately 97% of our consolidated revenues. To a lesser extent, revenues for
2010 were also affected by an increase in demand related to the flu season. These increases were
partially offset by the loss of several customers in late 2009. Revenues for 2009 were increased
by our acquisitions of Oncology Therapeutics Network (OTN) in October 2007 and McQueary Brothers
Drug Company (McQueary Brothers) in May 2008.
Income from continuing operations before income taxes increased 75% to $1.9 billion in 2010
and decreased 27% to $1.1 billion in 2009. The increase in 2010 was due to improved gross profit,
lower operating expenses compared to 2009, which included the $493 million Average Wholesale Price
(AWP) litigation charge discussed below, and increases in other income, partially offset by
higher interest expense. The decrease in income from continuing operations before income taxes in
2009 was due to higher operating expenses, primarily caused by the AWP litigation charge, and due
to lower other income, partially offset by improved gross profit.
27
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Gross profit increased 6% to $5.7 billion and 7% to $5.4 billion in 2010 and 2009. As a
percentage of revenues, gross profit increased 18 basis points (bp) to 5.22% and 11 bp to 5.04%
in 2010 and 2009. Gross profit margin increased in 2010 primarily reflecting an improved mix of
higher margin revenues in both our Distribution Solutions and Technology Solutions segments. The
increase in our 2009 gross profit margin was primarily due to an improvement in our Distribution
Solutions segment margin, partially offset by a decline in our Technology Solutions segment margin.
Operating expenses were $3.7 billion, $4.2 billion and $3.5 billion in 2010, 2009 and 2008.
Operating expenses for 2010 decreased compared to 2009, which included the AWP litigation charge as
further discussed under the caption Operating Expenses in this Financial Review. Excluding the
AWP litigation charge, operating expenses for 2010 approximated the same period a year ago
primarily due to lower Profit Sharing Investment Plan (PSIP) expense as more fully described
under the caption Operating Expenses in this Financial Review, cost containment efforts, the sale
of two businesses during the first and third quarters in 2009 and the reversal of a previously
established litigation accrual. These decreases were partially offset by an increase in expenses
associated with employee compensation and benefit costs, our 2009 business acquisitions and other
business initiatives. Operating expenses for 2009 increased primarily due to additional expenses
incurred to support our sales growth, expenses associated with our business acquisitions and higher
employee compensation. As noted above, operating expenses for 2009 included a pre-tax charge of
$493 million for the AWP litigation charge.
In 2010, other income, net includes a $17 million pre-tax gain ($14 million after-tax) from
the sale of our 50% equity interest in McKesson Logistics Solutions L.L.C. (MLS). In 2009, other
income, net includes a pre-tax impairment charge of $63 million ($60 million after-tax) on two
equity-held investments and a pre-tax gain of $24 million ($14 million after-tax) from the sale of
an equity-held investment. Over the last two years, other income, net was negatively affected by a
decrease in interest income due to lower interest rates and in 2009
was affected by a lower average
cash and cash equivalents balance.
Interest expense increased 30% to $187 million in 2010 and 1% to $144 million in 2009.
Interest expense increased in 2010 compared to the prior year primarily due to our issuance of
$700 million of long-term notes in February 2009. Interest expense for 2009 reflects the repayment
of $150 million of long-term debt during the fourth quarter of 2008 and the issuance of
$700 million of long-term debt during the fourth quarter of 2009.
Our reported income tax rates were 32.2%, 22.7% and 32.1% in 2010, 2009 and 2008. In 2009,
current income tax expense included $111 million of net income tax benefits for discrete items of
which, $87 million represents a non-cash benefit. These benefits primarily relate to the
recognition of previously unrecognized tax benefits and related accrued interest. The recognition
of these discrete items is primarily due to the lapsing of the statutes of limitations.
Net income was $1,263 million, $823 million and $990 million in 2010, 2009 and 2008 and
diluted earnings per common share were $4.62, $2.95 and $3.32, which were favorably affected by
decreases in our weighted average shares outstanding due to the cumulative effect of share
repurchases from 2008 to 2010.
28
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Distribution Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
Direct distribution & services |
|
$ |
72,210 |
|
|
$ |
66,876 |
|
|
$ |
60,436 |
|
Sales to customers warehouses |
|
|
21,435 |
|
|
|
25,809 |
|
|
|
27,668 |
|
|
|
|
Total U.S. pharmaceutical distribution & services |
|
|
93,645 |
|
|
|
92,685 |
|
|
|
88,104 |
|
Canada pharmaceutical distribution & services |
|
|
9,072 |
|
|
|
8,225 |
|
|
|
8,106 |
|
Medical-Surgical distribution & services |
|
|
2,861 |
|
|
|
2,658 |
|
|
|
2,509 |
|
|
|
|
Total Distribution Solutions |
|
|
105,578 |
|
|
|
103,568 |
|
|
|
98,719 |
|
|
|
|
|
Technology Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
2,439 |
|
|
|
2,337 |
|
|
|
2,240 |
|
Software & software systems |
|
|
571 |
|
|
|
572 |
|
|
|
591 |
|
Hardware |
|
|
114 |
|
|
|
155 |
|
|
|
153 |
|
|
|
|
Total Technology Solutions |
|
|
3,124 |
|
|
|
3,064 |
|
|
|
2,984 |
|
|
|
|
Total Revenues |
|
$ |
108,702 |
|
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
Total revenues increased 2% to $108.7 billion in 2010 and 5% to $106.6 billion in 2009. The
growth in revenues was primarily driven by our Distribution Solutions segment, which accounted for
approximately 97% of revenues.
Direct distribution and services revenues increased in 2010 compared to 2009 primarily due to
a shift of revenues from sales to customers warehouses to direct store delivery and market growth,
which includes price increases and increased volume from new and existing customers, offset in part
by the greater sales of lower priced generic drugs. This increase was partially offset by the loss
of several customers in late 2009. Direct distribution and services revenues increased in 2009
compared to 2008 primarily reflecting market growth, our acquisitions of OTN in October 2007 and
McQueary Brothers in May 2008 and a shift of revenues from sales to customers warehouses to direct
store delivery.
Sales to customers warehouses for 2010 decreased compared to prior year primarily due to a
shift of revenues to direct store delivery, reduced revenues associated with a large customer and
the loss of a large customer in mid-2009, partially offset by expanded business with existing
customers. Sales to customers warehouses decreased in 2009 compared to 2008 primarily reflecting
a customers loss of business, the loss of a large customer and reduced revenues associated with
the consolidation of certain customers. Additionally, 2009 revenues were also impacted by a shift
to direct store delivery. These decreases were partially offset by expanded business with existing
customers.
Sales to retail customers warehouses represent large volume sales of pharmaceuticals
primarily to a limited number of large self-warehousing retail chain customers whereby we order
bulk product from the manufacturer, receive and process the product through our central
distribution facility and subsequently deliver the bulk product (generally in the same form as
received from the manufacturer) directly to our customers warehouses. This distribution method is
typically not marketed or sold by the Company as a stand-alone service; rather, it is offered as an
additional distribution method for our large retail chain customers that have an internal
self-warehousing distribution network. Sales to customers warehouses provide a benefit to these
customers because they can utilize the Company as one source for both their direct-to-store
business and their warehouse business. We generally have significantly lower gross profit margins
on sales to customers warehouses as we pass much of the efficiency of this low cost-to-serve model
on to the customer. These sales do, however, contribute to our gross profit dollars.
29
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The customer mix of our U.S. pharmaceutical distribution revenues was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
Direct Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Independents |
|
|
12 |
% |
|
|
13 |
% |
|
|
13 |
% |
Institutions |
|
|
32 |
|
|
|
32 |
|
|
|
30 |
|
Retail Chains |
|
|
32 |
|
|
|
26 |
|
|
|
24 |
|
|
|
|
Subtotal |
|
|
76 |
|
|
|
71 |
|
|
|
67 |
|
Sales to retail customers warehouses |
|
|
24 |
|
|
|
29 |
|
|
|
33 |
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
In 2010, the percentage of total direct and warehouse revenue attributed to the Companys
retail chain customers compared to our other customer groups increased slightly from the same
period a year ago, while it declined in 2009. In 2009, this decline resulted in a positive impact
on the Companys gross profit margin. As previously described, a limited number of our large
retail chain customers purchase products through both the Companys direct and warehouse
distribution methods, the latter of which generally has a significantly lower gross profit margin
due to the low cost-to-serve model. When evaluating and pricing customer contracts, we do so based
on our assessment of total customer profitability. As a result, we do not evaluate the Companys
performance or allocate resources based on sales to customers warehouses or gross profit
associated with such sales.
Canadian pharmaceutical distribution and services revenues for 2010 increased on a constant
currency basis by 7% from prior year primarily due to market growth, which includes price increases
and increased volume from new and existing customers and a favorable foreign exchange rate of 3%.
Canadian pharmaceutical distribution and services revenues for 2009 increased slightly primarily
reflecting market growth, which was almost fully offset by 9% unfavorable foreign exchange rates
and the loss of a customer.
Medical-Surgical distribution and services revenues increased in 2010 compared to 2009
reflecting an increase in demand related to the flu season, acquisitions and increased volume from
new and existing customers. Medical-Surgical distribution and services revenues increased for 2009
from prior year primarily reflecting market growth and acquisitions. In addition, revenues in 2008
were impacted by the discontinuance of the distribution of a product line. Revenues associated
with this product line are now recorded by our U.S. pharmaceutical distribution and services
business.
Technology Solutions revenues increased in 2010 compared to prior year due to higher services
revenues primarily caused by increases in outsourcing revenues for claims processing and other
services and software maintenance reflecting the segments expanded customer base. These increases
were partially offset by a shift to products that have higher revenue deferral rates and lower
hardware sales. Technology Solutions revenues increased in 2009 primarily due to increased
services revenues primarily reflecting the segments expanded customer base and outsourcing
revenues for claims processing. These increases were partially offset by unfavorable foreign
exchange rates and a decrease in software revenues, particularly in the hospital and physician
office customer channels.
30
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
4,219 |
|
|
$ |
3,955 |
|
|
$ |
3,586 |
|
Technology Solutions |
|
|
1,457 |
|
|
|
1,423 |
|
|
|
1,423 |
|
|
|
|
Total |
|
$ |
5,676 |
|
|
$ |
5,378 |
|
|
$ |
5,009 |
|
|
|
|
|
Gross Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
4.00 |
% |
|
|
3.82 |
% |
|
|
3.63 |
% |
Technology Solutions |
|
|
46.64 |
|
|
|
46.44 |
|
|
|
47.69 |
|
Total |
|
|
5.22 |
|
|
|
5.04 |
|
|
|
4.93 |
|
|
Gross profit increased 6% to $5.7 billion in 2010 and 7% to $5.4 billion in 2009. As a
percentage of revenues, gross profit increased by 18 bp in 2010 and 11 bp in 2009. Gross profit
margin increased in 2010 primarily due to an improved mix of higher margin revenues in both of our
operating segments. Our Distribution Solutions segment margin increased primarily due to
flu-related demand. Our Technology Solutions segment margin improved reflecting a change in
revenue mix. In 2009, the increase in our Distribution Solutions gross profit margin was partially
offset by a decline in our Technology Solutions segment reflecting a change in revenue mix and the
recognition of $21 million of disease management deferred revenues in 2008 for which associated
expenses were previously recognized as incurred.
In 2010, our Distribution Solutions segments gross profit margin increased compared to 2009
primarily due to the impact of the H1N1 flu virus, which helped drive an improved mix of higher
margin revenues stemming from increased flu-related demand across our distribution businesses.
Gross profit margin was also favorably affected by a higher buy side margin, which primarily
reflects compensation from branded pharmaceutical manufacturers, and increased sales of higher
margin generic drugs. These benefits were partially offset by a decline in sell margin. Our
last-in, first-out (LIFO) net inventory expense was $8 million for 2010 and 2009.
In 2009, our Distribution Solutions segments gross profit margin increased compared to 2008.
Gross profit margin was impacted by the benefit of increased sales of generic drugs with higher
margins; higher buy side margins and an increase associated with a lower proportion of revenues
within the segment attributed to sales to customers warehouses, which generally have lower gross
profit margins relative to other revenues within the segment. These increases were partially
offset by a modest decline in sell margin during the latter part of the year and LIFO net inventory
credits ($8 million LIFO net expense in 2009 compared to a $14 million LIFO net credit in 2008).
Our Distribution Solutions segment 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 practice in the Distribution Solutions distribution businesses is
to pass on to customers published price changes from suppliers. Manufacturers generally provide us
with price protection, which limits price-related inventory losses. Price declines on many generic
pharmaceutical products in this segment over the last few years have moderated the effects of
inflation in other product categories, which resulted in minimal overall price changes in those
years. Additional information regarding our LIFO accounting is included under the caption
Critical Accounting Policies and Estimates, included in this Financial Review.
For each of the last three years, the Companys sales to customers warehouses represented 5%
or less of the segments total gross profit dollars. In 2010, the percentage of total direct and
warehouse revenue attributed to our retail chain customers compared to our other customer groups
increased slightly from the same period a year ago, while it declined in 2009. In 2009, this
decline resulted in a positive impact on the Companys gross profit margin.
31
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In 2010, our Technology Solutions segments gross profit margin was favorably affected by a
change in revenue mix, partially offset by a higher software revenue deferral rate.
In 2009, our Technology Solutions segments gross profit margin decreased compared to the
prior year primarily reflecting a change in revenue mix and the recognition in 2008 of $21 million
of disease management deferred revenues for which associated expenses were previously recognized as
incurred.
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (1) |
|
$ |
2,260 |
|
|
$ |
2,777 |
|
|
$ |
2,138 |
|
Technology Solutions |
|
|
1,077 |
|
|
|
1,096 |
|
|
|
1,115 |
|
Corporate |
|
|
351 |
|
|
|
309 |
|
|
|
283 |
|
|
|
|
Subtotal |
|
|
3,688 |
|
|
|
4,182 |
|
|
|
3,536 |
|
Litigation (credit), net |
|
|
(20 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
|
Total |
|
$ |
3,668 |
|
|
$ |
4,182 |
|
|
$ |
3,531 |
|
|
|
|
Operating Expenses as a Percentage of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
2.14 |
% |
|
|
2.68 |
% |
|
|
2.17 |
% |
Technology Solutions |
|
|
34.48 |
|
|
|
35.77 |
|
|
|
37.37 |
|
Total |
|
|
3.37 |
|
|
|
3.92 |
|
|
|
3.47 |
|
|
(1) |
|
Operating expenses for 2009 include the $493 million AWP litigation charge. |
Operating expenses decreased 12% to $3.7 billion in 2010 and increased 18% to $4.2
billion in 2009. Operating expenses for 2010 decreased compared to 2009, which included the AWP
litigation charge as more fully described below. Excluding the AWP litigation charge, operating
expenses for 2010 approximated the same period a year ago primarily due to lower PSIP expense as
more fully described below, cost containment efforts, the sale of two businesses during the first
and third quarters in 2009 and the reversal of a previously established litigation accrual. These
decreases were partially offset by an increase in expenses associated with employee compensation
and benefit costs, our 2009 business acquisitions and other business initiatives.
Excluding the AWP litigation charge, operating expenses for 2009 increased primarily due to
additional expenses incurred to support our sales growth, expenses associated with our business
acquisitions and higher employee compensation.
The McKesson Corporation PSIP is a member of the settlement class in the Consolidated
Securities Litigation Action. On April 27, 2009, the court issued an order approving the
distribution of the settlement funds. On October 9, 2009, the PSIP received approximately $119
million of the Consolidated Securities Litigation Action proceeds. Approximately $42 million of
the proceeds were attributable to the allocated shares of McKesson common stock owned by the PSIP
participants during the Consolidated Securities Litigation Action class-holding period and were
allocated to the respective participants on that basis in the third quarter of 2010. Approximately
$77 million of the proceeds were attributable to the unallocated shares (the Unallocated
Proceeds) of McKesson common stock owned by the PSIP in an employee stock ownership plan (ESOP)
suspense account. In accordance with the plan terms, the PSIP distributed all of the Unallocated
Proceeds to current PSIP participants after the close of the plan year in April 2010. The receipt
of the Unallocated Proceeds by the PSIP was reimbursement for the loss in value of the Companys
common stock held by the PSIP in its ESOP suspense account during the Consolidated Securities
Litigation Action class-holding period and was not a contribution made by the Company to the PSIP
or ESOP. Accordingly, there were no accounting consequences to the Companys financial statements
relating to the receipt of the Unallocated Proceeds by the PSIP.
32
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The Companys PSIP expense for the full year is negligible, as the Company did not make
additional contributions to the PSIP or ESOP. As a result, our compensation expense in 2010 was
lower than 2009. During 2009 and 2008, PSIP expense was $53 million and $13 million. The expense
for 2008 was lower than 2009 due to the utilization of lower cost basis shares from the ESOP to
fund our matching contributions. The expense for 2011 is expected to be approximately $58 million.
PSIP expense by segment for the last three years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Distribution Solutions |
|
$ |
|
|
|
$ |
23 |
|
|
$ |
5 |
|
Technology Solutions |
|
|
1 |
|
|
|
28 |
|
|
|
7 |
|
Corporate |
|
|
|
|
|
|
2 |
|
|
|
1 |
|
|
|
|
PSIP expense |
|
$ |
1 |
|
|
$ |
53 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (1) |
|
$ |
|
|
|
$ |
12 |
|
|
$ |
3 |
|
Operating expenses |
|
|
1 |
|
|
|
41 |
|
|
|
10 |
|
|
|
|
PSIP expense |
|
$ |
1 |
|
|
$ |
53 |
|
|
$ |
13 |
|
|
|
|
|
(1) |
|
Amounts recorded to cost of sales pertain solely to our Technology Solutions segment. |
Over the last three years, we recorded the following reduction in workforce and
restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Other workforce reduction charges, net (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
9 |
|
|
$ |
7 |
|
|
$ |
|
|
Technology Solutions |
|
|
11 |
|
|
|
25 |
|
|
|
8 |
|
|
|
|
Total |
|
|
20 |
|
|
|
32 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges (credits), net |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (2) |
|
|
1 |
|
|
|
4 |
|
|
|
8 |
|
Technology Solutions (3) |
|
|
|
|
|
|
(2 |
) |
|
|
9 |
|
Corporate |
|
|
1 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
|
Total |
|
|
2 |
|
|
|
1 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reduction in workforce and restructuring charges |
|
$ |
22 |
|
|
$ |
33 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (4) |
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
7 |
|
Operating expenses |
|
|
17 |
|
|
|
28 |
|
|
|
20 |
|
|
|
|
Total reduction in workforce and restructuring charges |
|
$ |
22 |
|
|
$ |
33 |
|
|
$ |
27 |
|
|
|
|
|
(1) |
|
Although other workforce reduction actions do not constitute a restructuring plan as
defined under U.S. GAAP, they do represent independent actions taken from time-to-time, as
appropriate. Other workforce reduction charges also reflected related facility exit costs of
$4 million and $3 million in 2010 and 2009 for our Technology Solutions segment. |
|
(2) |
|
In 2008, we incurred $4 million of severance costs associated with the closure of two
facilities and $1 million and $3 million of severance and asset impairments associated with
the integration of OTN. |
|
(3) |
|
In 2008, we incurred $5 million of severance and exit-related costs and a $4 million asset
impairment charge for the write-off of capitalized software costs associated with the
termination of a software project. |
|
(4) |
|
Amounts recorded to cost of sales generally pertain to our Technology Solutions segment. |
33
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
On a segment basis, Distribution Solutions operating expenses decreased in 2010 and
increased in 2009 primarily due to the $493 million AWP litigation charge in 2009. Excluding the
AWP litigation charge, operating expenses and operating expenses as a percentage of revenues
decreased in 2010 primarily due to the sale of two businesses during the first and third quarters
of 2009, lower PSIP expense in 2010 and our continued focus on cost containment, partially offset
by an increase in expenses associated with our 2009 business acquisitions.
Excluding the AWP litigation charge, operating expenses in 2009 increased primarily due to
business acquisitions and additional costs incurred to support our sales volume growth. Operating
expenses as a percentage of revenues increased in 2009 primarily due to the AWP litigation charge
as well as additional costs incurred to support our sales volume growth.
As discussed in Financial Note 18, Other Commitments and Contingent Liabilities, in 2009 we
reached an agreement to settle all private party claims relating to First DataBank, Inc.s
published drug reimbursement benchmarks for $350 million. We also recorded an accrual for pending
and expected AWP-related claims by public payors, which is currently estimated to be $143 million.
The combination of the AWP settlement for all private party claims and the decision by us to
establish an estimated accrual for the pending and expected AWP-related claims by public payors
resulted in a pre-tax, non-cash charge of $493 million in the third quarter of 2009.
Technology Solutions segments operating expenses decreased over the past two years.
Operating expenses and operating expenses as a percentage of revenues for 2010 benefited from lower
PSIP expense, cost containment efforts and reduction in workforce plans implemented in 2009,
partially offset by our continued investment in research and development activities. Operating
expenses for 2009 decreased primarily due to cost containment efforts and a decrease in bad debt
expense, partially offset by an increase in net research and development expenses and additional
costs for business acquisitions. Operating expenses as a percentage of revenues for this segment
decreased for 2009 primarily reflecting the segments cost containment efforts and a more favorable
business mix.
Corporate expenses have increased over the last two years. Corporate expenses for 2010
increased primarily due to higher compensation and benefits costs, other business initiatives and
legal settlement charges, partially offset by the reversal of a previously established litigation
accrual. Corporate expenses increased in 2009 compared to 2008 primarily reflecting an increase in
accounts receivable sales facility fees, compensation expense and additional costs incurred to
support various initiatives.
Other Income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
By Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
29 |
|
|
$ |
(20 |
) |
|
$ |
35 |
|
Technology Solutions |
|
|
5 |
|
|
|
7 |
|
|
|
11 |
|
Corporate |
|
|
9 |
|
|
|
25 |
|
|
|
75 |
|
|
|
|
Total |
|
$ |
43 |
|
|
$ |
12 |
|
|
$ |
121 |
|
|
In 2010, other income, net includes a $17 million pre-tax gain ($14 million after-tax) from
the sale of our 50% equity interest in MLS. The gain on sale of our investment in MLS was recorded
within our Distribution Solutions segment. The increase in other income, net was partially offset
by a decrease in interest income due to lower interest rates in 2010. Interest income, which is
primarily recorded in Corporate, was $16 million, $31 million and $89 million in 2010, 2009 and
2008.
In 2009, other income, net included a pre-tax impairment charge of $63 million ($60 million
after-tax) on two equity-held investments (as further described below) and a pre-tax gain of $24
million ($14 million after-tax) from the sale of our 42% equity interest in Verispan, LLC
(Verispan). The impairment charge and the gain on sale of our investment in Verispan were both
recorded within our Distribution Solutions segment. Excluding these items, other income, net
decreased primarily due to a decrease in interest income from lower average cash and cash
equivalents balances and interest rates.
34
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We evaluate our investments for impairment when events or changes in circumstances indicate
that the carrying values of such investment may have experienced an other-than-temporary decline in
value. During the fourth quarter of 2009, we determined that the fair value of our interest in
Parata was lower than its carrying value and that such impairment was other-than-temporary. Fair
value was determined using a discounted cash flow analysis based on estimated future results and
market capitalization rates. We determined the impairment was other-than-temporary based on our
assessment of all relevant factors including deterioration in the investees financial condition
and weak market conditions. As a result, we recorded a pre-tax impairment of $58 million ($55
million after-tax) on this investment which is recorded within other income, net in the
consolidated statements of operations. Our investment in Parata is accounted for under the equity
method of accounting within our Distribution Solutions segment.
During the fourth quarter of 2009, we also recorded a pre-tax impairment of $5 million ($5
million after-tax) on another equity-held investment within our Distribution Solutions segment.
Segment Operating Profit and Corporate Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Segment Operating Profit (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (2) (3) |
|
$ |
1,988 |
|
|
$ |
1,158 |
|
|
$ |
1,483 |
|
Technology Solutions |
|
|
385 |
|
|
|
334 |
|
|
|
319 |
|
|
|
|
Subtotal |
|
|
2,373 |
|
|
|
1,492 |
|
|
|
1,802 |
|
Corporate Expenses, Net |
|
|
(342 |
) |
|
|
(284 |
) |
|
|
(208 |
) |
Litigation Credit, Net |
|
|
20 |
|
|
|
|
|
|
|
5 |
|
Interest Expense |
|
|
(187 |
) |
|
|
(144 |
) |
|
|
(142 |
) |
|
|
|
Income from Continuing Operations Before
Income Taxes |
|
$ |
1,864 |
|
|
$ |
1,064 |
|
|
$ |
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
1.88 |
% |
|
|
1.12 |
% |
|
|
1.50 |
% |
Technology Solutions |
|
|
12.32 |
|
|
|
10.90 |
|
|
|
10.69 |
|
|
|
|
|
(1) |
|
Segment operating profit includes gross profit, net of operating expenses, plus other
income (expense), net for our two operating segments. |
|
(2) |
|
Operating expenses for 2009 for our Distribution Solutions segment included the $493 million
pre-tax AWP litigation charge. |
|
(3) |
|
Other income, net for 2010 for our Distribution Solutions segment included the MLS pre-tax
gain of $17 million and for 2009 included $63 million of pre-tax charges to write-down two
equity-held investments and a $24 million pre-tax gain on the sale of our equity investment in
Verispan. |
In 2010, operating profit margin for our Distribution Solutions segment increased
primarily due to a higher gross profit margin, lower operating expenses as a percentage of revenues
and the gain on sale of the segments 50% equity investment in MLS. Operating expenses improved
due to the sale of two businesses during the first and third quarters of 2009 and lower PSIP
expense, partially offset by an increase in expenses associated with our business acquisitions.
Results for 2009 included the $493 million AWP litigation charge, $63 million of pre-tax charges to
write-down two equity-held investments and a $24 million pre-tax gain on the sale of the segments
42% equity investment in Verispan.
In 2009, operating profit margin in our Distribution Solutions segment decreased compared to
2008 primarily due to an increase in operating expenses as a percentage of revenues as a result of
the AWP litigation charge and a decrease in other income, partially offset by a higher gross profit
margin.
35
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In 2010, operating profit margin in our Technology Solutions segment increased compared to
2009 primarily due to lower operating expenses as a percentage of revenues and an improvement in
gross profit margin.
In 2009, operating profit margin in our Technology Solutions segment increased compared to
2008 primarily due to a decrease in operating expenses as a percentage of revenues, partially
offset by a decrease in gross profit margin. Operating profit margin for this segment for the past
two years has benefited from cost containment efforts and a more favorable revenue mix.
Corporate expenses, net of other income increased in 2010 compared to 2009 primarily due to an
increase in operating expenses and a decrease in interest income. Corporate expenses, net of other
income, increased in 2009 compared to 2008 primarily due to a decrease in interest income and an
increase in operating expenses.
Litigation Credit, Net: In 2010 and 2008 we recorded net credits of $20 million and $5
million relating to settlements for the securities litigation.
Interest Expense: Interest expense increased in 2010 compared to the prior year primarily due
to our issuance of $700 million of long-term notes in February 2009. Interest expense increased
slightly in 2009 compared to the prior year, which reflects the repayment of $150 million of
long-term debt during the fourth quarter of 2008 and the issuance of $700 million of long-term debt
during the fourth quarter of 2009. Refer to our discussion under the caption Credit Resources
within this Financial Review for additional information regarding our financing activities.
Income Taxes: Our reported tax rates were 32.2%, 22.7% and 32.1% in 2010, 2009 and 2008. In
addition to the items noted below, fluctuations in our reported tax rate are primarily due to
changes within our business mix, including varying proportions of income attributable to foreign
countries that have lower income tax rates.
In 2009, we recorded a $182 million income tax benefit for the AWP litigation accrual. The
tax benefit could change in the future depending on the resolution of the pending and expected
claims.
In 2009, current income tax expense included $111 million of net income tax benefits for
discrete items of which $87 million represents a non-cash benefit. These benefits primarily relate
to the recognition of previously unrecognized tax benefits and related accrued interest. The
recognition of these discrete items was primarily due to the lapsing of the statutes of
limitations.
In 2008, the U.S. Internal Revenue Service (IRS) began its examination of our fiscal years
2003 through 2006. In 2009 and 2010, we received assessments from the Canada Revenue Agency
(CRA) for a total of $62 million related to transfer pricing for 2003, 2004 and 2005. We paid
the CRA assessments to stop the accrual of interest. We have appealed the assessment for 2003 and
have filed a notice of objection for 2004 and 2005. We believe we have adequately provided for any
potential adverse results. In nearly all jurisdictions, the tax years prior to 2003 are no longer
subject to examination. We believe that we have made adequate provision for all remaining income
tax uncertainties.
In 2008, the IRS completed an examination of our consolidated income tax returns for 2000 to
2002 resulting in a signed Revenue Agent Report (RAR), which was subsequently approved by the
Joint Committee on Taxation. The IRS and the Company agreed to certain adjustments, primarily
related to transfer pricing and income tax credits. As a result of the approved RAR, we recognized
approximately $25 million of net federal and state income tax benefits in 2008.
Discontinued Operations: No charges for discontinued operations were incurred during 2010 and
2009. In 2008, discontinued operations included $1 million from the Companys Acute Care business,
which was sold in 2007.
36
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Net Income: Net income was $1,263 million, $823 million and $990 million in 2010, 2009 and
2008 and diluted earnings per common share were $4.62, $2.95 and $3.32. The net income and diluted
earnings per common share for 2009 included a pre-tax charge of $493 million ($311 million
after-tax) for the AWP litigation as discussed in further detail under the caption Operating
Expenses in this Financial Review.
Weighted Average Diluted Common Shares Outstanding: Diluted earnings per common share was
calculated based on a weighted average number of shares outstanding of 273 million, 279 million and
298 million for 2010, 2009 and 2008. The decrease in the number of weighted average diluted common
shares outstanding over the past two years primarily reflects a decrease in the number of shares
outstanding as a result of stock repurchased, partially offset by exercise of share-based awards.
International Operations
International operations accounted for 8.6%, 7.9% and 8.2% of 2010, 2009 and 2008 consolidated
revenues. International 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
international operations is also included in Financial Note 21, Segments of Business, to the
accompanying consolidated financial statements.
Business Combinations and Investments
In 2009, we made the following acquisition:
On May 21, 2008, we acquired McQueary Brothers of Springfield, Missouri for approximately $190
million. McQueary Brothers is a regional distributor of pharmaceutical, health and beauty products
to independent and regional chain pharmacies in the Midwestern U.S. This acquisition expanded our
existing U.S. pharmaceutical distribution business. The acquisition was funded with cash on hand.
During the first quarter of 2010, the acquisition accounting was completed. Approximately $126
million of the purchase price allocation has been assigned to goodwill, which primarily reflects
the expected future benefits from synergies to be realized upon integrating the business. Included
in the purchase price allocation are acquired identifiable intangibles of $61 million representing
a customer relationship with a useful life of 7 years, a trade name of $2 million with a useful
life of less than one year and a not-to-compete agreement of $4 million with a useful life of 4
years. Financial results for McQueary Brothers have been included within our Distribution
Solutions segment since the date of acquisition.
In 2008, we made the following acquisition:
On October 29, 2007, we acquired all of the outstanding shares of OTN of San Francisco,
California for approximately $519 million, including the assumption of debt and net of $31 million
of cash and cash equivalents acquired from OTN. During the third quarter of 2009, the acquisition
accounting was completed. OTN is a U.S. distributor of specialty pharmaceuticals. The acquisition
of OTN expanded our existing specialty pharmaceutical distribution business. The acquisition was
funded with cash on hand. Financial results for OTN are included within our Distribution Solutions
segment since the date of acquisition. Approximately $240 million of the purchase price allocation
has been assigned to goodwill, which primarily reflects the expected future benefits from synergies
upon integrating the business. Included in the purchase price allocation are acquired identifiable
intangibles of $115 million representing customer relationships with a weighted-average life of 9
years, developed technology of $3 million with a weighted-average life of 4 years and trademarks
and trade names of $10 million with a weighted-average life of 5 years.
37
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
During the last three years, we also completed a number of other smaller acquisitions and
investments 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 and for certain recent acquisitions may be subject to change as
we continue to evaluate and implement various restructuring initiatives. Goodwill recognized for
our business acquisitions is generally not expected to be deductible for tax purposes. Pro forma
results of operations for our business acquisitions 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 Note 2, Business Combinations and Investments, to the consolidated
financial statements appearing in this Annual Report on Form 10-K for further discussions regarding
our acquisitions and investing activities.
2011 Outlook
Information regarding the Companys 2011 outlook is contained in our Form 8-K dated May 3,
2010. 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.
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. At March 31, 2010, revenues and accounts receivable from our ten largest customers
accounted for approximately 53% of consolidated revenues and 45% of accounts receivable. At March
31, 2010, revenues and accounts receivable from our two largest customers, CVS and Rite Aid,
represented approximately 15% and 12% of total consolidated revenues and 14% and 10% of 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.
38
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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
2010 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, 2010, trade and notes receivables were $7,375 million prior to allowances of $131
million. In 2010, 2009 and 2008 our provision for bad debts was $17 million, $29 million and $41
million. At March 31, 2010 and 2009, the allowance as a percentage of trade and notes receivables
was 1.8% and 2.2%. An increase or decrease of 0.1% in the 2010 allowance as a percentage of trade
and notes receivables would result in an increase or decrease in the provision on receivables of
approximately $7 million. 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 and the cost of Canadian inventories is determined using the first-in, first-out (FIFO)
method. Technology Solutions segment inventories consist of computer hardware with cost determined
by the standard cost method. Rebates, fees, cash discounts, allowances, chargebacks and other
incentives received from vendors are generally accounted for as a reduction in the cost of
inventory and are recognized when the inventory is sold. Total inventories were $9.4 billion and
$8.5 billion at March 31, 2010 and 2009.
The LIFO method was used to value approximately 87% and 88% of our inventories at March 31,
2010 and 2009. At March 31, 2010 and 2009, our LIFO reserves, net of LCM adjustments, were $93
million and $85 million. LIFO reserves include both pharmaceutical and non-pharmaceutical
products. In 2010 and 2009, we recognized net LIFO expense of $8 million and in 2008, net LIFO
credits of $14 million within our consolidated statements of operations. In 2010, our $8 million
net LIFO expense related to our non-pharmaceutical products. 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 impact 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 FIFO 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 inventory as valued under FIFO. Primarily due to continued deflation in generic
pharmaceutical inventories, pharmaceutical inventories at LIFO were $112 million and $107 million
higher than FIFO as of March 31, 2010 and 2009. As a result, in 2010 and 2009, we recorded LCM
charges of $5 million and $64 million within our consolidated statements of operations to adjust
our LIFO inventories to market. As deflation in generic pharmaceuticals continues, we anticipate
that LIFO credits from the valuation of our pharmaceutical products will be fully offset by LCM
reserves.
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
provide reserves for excess and obsolete inventory, if indicated, as a result of these reviews.
These factors could make our estimates of inventory valuation differ from actual results.
39
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Business Combinations: We account for acquired businesses using the acquisition method of
accounting, which requires that the assets acquired and liabilities assumed 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.
Prior to April 1, 2009, amounts allocated to acquired in-process research and development
(IPR&D) were expensed at the date of acquisition. Effective April 1, 2009, acquired IPR&D is
measured at fair value using market participant assumptions and initially capitalized as an
indefinite-lived intangible asset. Capitalized IPR&D is amortized over its estimated useful life
once the asset is put in service. Capitalized IPR&D is reviewed for impairment whenever events or
changes in circumstances indicate that we will not be able to recover the assets carrying amount.
The judgments made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives, can materially impact our results of
operations. The valuations are based on information available near the acquisition date and are
based on expectations and assumptions that have been deemed reasonable by management. Effective
April 1, 2009, contingent consideration is measured at its acquisition-date fair value. Contingent
consideration classified as a liability is remeasured at fair value at the end of each subsequent
reporting period and changes to the fair value are included in the current periods earnings.
Contingent consideration classified as equity is not remeasured subsequently.
Several 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 or liability acquired. 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 assets 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
and Investments, to the consolidated financial statements appearing in this Annual Report on Form
10-K for additional information regarding our acquisitions.
Goodwill: As a result of acquiring businesses, we have $3,568 million and $3,528 million of
goodwill at March 31, 2010 and 2009. 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 Companys 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 unit. Components that have essentially similar operations,
products, services and customers are aggregated as a single reporting unit. Management judgment is
involved in determining which components may be combined and changes in these combinations could
affect the outcome of the testing.
40
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Impairment tests require that we first compare the carrying value of net assets to the
estimated fair value of net assets for the reporting units. If the carrying value exceeds the fair
value, a second step would be performed to calculate the amount of impairment, which would be
recorded as a charge in our consolidated statements of operations. Fair values can be determined
using the market, income or cost approach. 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 rate of
return. In addition, we compare the aggregate fair value of our reporting units to our market
capitalization as further corroboration of the fair value.
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. The 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 2010 and 2009, we concluded that there were no impairments of goodwill as the fair value of
each reporting unit exceeded its carrying value.
Supplier Incentives: Fees for service and other incentives received from suppliers, relating
to the purchase or distribution of inventory, are generally reported as a reduction to cost of
goods sold. We consider these fees and other incentives to represent product discounts and as a
result, the amounts are recorded as a reduction of product cost and are recognized through cost of
goods sold upon the sale of the related inventory.
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 carefully
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, 2010 and 2009, supplier reserves were $89
million and $113 million. All of the supplier reserves at March 31, 2010 and 2009 pertain to our
Distribution Solutions segment. A hypothetical 0.1% percentage increase or decrease in the
supplier reserve as a percentage of trade payables would have resulted in an increase or decrease
in the cost of sales of approximately $13 million in 2010. The ultimate outcome of any amounts due
from our suppliers may be different from our estimate.
41
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect
managements 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 $1,187 million and $1,447 million at
March 31, 2010 and 2009 and deferred tax liabilities of $1,845 million and $1,889 million.
Deferred tax assets primarily consist of net loss and credit carryforwards and timing differences
on our compensation and benefit related accruals. Deferred tax liabilities primarily consist of
basis differences for inventory valuation (including inventory valued at LIFO) and other assets.
We established valuation allowances of $97 million against certain deferred tax assets, which
primarily relate to federal, state and foreign 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.
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 $19 million, or $0.07 per diluted share, for 2010.
Share-Based Compensation: Our compensation programs include share-based compensation. We
account for all share-based compensation transactions using a fair-value based measurement method.
The share-based compensation expense is recognized, for the portion of the awards that is
ultimately expected to vest, on a straight-line basis over the requisite service period for those
awards with graded vesting and service conditions. For awards with performance conditions and
multiple vest dates, we recognize the expense on a graded vesting basis. For awards with
performance conditions and a single vest date, we recognize the expense on a straight-line basis.
We estimate the grant-date fair value of employee stock options using the Black-Scholes
options-pricing model. We believe that it is difficult to accurately measure the value of an
employee stock option. Our estimates of employee stock option values rely on estimates of factors
we input into the model. The key factors involve an estimate of future uncertain events. The key
factors influencing the estimation process, among others, are the expected life of the option, the
expected stock price volatility factor and the expected dividend yield. In determining the
expected life of the option, we primarily use historical experience as our best estimate of future
exercise patterns. We use a combination of historical and implied market volatility to determine
the expected stock price volatility factor. We believe that this market-based input provides a
better estimate of our future stock price movements and is consistent with employee stock option
valuation considerations. Once the fair values of employee stock options are determined, current
accounting practices do not permit them to be changed, even if the estimates used are different
from actual experience.
42
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In addition, we develop an estimate of the number of share-based awards, which will ultimately
vest primarily based on historical experience. Changes in the estimated forfeiture rate can have a
material effect on share-based compensation expense. If the actual forfeiture rate is higher than
the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture
rate, which will result in a decrease to the expense recognized in the financial statements. If
the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made
to decrease the estimated forfeiture rate, which will result in an increase to the expense
recognized in the financial statements. We re-assess the estimated forfeiture rate established
upon grant periodically throughout the requisite service period. Such estimates are revised if
they differ materially from actual forfeitures. As required, the forfeiture estimates will be
adjusted to reflect actual forfeitures when an award vests. The actual forfeitures in future
reporting periods could be materially higher or lower than our current estimates.
Our assessments of estimated share-based compensation charges are affected by our stock price
as well as assumptions regarding a number of complex and subjective variables and the related tax
impact. These variables include the volatility of our stock price, employee stock option exercise
behavior, timing, number and types of annual share-based awards and the attainment of performance
goals. As a result, the future share-based compensation expense may differ from the Companys
historical amounts.
Loss Contingencies: We are subject to various claims, other 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. We record a provision for a liability when
management believes that it is both probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. Management reviews these provisions at least quarterly and
adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel
and other information and events pertaining to a particular case. Because litigation outcomes are
inherently unpredictable, these decisions often involve a series of complex assessments by
management about future events that can rely heavily on estimates and assumptions and it is
possible that the actual cost of these matters could impact our earnings, either negatively or
positively, in the period of their resolution.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations, together with our existing sources of
liquidity from our accounts receivable sales facility and short-term borrowings under the revolving
credit facility and commercial paper, will be sufficient to fund our long-term and short-term
capital expenditures, working capital and other cash requirements. In addition, from time-to-time,
we may access the long-term debt capital markets to discharge our other liabilities.
Net cash flow from operating activities was $2,316 million in 2010, compared to $1,351 million
in 2009 and $869 million in 2008. Operating activities for 2010 were primarily affected by
improved management of drafts and accounts payable, partially offset by an increase in inventories
due to our revenue growth and the AWP litigation private payor settlement payments of $350 million.
Cash flows from operations can also be significantly impacted by factors such as the timing of
receipts from customers and payments to vendors.
Operating activities for 2009 include a non-cash charge of $493 million and the related income
tax benefit of $182 million for the AWP litigation charge. Operating activities for 2009 reflect
an increase in receivables primarily associated with our revenue growth as well as longer payment
terms for certain customers and improvement in our net financial inventory (inventory, net of
drafts and accounts payable).
Operating activities for 2008 were affected by a use of cash of $962 million due to the
release of restricted cash for our Consolidated Securities Litigation Action. In addition,
operating activities in 2008 reflect changes in our working capital accounts due to revenue growth.
43
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Net cash used in investing activities was $309 million in 2010 compared to $727 million in
2009 and $5 million in 2008. Investing activities for 2010 include $199 million and $179 million
in capital expenditures for property acquisitions and capitalized software and the release of $55
million of restricted cash from escrow related to the AWP litigation settlement payments.
Investing activities for 2009 included $358 million of cash payments for business acquisitions,
including the McQueary Brothers acquisition for approximately $190 million. Investing activities
for 2008 benefited from the $962 million release of restricted cash for our Consolidated Securities
Litigation Action. Investing activities included $610 million in 2008 of cash paid for business
acquisitions, including OTN.
Financing activities utilized cash of $421 million in 2010, provided cash of $178 million in
2009 and utilized cash of $1,470 million in 2008. Financing activities for 2010 include $323
million in cash paid for share repurchases and $218 million in cash paid on our long-term debt,
which primarily consisted of $215 million paid on the maturity of our 9.13% Series C Senior Notes
in March 2010. Financing activities for 2009 include our February 2009 issuance of $350 million of
6.50% notes due 2014 and $350 million of 7.50% notes due 2019. Net proceeds of $693 million from
the issuance of the notes, after discounts and offering expenses, were used by the Company for
general corporate purposes. Financing activities for 2009 were also impacted by $502 million of
cash paid for share repurchases, $116 million of dividends paid and $97 million of cash receipts
from employees exercises of stock options.
Financing activities for 2008 included $1.7 billion of cash paid for stock repurchases and $70
million of dividends paid, partially offset by $354 million of cash receipts from common stock
issuances.
The Companys Board has authorized the repurchase of McKessons common stock 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. This authorization is described in more detail in Financial Note 19,
Stockholders Equity, to the consolidated financial statements appearing in this Annual Report on
Form 10-K. During 2010, 2009 and 2008, the Company repurchased $299 million, $484 million and
$1,686 million of its common stock at average prices of $41.47, $50.52 and $59.48. As of March 31,
2010, $531 million remained available for future repurchases under the outstanding April 2008 Board
approved share repurchase plan. In April 2010, the Board authorized the repurchase of up to an
additional $1.0 billion of the Companys common stock.
In July 2008, the Board authorized the retirement of shares of the Companys common stock that
may be repurchased from time-to-time pursuant to its stock repurchase program. During the second
quarter of 2009, all of the 4 million repurchased shares, which we purchased for $204 million, were
formally retired 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, $165 million was recorded as a decrease to retained
earnings.
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 Companys future earnings, financial condition, capital requirements and other
factors.
Although we believe that our operating cash flow, financial assets, current access to capital
and credit markets, as evidenced by our debt issuance in February 2009, 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 continued or increased volatility and disruption
in the global capital and credit markets will not impair our liquidity or increase our costs of
borrowing.
44
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Selected Measures of Liquidity and Capital Resources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Cash and cash equivalents |
|
$ |
3,731 |
|
|
$ |
2,109 |
|
|
$ |
1,362 |
|
Working capital |
|
|
4,492 |
|
|
|
3,065 |
|
|
|
2,438 |
|
Debt, net of cash and cash equivalents |
|
|
(1,434 |
) |
|
|
403 |
|
|
|
435 |
|
Debt to capital ratio (1) |
|
|
23.4 |
% |
|
|
28.9 |
% |
|
|
22.7 |
% |
Net debt to net capital employed (2) |
|
|
(23.5 |
)% |
|
|
6.1 |
% |
|
|
6.6 |
% |
Return on stockholders equity (3) |
|
|
18.7 |
% |
|
|
13.2 |
% |
|
|
15.6 |
% |
|
|
|
|
(1) |
|
Ratio is computed as total debt divided by total debt and stockholders equity. |
|
(2) |
|
Ratio is computed as total debt, net of cash and cash equivalents (net debt), divided by
net debt and stockholders equity (net capital employed). |
|
(3) |
|
Ratio is computed as net income, divided by a five-quarter average of stockholders equity. |
Our cash and equivalents balance as of March 31, 2010, included approximately $1.2
billion of cash held by our subsidiaries outside of the United States. 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. We may temporarily access cash held by foreign
subsidiaries without subjecting us to U.S. federal, state and local income tax through intercompany
loans. A notice issued by the IRS in January 2009 announced that the Treasury Department will, for
a temporary period, extend the permitted duration of such intercompany loans that qualify for
suspended deemed dividend treatment under Section 956 of the Internal Revenue Code of 1986, as
amended. Pursuant to the IRS notice, such intercompany loans from foreign subsidiaries to the U.S.
parent must be less than 60 days in duration and borrowing activities cannot exceed 180 cumulative
days during the year. At March 31, 2010, there were no intercompany loans outstanding. The
position set forth in the notice will apply for the Company until March 31, 2011.
Working capital primarily includes cash and cash equivalents, receivables and inventories, net
of drafts and accounts payable, 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 customer requirements.
Consolidated working capital increased at March 31, 2010, compared to March 31, 2009,
primarily due to increases in cash and cash equivalents, partially offset by an increase in net
financial inventory and repayment of $215 million of our long-term debt in March 2010.
Consolidated working capital increased at March 31, 2009, compared to March 31, 2008, primarily due
to increases in cash and cash equivalents and accounts receivable, partially offset by our $493
million AWP litigation accrual and a higher current portion of long-term debt.
Our ratio of net debt to net capital employed decreased at March 31, 2010, compared to March
31, 2009, primarily reflecting an increase in cash and cash equivalents and repayment of $215
million of our long-term debt in March 2010. This ratio decreased at March 31, 2009, compared to
March 31, 2008, primarily reflecting an increase in cash and cash equivalents, partially offset by
our issuance of $700 million of long-term debt.
The Company has paid quarterly cash dividends at the rate of $0.06 per share on its common
stock since the fourth quarter of 1999. In April 2008, the quarterly dividend was raised from six
cents to twelve cents per share. 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 Companys future earnings, financial
condition, capital requirements and other factors. In 2010, 2009 and 2008, we paid total cash
dividends of $131 million, $116 million and $70 million.
45
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Contractual Obligations:
The table below presents our significant financial obligations and commitments at March 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years |
(In millions) |
|
Total |
|
Within 1 |
|
Over 1 to 3 |
|
Over 3 to 5 |
|
After 5 |
|
On balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1) |
|
$ |
2,296 |
|
|
$ |
3 |
|
|
$ |
919 |
|
|
$ |
350 |
|
|
$ |
1,024 |
|
Other (2) |
|
|
300 |
|
|
|
22 |
|
|
|
48 |
|
|
|
128 |
|
|
|
102 |
|
Off balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings (3) |
|
|
879 |
|
|
|
149 |
|
|
|
258 |
|
|
|
156 |
|
|
|
316 |
|
Purchase obligations (4) |
|
|
3,272 |
|
|
|
3,059 |
|
|
|
121 |
|
|
|
66 |
|
|
|
26 |
|
Customer guarantees (5) |
|
|
146 |
|
|
|
64 |
|
|
|
25 |
|
|
|
6 |
|
|
|
51 |
|
Operating lease obligations
(6) |
|
|
363 |
|
|
|
106 |
|
|
|
140 |
|
|
|
67 |
|
|
|
50 |
|
|
|
|
Total |
|
$ |
7,256 |
|
|
$ |
3,403 |
|
|
$ |
1,511 |
|
|
$ |
773 |
|
|
$ |
1,569 |
|
|
|
|
|
(1) |
|
Represents maturities of the Companys long-term obligations including an immaterial
amount of capital lease obligations. See Financial Note 12, Long-Term Debt and Other
Financing, for further information. |
|
(2) |
|
Represents our estimated benefit payments for the unfunded benefit plans and minimum funding
requirements for the pension plans. |
|
(3) |
|
Primarily represents interest that will become due on our fixed rate long-term debt
obligations. |
|
(4) |
|
A purchase obligation is defined as an arrangement to purchase goods or services that is
enforceable and legally binding on the Company. These obligations primarily relate to
inventory purchases, capital commitments and service agreements. |
|
(5) |
|
Represents primarily agreements with certain of our customers financial institutions
(primarily for our Canadian business) under which we have guaranteed the repurchase of
inventory at a discount in the event these customers are unable to meet certain obligations to
those financial institutions. Among other limitations, these inventories must be in resalable
condition. The inventory repurchase agreements mostly range from one to two years. Customer
guarantees range from one to five years and were primarily provided to facilitate financing
for certain customers. The majority of our other customer guarantees are secured by certain
assets of the customer. At March 31, 2010, the maximum amounts of inventory repurchase
guarantees and other customer guarantees were $124 million and $17 million. We consider it
unlikely that we would make significant payments under these guarantees and accordingly, no
amounts had been accrued at March 31, 2010. Refer to Financial Note 17, Financial Guarantees
and Warranties, for further information. |
|
(6) |
|
Represents minimum rental payments for operating leases. See Financial Note 16, Lease
Obligations, for further information. |
At March 31, 2010, the liability recorded for uncertain tax positions, excluding
associated interest and penalties, was approximately $514 million. This liability represents an
estimate of tax positions that the Company has taken in its tax returns which may ultimately not be
sustained upon examination by the tax authorities. Since the ultimate amount and timing of any
future cash settlements cannot be predicted with reasonable certainty, the estimated liability has
been excluded from the contractual obligations table.
In addition, at March 31, 2010, our banks and insurance companies have issued $111 million of
standby letters of credit and surety bonds, which were issued on our behalf mostly related to our
customer contracts and in order to meet the security requirements for statutory licenses and
permits, court and fiduciary obligations and our workers compensation and automotive liability
programs.
46
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Credit Resources:
We fund our working capital requirements primarily with cash and cash equivalents, our
accounts receivable sales facility, short-term borrowings under the revolving credit facility and
commercial paper.
Long-Term Debt
In March 2010, we repaid our $215 million 9.13% Series C Senior notes, which had matured.
On February 12, 2009, we issued 6.50% notes due February 15, 2014, (the 2014 Notes) in an
aggregate principal amount of $350 million and 7.50% notes due February 15, 2019, (the 2019
Notes) in an aggregate principal amount of $350 million. Interest is payable on February 15 and
August 15 of each year beginning on August 15, 2009. The 2014 Notes will mature on February 15,
2014 and the 2019 Notes will mature on February 15, 2019. We utilized net proceeds, after
discounts and offering expenses, of $693 million from the issuance of the 2014 Notes and 2019 Notes
for general corporate purposes.
Our senior debt credit ratings from S&P, Fitch, and Moodys are currently A-, BBB+ and Baa3,
and our commercial paper ratings are currently A-2, F-2 and P-3. Our ratings outlook is stable
with S&P, Fitch, and Moodys.
Accounts Receivable Sales Facility
In May 2009, we renewed our accounts receivable sales facility for an additional one-year
period under terms similar to those previously in place. The renewed facility will expire in
mid-May 2010. Based on our existing accounts receivable sales facility agreement, we anticipate
that activity under this facility may, for U.S. GAAP purposes, be considered as a secured borrowing
rather than a sale under accounting standards that will become effective for us on April 1, 2010.
We anticipate renewing this facility before its expiration. The aggregate commitment of the
purchasers under this facility is $1.1 billion, although from time-to-time, the available amount
may be less than that amount based on concentration limits and receivable eligibility requirements.
Through this facility, McKesson Corporation, the parent company, sells certain U.S.
pharmaceutical trade accounts receivable on a non-recourse basis to a wholly-owned and consolidated
subsidiary, which then sells these receivables to a special purpose entity (SPE), which is a
wholly-owned, bankruptcy-remote subsidiary of McKesson Corporation that is consolidated in our
financial statements. This SPE then sells undivided interests in the receivables to third-party
purchaser groups, each of which includes commercial paper conduits, which are special purpose legal
entities administered by financial institutions.
Additional information regarding our accounts receivable sales facility is included in
Financial Notes 1 and 12, Significant Accounting Policies and Long-Term Debt and Other
Financing, to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Revolving Credit Facility
We have a syndicated $1.3 billion five-year senior unsecured revolving credit facility, which
expires in June 2012. Borrowings under this credit facility bear interest based upon either a
Prime rate or the London Interbank Offering Rate. There were no borrowings under this facility in
2010 and $279 million for 2009. As of March 31, 2010 and 2009, there were no amounts outstanding
under this facility.
47
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Commercial Paper
We issued and repaid commercial paper of nil and approximately $3.3 billion and $260 million
in 2010, 2009 and 2008. There were no commercial paper issuances outstanding at March 31, 2010 and
2009.
Debt Covenant
Our various borrowing facilities and long-term debt are subject to certain covenants. Our
principal debt covenant is our debt to capital ratio under our unsecured revolving credit facility,
which cannot exceed 56.5%. If we exceed this ratio, repayment of debt outstanding under the
revolving credit facility could be accelerated. As of March 31, 2010, this ratio was 23.4% and we
were in compliance with our other financial covenants. A reduction in our credit ratings, or the
lack of compliance with our covenants, could negatively impact our ability to finance operations or
issue additional debt at acceptable interest rates.
Funds necessary for future debt maturities and our other cash requirements are expected to be
met by existing cash balances, cash flow from operations, existing credit sources and other capital
market transactions.
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in Financial
Note 20, Related Party Balances and Transactions, to the consolidated financial statements
appearing in this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements that we have recently adopted, as well as those that have been
recently issued but not yet adopted by us, are included in Financial Note 1, Significant
Accounting Policies, to the consolidated financial statements appearing in this Annual Report on
Form 10-K.
48
McKESSON CORPORATION
FINANCIAL
REVIEW (Concluded)
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk: Our long-term debt bears interest predominately at fixed rates, whereas
our short-term borrowings are at variable interest rates. If the underlying weighted average
interest rate on our variable rate debt were to have changed by 50 bp in 2010, interest expense
would not have been materially different from that reported.
Our cash and cash equivalents balances earn interest at variable rates. Should interest rates
decline, our interest income may be negatively impacted. If the underlying weighted average
interest rate on our cash and cash equivalents balances changed by 50 bp in 2010, interest income
would have increased or decreased by approximately $16 million.
As of March 31, 2010 and 2009, the net fair value liability of financial instruments with
exposure to interest rate risk was approximately $2,548 million and $2,545 million. The estimated
fair value of our long-term debt and other financing was determined using quoted market prices and
other inputs that were derived from available market information and may not be representative of
actual values that could have been realized or that will be realized in the future. Fair value is
subject to fluctuations based on our performance, our credit ratings, changes in the value of our
stock and changes in interest rates for debt securities with similar terms.
Foreign exchange risk: We derive revenues and earnings from Canada, the United Kingdom,
Ireland, other European countries, Israel, Asia Pacific and Mexico, which exposes us to changes in
foreign exchange rates. We seek to manage our foreign exchange risk in part through operational
means, including managing same currency revenues in relation to same currency costs, and same
currency assets in relation to same currency liabilities. Foreign exchange risk is also managed
through the use of foreign currency forward-exchange contracts. These contracts are used to offset
the potential earnings effects from mostly intercompany foreign currency investments and loans. As
of March 31, 2010, an adverse 10% change in quoted foreign currency exchange rates would not have
had a material impact on our net fair value of financial instruments that have exposure to foreign
currency risk.
49
McKESSON CORPORATION
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
|
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Page |
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51 |
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|
52 |
|
Consolidated Financial Statements: |
|
|
|
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|
|
|
53 |
|
|
|
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54 |
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55 |
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56 |
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57 |
|
50
McKESSON CORPORATION
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of McKesson Corporation is responsible for establishing and maintaining an
adequate system of internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). With the participation of the Chief Executive Officer and the
Chief Financial Officer, our management conducted an assessment of the effectiveness of our
internal control over financial reporting based on the framework and criteria established in
Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, our management has concluded that our internal
control over financial reporting was effective as of March 31, 2010.
Deloitte & Touche LLP, an independent registered public accounting firm, audited the financial
statements included in this Annual Report on Form 10-K and has also audited the effectiveness of
the Companys internal control over financial reporting as of March 31, 2010. This audit report
appears on page 52 of this Annual Report on Form 10-K.
May 4, 2010
|
|
|
|
|
|
|
|
|
/s/ John H. Hammergren
|
|
|
John H. Hammergren |
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
/s/ Jeffrey C. Campbell
|
|
|
Jeffrey C. Campbell |
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
51
McKESSON CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of McKesson Corporation:
We have audited the accompanying consolidated balance sheets of McKesson Corporation and
subsidiaries (the Company) as of March 31, 2010 and 2009, and the related consolidated statements
of operations, stockholders equity and cash flows for each of the three fiscal years in the period
ended March 31, 2010. Our audit also included the consolidated financial statement
schedule (financial statement schedule) listed in the Index at Item 15(a). We also have audited
the Companys internal control over financial reporting as of March 31, 2010, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on these financial
statements and financial statement schedule, and an opinion on the Companys internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of McKesson Corporation and subsidiaries as of March 31,
2010 and 2009, and the results of their operations and their cash flows for each of the three
fiscal years in the period ended March 31, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/
Deloitte & Touche LLP
San Francisco, California
May 4, 2010
52
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
108,702 |
|
|
$ |
106,632 |
|
|
$ |
101,703 |
|
Cost of Sales |
|
|
103,026 |
|
|
|
101,254 |
|
|
|
96,694 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
5,676 |
|
|
|
5,378 |
|
|
|
5,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
746 |
|
|
|
743 |
|
|
|
744 |
|
Distribution |
|
|
882 |
|
|
|
943 |
|
|
|
886 |
|
Research and development |
|
|
376 |
|
|
|
364 |
|
|
|
347 |
|
Administrative |
|
|
1,684 |
|
|
|
1,639 |
|
|
|
1,559 |
|
Litigation charge (credit), net |
|
|
(20 |
) |
|
|
493 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
3,668 |
|
|
|
4,182 |
|
|
|
3,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
2,008 |
|
|
|
1,196 |
|
|
|
1,478 |
|
Other Income, Net |
|
|
43 |
|
|
|
12 |
|
|
|
121 |
|
Interest Expense |
|
|
(187 |
) |
|
|
(144 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
Before Income Taxes |
|
|
1,864 |
|
|
|
1,064 |
|
|
|
1,457 |
|
Income Tax Expense |
|
|
(601 |
) |
|
|
(241 |
) |
|
|
(468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
1,263 |
|
|
|
823 |
|
|
|
989 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,263 |
|
|
$ |
823 |
|
|
$ |
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
4.70 |
|
|
$ |
2.99 |
|
|
$ |
3.40 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4.70 |
|
|
$ |
2.99 |
|
|
$ |
3.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
273 |
|
|
|
279 |
|
|
|
298 |
|
Basic |
|
|
269 |
|
|
|
275 |
|
|
|
291 |
|
See Financial Notes
53
McKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,731 |
|
|
$ |
2,109 |
|
Receivables, net |
|
|
8,075 |
|
|
|
7,774 |
|
Inventories, net |
|
|
9,441 |
|
|
|
8,527 |
|
Prepaid expenses and other |
|
|
257 |
|
|
|
261 |
|
|
|
|
|
|
|
|
Total |
|
|
21,504 |
|
|
|
18,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
|
851 |
|
|
|
796 |
|
Capitalized Software Held for Sale, Net |
|
|
234 |
|
|
|
221 |
|
Goodwill |
|
|
3,568 |
|
|
|
3,528 |
|
Intangible Assets, Net |
|
|
551 |
|
|
|
661 |
|
Other Assets |
|
|
1,481 |
|
|
|
1,390 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
28,189 |
|
|
$ |
25,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Drafts and accounts payable |
|
$ |
13,255 |
|
|
$ |
11,739 |
|
Deferred revenue |
|
|
1,218 |
|
|
|
1,145 |
|
Current portion of long-term debt |
|
|
3 |
|
|
|
219 |
|
Other accrued liabilities |
|
|
2,536 |
|
|
|
2,503 |
|
|
|
|
|
|
|
|
Total |
|
|
17,012 |
|
|
|
15,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
2,293 |
|
|
|
2,290 |
|
Other Noncurrent Liabilities |
|
|
1,352 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
Other Commitments and Contingent Liabilities (Note
18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100 shares
authorized, no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value
Shares authorized: 2010 and 2009 800
Shares issued: 2010 359, 2009 351 |
|
|
4 |
|
|
|
4 |
|
Additional Paid-in Capital |
|
|
4,756 |
|
|
|
4,417 |
|
Retained Earnings |
|
|
7,236 |
|
|
|
6,103 |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
6 |
|
|
|
(179 |
) |
Other |
|
|
(12 |
) |
|
|
(8 |
) |
Treasury
Shares, at Cost, 2010 88 and 2009 80 |
|
|
(4,458 |
) |
|
|
(4,144 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
7,532 |
|
|
|
6,193 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
28,189 |
|
|
$ |
25,267 |
|
|
|
|
|
|
|
|
See Financial Notes
54
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended March 31, 2010, 2009 and 2008
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
ESOP Notes |
|
|
Treasury |
|
|
|
|
|
|
Other |
|
|
|
Stock |
|
|
Paid-in |
|
|
Other |
|
|
Retained |
|
|
Comprehensive |
|
|
and |
|
|
Common |
|
|
|
|
|
|
Stockholders |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Guarantees |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
Income
(Loss) |
|
Balances, March 31, 2007 |
|
|
341 |
|
|
$ |
3 |
|
|
$ |
3,722 |
|
|
$ |
(19 |
) |
|
$ |
4,712 |
|
|
$ |
31 |
|
|
$ |
(14 |
) |
|
|
(46 |
) |
|
$ |
(2,162 |
) |
|
$ |
6,273 |
|
|
|
|
|
Issuance of shares under employee plans |
|
|
10 |
|
|
|
1 |
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
343 |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
Tax benefit related to issuance of
shares under employee plans |
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
ESOP note collections |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
95 |
|
Unrealized net gain and other components
of benefit plans, net of tax of $(13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990 |
|
|
|
990 |
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
(1,686 |
) |
|
|
(1,686 |
) |
|
|
|
|
Cash dividends declared, $0.24 per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
|
|
Adoption of ASC 740-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2008 |
|
|
351 |
|
|
$ |
4 |
|
|
$ |
4,252 |
|
|
$ |
(10 |
) |
|
$ |
5,586 |
|
|
$ |
152 |
|
|
$ |
(3 |
) |
|
|
(74 |
) |
|
$ |
(3,860 |
) |
|
$ |
6,121 |
|
|
$ |
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under employee plans |
|
|
4 |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
78 |
|
|
|
|
|
ESOP funding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
Tax benefit related to issuance of
shares under employee plans |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
ESOP note collections |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
|
|
(273 |
) |
Unrealized net loss and other components
of benefit plans, net of tax benefit of
$33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
(57 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823 |
|
|
|
823 |
|
Repurchase and retirement of common stock |
|
|
(4 |
) |
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(280 |
) |
|
|
(484 |
) |
|
|
|
|
Cash dividends declared, $0.48 per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(7 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2009 |
|
|
351 |
|
|
$ |
4 |
|
|
$ |
4,417 |
|
|
$ |
(7 |
) |
|
$ |
6,103 |
|
|
$ |
(179 |
) |
|
$ |
(1 |
) |
|
|
(80 |
) |
|
$ |
(4,144 |
) |
|
$ |
6,193 |
|
|
$ |
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under employee plans |
|
|
8 |
|
|
|
|
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(24 |
) |
|
|
194 |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
Tax benefit related to issuance of
shares under employee plans |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
ESOP note collections |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
|
238 |
|
Unrealized net loss and other components
of benefit plans, net of tax benefit of
$32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
(53 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
|
|
1,263 |
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(299 |
) |
|
|
(299 |
) |
|
|
|
|
Cash dividends declared, $0.48 per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2010 |
|
|
359 |
|
|
$ |
4 |
|
|
$ |
4,756 |
|
|
$ |
(12 |
) |
|
$ |
7,236 |
|
|
$ |
6 |
|
|
$ |
|
|
|
|
(88 |
) |
|
$ |
(4,458 |
) |
|
$ |
7,532 |
|
|
$ |
1,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Financial Notes
55
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,263 |
|
|
$ |
823 |
|
|
$ |
990 |
|
Discontinued operations, net of income taxes |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Adjustments to reconcile to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
148 |
|
|
|
133 |
|
|
|
124 |
|
Amortization |
|
|
326 |
|
|
|
308 |
|
|
|
247 |
|
Provision for bad debts |
|
|
17 |
|
|
|
29 |
|
|
|
41 |
|
Impairment of investments |
|
|
|
|
|
|
63 |
|
|
|
|
|
Other deferred taxes |
|
|
161 |
|
|
|
320 |
|
|
|
196 |
|
Share-based compensation expense |
|
|
114 |
|
|
|
99 |
|
|
|
91 |
|
Other non-cash items |
|
|
(20 |
) |
|
|
(99 |
) |
|
|
(107 |
) |
Changes in operating assets and liabilities, net of
business acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(133 |
) |
|
|
(708 |
) |
|
|
(288 |
) |
Inventories |
|
|
(782 |
) |
|
|
370 |
|
|
|
(676 |
) |
Drafts and accounts payable |
|
|
1,340 |
|
|
|
(189 |
) |
|
|
762 |
|
Deferred revenue |
|
|
27 |
|
|
|
(55 |
) |
|
|
98 |
|
Taxes |
|
|
88 |
|
|
|
(47 |
) |
|
|
336 |
|
Litigation charge (credit), net |
|
|
(20 |
) |
|
|
493 |
|
|
|
(5 |
) |
Litigation settlement payments |
|
|
(350 |
) |
|
|
|
|
|
|
(962 |
) |
Deferred tax (benefit) expense on litigation |
|
|
116 |
|
|
|
(172 |
) |
|
|
2 |
|
Other |
|
|
21 |
|
|
|
(17 |
) |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,316 |
|
|
|
1,351 |
|
|
|
869 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions |
|
|
(199 |
) |
|
|
(195 |
) |
|
|
(195 |
) |
Capitalized software expenditures |
|
|
(179 |
) |
|
|
(197 |
) |
|
|
(161 |
) |
Acquisitions of businesses, less cash and cash equivalents
acquired |
|
|
(18 |
) |
|
|
(358 |
) |
|
|
(610 |
) |
Proceeds from sale of businesses |
|
|
1 |
|
|
|
63 |
|
|
|
|
|
Restricted cash for litigation charge, net |
|
|
55 |
|
|
|
(55 |
) |
|
|
962 |
|
Other |
|
|
31 |
|
|
|
15 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(309 |
) |
|
|
(727 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings |
|
|
5 |
|
|
|
3,630 |
|
|
|
260 |
|
Repayments of short-term borrowings |
|
|
(6 |
) |
|
|
(3,630 |
) |
|
|
(260 |
) |
Proceeds from issuances of long-term debt, net |
|
|
|
|
|
|
699 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(218 |
) |
|
|
(4 |
) |
|
|
(162 |
) |
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuances |
|
|
212 |
|
|
|
97 |
|
|
|
354 |
|
Share repurchases, including shares surrendered for tax
withholding |
|
|
(323 |
) |
|
|
(298 |
) |
|
|
(1,698 |
) |
Share repurchases, retirements |
|
|
|
|
|
|
(204 |
) |
|
|
|
|
Dividends paid |
|
|
(131 |
) |
|
|
(116 |
) |
|
|
(70 |
) |
Other |
|
|
40 |
|
|
|
4 |
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(421 |
) |
|
|
178 |
|
|
|
(1,470 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
36 |
|
|
|
(55 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,622 |
|
|
|
747 |
|
|
|
(592 |
) |
Cash and cash equivalents at beginning of year |
|
|
2,109 |
|
|
|
1,362 |
|
|
|
1,954 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
3,731 |
|
|
$ |
2,109 |
|
|
$ |
1,362 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
188 |
|
|
$ |
139 |
|
|
$ |
146 |
|
Income taxes, net of refunds |
|
|
234 |
|
|
|
235 |
|
|
|
(66 |
) |
|
See Financial Notes
56
McKESSON CORPORATION
FINANCIAL NOTES
1. Significant Accounting Policies
Nature of Operations: McKesson Corporation (McKesson, the Company, or we and other
similar pronouns) is a corporation that delivers medicines, pharmaceutical supplies, information
and care management products and services designed to reduce costs and improve quality across the
healthcare industry.
We conduct our business through two operating segments, McKesson Distribution Solutions and
McKesson Technology Solutions, as further described in Financial Note 21, Segments of Business.
Basis of Presentation: The consolidated financial statements and accompanying notes are
prepared in accordance with U. S. generally accepted accounting principles (GAAP). The
consolidated financial statements of McKesson include the financial statements of all wholly-owned
subsidiaries, majority-owned or controlled companies and certain immaterial variable interest
entities (VIEs) of which the Company is the primary beneficiary. We evaluate our ownership,
contractual and other interests in entities to determine if they are VIEs, if we have a variable
interest in those entities and the nature and extent of those interests. These evaluations are
highly complex and involve judgment and the use of estimates and assumptions based on available
historical information and managements judgment, among other factors. Intercompany transactions
and balances have been eliminated.
Fiscal Period: The Companys fiscal year begins on April 1 and ends on March 31. Unless
otherwise noted, all references to a particular year shall mean the Companys fiscal year.
Reclassifications: Certain prior year amounts have been reclassified to conform to the
current year presentation.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP
requires that we make estimates and assumptions that affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual amounts could differ from those
estimated amounts.
Cash and Cash Equivalents: All highly liquid debt instruments purchased with original
maturity of three months or less at the date of acquisition are included in cash and cash
equivalents.
We maintain cash and cash equivalents with several financial institutions. Bank deposits may
exceed the amount of federal deposit insurance. Cash equivalents may be invested in money market
funds. We mitigate the risk of our short-term investment portfolio by investing the majority of
funds in U.S. government securities, depositing funds with reputable financial institutions and
monitoring risk profiles and investment strategies of money market funds.
Restricted Cash: Cash that is subject to legal restrictions or is unavailable for general
operating purposes is classified as restricted cash and included within prepaid expenses and other
in the consolidated balance sheets. At March 31, 2010 and 2009, restricted cash was not material.
Marketable Securities Available for Sale: We carry our marketable securities, which are
available for sale, at fair value and they are included in prepaid expenses and other in the
consolidated balance sheets. The net unrealized gains and losses, net of the related tax effect,
computed in marking these securities to market have been reported within stockholders equity. At
March 31, 2010 and 2009, marketable securities were not material.
57
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Concentrations of Credit Risk and Receivables: Our trade receivables are subject to a
concentration of credit risk with customers primarily in our Distribution Solutions segment. At
March 31, 2010, revenues and accounts receivable from our ten largest customers accounted for
approximately 53% of consolidated revenues and 45% of accounts receivable. At March 31, 2010,
revenues and accounts receivable from our two largest customers, CVS Caremark Corporation (CVS)
and Rite Aid Corporation (Rite Aid), represented approximately 15% and 12% of total consolidated
revenues and 14% and 10% of accounts receivable. As a result, our sales and credit concentration
is significant. A default in payment, a material reduction in purchases from these, or any other
large customers or the loss of a large customer could have a material adverse impact on our
financial condition, results of operations and liquidity. In addition, trade receivables are
subject to a concentration of credit risk with customers in the institutional, retail and
healthcare provider sectors, which can be affected by a downturn in the economy and changes in
reimbursement policies. This credit risk is mitigated by the size and diversity of the customer
base as well as its geographic dispersion. We estimate the receivables for which we do not expect
full collection based on historical collection rates and ongoing evaluations of the
creditworthiness of our customers. An allowance is recorded in our consolidated financial
statements for these amounts.
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
last-in, first-out (LIFO) method and the cost of Canadian inventories is determined using the
first-in, first-out (FIFO) method. Technology Solutions segment inventories consist of computer
hardware with cost determined by the standard cost method. Rebates, fees, cash discounts,
allowances, chargebacks and other incentives received from vendors are generally accounted for as a
reduction in the cost of inventory and are recognized when the inventory is sold. Total
inventories were $9.4 billion and $8.5 billion at March 31, 2010 and 2009.
The LIFO method was used to value approximately 87% and 88% of our inventories at March 31,
2010 and 2009. At March 31, 2010 and 2009, our LIFO reserves, net of LCM adjustments, were $93
million and $85 million. LIFO reserves include both pharmaceutical and non-pharmaceutical
products. In 2010 and 2009, we recognized net LIFO expense of $8 million and in 2008, net LIFO
credits of $14 million within our consolidated statements of operations. In 2010, our $8 million
net LIFO expense related to our non-pharmaceutical products. 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 impact 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 FIFO 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 inventory as valued under FIFO. Primarily due to continued deflation in generic
pharmaceutical inventories, pharmaceutical inventories at LIFO were $112 million and $107 million
higher than FIFO as of March 31, 2010 and 2009. As a result, in 2010 and 2009, we recorded LCM
charges of $5 million and $64 million in cost of sales within our consolidated statements of
operations to adjust our LIFO inventories to market.
Property, Plant and Equipment: We state our property, plant and equipment at cost and
depreciate them under the straight-line method at rates designed to distribute the cost of
properties over estimated service lives ranging from one to 30 years.
58
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Capitalized Software Held for Sale: Development costs for software held for sale, which
primarily pertain to our Technology Solutions segment, are capitalized once a project has reached
the point of technological feasibility. Completed projects are amortized after reaching the point
of general availability using the straight-line method based on an estimated useful life of
approximately three years. We monitor the net realizable value of capitalized software held for
sale to ensure that the investment will be recovered through future sales.
Additional information regarding our capitalized software expenditures is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Amounts capitalized |
|
$ |
75 |
|
|
$ |
74 |
|
|
$ |
73 |
|
Amortization expense |
|
|
67 |
|
|
|
50 |
|
|
|
44 |
|
Third-party royalty fees paid |
|
|
63 |
|
|
|
50 |
|
|
|
52 |
|
|
Goodwill: Goodwill is tested for impairment on an annual basis or more frequently if
indicators for potential impairment exist. 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 unit. Components that have
essentially similar operations, products, services and customers are aggregated as a single
reporting unit.
Impairment tests require that we first compare the carrying value of net assets to the
estimated fair value of net assets for the reporting units. If the carrying value exceeds the fair
value, a second step is performed to calculate the amount of impairment, which would be recorded as
a charge in the consolidated statements of operations. The fair value of a reporting unit is based
upon a number of considerations including projections of revenues, earnings and discounted cash
flows and determination of market value multiples for similar businesses or guideline companies
whose securities are actively traded in public markets. The discount rate used for cash flows
reflects capital market conditions and the specific risks associated with the business. In
addition, we compare the aggregate of the reporting units fair value to the Companys market
capitalization as a further corroboration of the fair value. The testing requires a complex series
of assumptions and judgment by management in projecting future operating results, selecting
guideline companies for comparisons and assessing risks. The use of alternative assumptions and
estimates could affect the fair values and change the impairment determinations. There were no
goodwill impairments during 2010, 2009, or 2008.
Intangible assets: Currently all of our intangible assets are subject to amortization and are
amortized over their estimated period of benefit, ranging from one to fifteen years. We evaluate
the recoverability of intangible assets periodically and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment exists. No
material impairments of intangible assets have been identified during any of the years presented.
Capitalized Software Held for Internal Use: We capitalize costs of software held for internal
use during the application development stage of a project and amortize those costs over the assets
estimated useful lives ranging from one to ten years. As of March 31, 2010 and 2009, capitalized
software held for internal use was $483 million and $475 million, net of accumulated amortization
of $665 million and $567 million, and was included in other assets in the consolidated balance
sheets.
Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic
exposures as well as those risks required to be insured by law or contract. It is our policy to
retain a significant portion of certain losses primarily related to workers compensation and
comprehensive general, product and vehicle liability. Provisions for losses expected under these
programs are recorded based upon our estimate of the aggregate liability for claims incurred as
well as for claims incurred but not yet reported. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
59
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenue Recognition: Revenues for our Distribution Solutions segment are recognized when
product is delivered and title passes to the customer or when services have been rendered and there
are no further obligations to customers.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our
sales return policy generally allows customers to return products only if they can be resold for
value or returned to suppliers for full credit. Sales returns are accrued based on estimates at
the time of sale to the customer. Sales returns from customers were approximately $1,233 million,
$1,216 million and $1,093 million in 2010, 2009 and 2008. Taxes collected from customers and
remitted to governmental authorities are presented on a net basis; that is, they are excluded from
revenues.
The revenues for our Distribution Solutions segment include large volume sales of
pharmaceuticals to a limited number of large customers who warehouse their own product. We order
bulk product from the manufacturer, receive and process the product through our central
distribution facility and deliver the bulk product (generally in the same form as received from the
manufacturer) directly to our customers warehouses. Sales to customers warehouses amounted to
$21.4 billion in 2010, $25.8 billion in 2009 and $27.7 billion in 2008. We also record revenues
for direct store deliveries from most of these same customers. Direct store deliveries are
shipments from the manufacturer to our customers of a limited category of products that require
special handling. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take
title to and possession of the inventory, are subject to inventory risk, have latitude in
establishing prices, assume the risk of loss for collection from customers as well as delivery or
return of the product, are responsible for fulfillment and other customer service requirements, or
the transactions have several but not all of these indicators.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may
contain a combination of various products and services. Revenue from a multiple element
arrangement is allocated to the separate elements based on estimates of fair value and recognized
in accordance with the revenue recognition criteria applicable to each element. If fair value
cannot be established for any undelivered element, all of the arrangements revenue is deferred
until delivery of the last element has occurred and services have been performed or until fair
value can objectively be determined for any remaining undelivered elements.
Revenues for our Technology Solutions segment are generated primarily by licensing software
and software systems (consisting of software, hardware and maintenance support), and providing
outsourcing and professional services. Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service
agreements. Perpetual software arrangements are recognized at the time of delivery or under the
percentage-of-completion method based on the terms and conditions in the contract. Contracts
accounted for under the percentage-of-completion method are generally measured based on the ratio
of labor costs incurred to date to total estimated labor costs to be incurred. Changes in
estimates to complete and revisions in overall profit estimates on these contracts are charged to
earnings in the period in which they are determined. We accrue for contract losses if and when the
current estimate of total contract costs exceeds total contract revenue.
Hardware revenues are generally recognized upon delivery. Revenue from multi-year software
license agreements is recognized ratably over the term of the agreement. Software implementation
fees are recognized as the work is performed or under the percentage-of-completion method.
Maintenance and support agreements are marketed under annual or multi-year agreements and are
recognized ratably over the period covered by the agreements. Subscription, content and
transaction processing fees are generally marketed under annual and multi-year agreements and are
recognized ratably over the contracted terms beginning on the service start date for fixed fee
arrangements and recognized as transactions are performed beginning on the service start date for
per-transaction fee arrangements. Remote processing service fees are recognized monthly as the
service is performed. Outsourcing service revenues are recognized as the service is performed.
60
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We also offer certain products on an application service provider basis, making our software
functionality available on a remote hosting basis from our data centers. The data centers provide
system and administrative support, as well as hosting services. Revenue on products sold on an
application service provider basis is recognized on a monthly basis over the term of the contract
beginning on the service start date of products hosted.
This segment also engages in multiple-element arrangements, which may contain any combination
of software, hardware, implementation or consulting services, or maintenance services. When some
elements are delivered prior to others in an arrangement and vendor-specific objective evidence of
fair value (VSOE) exists for the undelivered elements, revenue for the delivered elements is
recognized upon delivery of such items. The segment establishes VSOE for hardware and
implementation and consulting services based on the price charged when sold separately, and for
maintenance services, based on renewal rates offered to customers. Revenue for the software
element is recognized under the residual method only when fair value has been established for all
of the undelivered elements in an arrangement. If fair value cannot be established for any
undelivered element, all of the arrangements revenue is deferred until the delivery of the last
element or until the fair value of the undelivered element is determinable.
Our Technology Solutions segment also includes revenues from disease management programs
provided to various states Medicaid programs. These service contracts include provisions for
achieving certain cost-savings and clinical targets. If the targets
are not met for certain of these contracts, a portion, or
all, of the revenue must be refunded to the customer. We recognize revenue during the term of the
contract by assessing actual performance against contractual targets and then determining the
amount the customer would be legally obligated to pay if the contract terminated as of the
measurement date. These assessments include estimates of medical claims and other data in
accordance with the contract methodology. Because complete data is unavailable until six to nine
months after the measurement period, there is generally a significant time delay between recording
the accrual and the final settlement of the contract. If data is insufficient to assess
performance or we have not met the targets, we defer recognition of the revenue. As of March 31,
2010 and 2009, we had deferred $26 million and $25 million
related to these types of contracts, which was
included in deferred revenue in the consolidated balance sheets. We generally have been successful
in achieving performance targets under these agreements.
Supplier Incentives: Fees for service and other incentives received from suppliers, relating
to the purchase or distribution of inventory, are generally reported as a reduction to cost of
goods sold. We consider these fees to represent product discounts and as a result, the fees are
recorded as a reduction of product cost and recognized through cost of goods sold upon the sale of
the related inventory.
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 carefully
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. The ultimate outcome of any outstanding claim may be different
than our estimate. As of March 31, 2010 and 2009, supplier reserves were $89 million and $113
million.
Income Taxes: We account for income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial
statements and the tax basis of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Tax benefits from uncertain tax positions
are recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on the
technical merits. The amount recognized is measured as the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon effective settlements. Deferred taxes are
not provided on undistributed earnings of our foreign operations that are considered to be
permanently reinvested.
61
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Foreign Currency Translation: Our international subsidiaries generally consider their local
currency to be their functional currency. Assets and liabilities of these international
subsidiaries are translated into U.S. dollars at year-end exchange rates and revenues and expenses
are translated at average exchange rates during the year. Cumulative currency translation
adjustments are included in accumulated other comprehensive income or losses in the stockholders
equity section of the consolidated balance sheets. Realized gains and losses from currency
exchange transactions are recorded in operating expenses in the consolidated statements of
operations and were not material to our consolidated results of operations in 2010, 2009 or 2008.
Derivative Financial Instruments: Derivative financial instruments are used principally in
the management of foreign currency and interest rate exposures and are recorded on the consolidated
balance sheets at fair value. If a derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the hedged risk are
recognized as a charge or credit to earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are recorded in
accumulated other comprehensive income or losses and are recognized in the consolidated statements
of operations when the hedged item affects earnings. We periodically evaluate hedge effectiveness
and ineffective portions of changes in the fair value of cash flow hedges are recognized as a
charge or credit to earnings. Derivative instruments not designated as hedges are marked-to-market
at the end of each accounting period with the change included in earnings.
Accounts Receivable Sales: At March 31, 2010, we had a $1.1 billion revolving receivables
sales facility. Through this facility, McKesson Corporation, the parent company, sells certain
U.S. pharmaceutical trade accounts receivable on a non-recourse basis to a wholly-owned and
consolidated subsidiary, which then sells these receivables to a special purpose entity (SPE),
which is a wholly-owned, bankruptcy-remote subsidiary of McKesson Corporation that is consolidated
in our financial statements. This SPE then sells undivided interests in the receivables to
third-party purchaser groups, each of which includes commercial paper conduits (Conduits), which
are special purpose legal entities administered by financial institutions. Sales of undivided
interests in the receivables by the SPE to the Conduits are accounted for as a sale because we have
relinquished control of the receivables. Accordingly, accounts receivable sold under these
transactions are excluded from receivables, net in the accompanying consolidated balance sheets.
Receivables sold and receivables retained by the Company are carried at face value, which due to
the short-term nature of its accounts receivable and terms of the facility, approximates fair
value. McKesson receives cash in the amount of the face value for the undivided interests in the
receivables sold. No gain or loss is recorded upon sale as fee charges from the Conduits are based
upon a floating yield rate and the period the undivided interests remain outstanding. Fee charges
from the Conduits are accrued at the end of each month and are recorded within administrative
expenses in the consolidated statements of operations. Should we default under the accounts
receivable sales facility, the Conduits are entitled to receive only collections on receivables
owned by the SPE.
We continue servicing the receivables sold. No servicing asset is recorded at the time of
sale because we do not receive any servicing fees from third parties or other income related to
servicing the receivables. We do not record any servicing liability at the time of sale as the
receivables collection period is relatively short and the costs of servicing the receivables sold
over the servicing period are insignificant. Servicing costs are recognized as incurred over the
servicing period. See Financial Note 12, Long-Term Debt and Other Financing, for additional
information.
Share-Based Compensation: We account for all share-based compensation transactions using a
fair-value based measurement method. The share-based compensation expense is recognized, for the
portion of the awards that is ultimately expected to vest, on a straight-line basis over the
requisite service period for those awards with graded vesting and service conditions. For awards
with performance conditions and multiple vest dates, we recognize the expense on a graded vesting
basis. For awards with performance conditions and a single vest date, we recognize the expense on
a straight-line basis. The compensation expense recognized has been classified in the consolidated
statements of operations or capitalized on the consolidated balance sheets in the same manner as
cash compensation paid to our employees.
62
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Loss Contingencies: We are subject to various claims, other 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. We record a provision for a liability when
management believes that it is both probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. Management reviews these provisions at least quarterly and
adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel
and other information and events pertaining to a particular case. Because litigation outcomes are
inherently unpredictable, these decisions often involve a series of complex assessments by
management about future events that can rely heavily on estimates and assumptions and it is
possible that the actual cost of these matters could impact our earnings, either negatively or
positively, in the period of their resolution.
Recently Adopted Accounting Pronouncements
Accounting Standards CodificationTM: Effective July 1, 2009, we adopted the
Financial Accounting Standards Board (FASB) Accounting Standards CodificationTM (ASC
or Codification) as the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the U.S. Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. The Codification superseded all then-existing non-SEC accounting
and reporting standards. The adoption of the Codification did not have a material effect on our
consolidated financial statements.
Fair Value Measurements and Disclosures: In September 2006, the FASB issued new standards
that provide a consistent definition of fair value that focuses on exit price, prioritizes the use
of market-based inputs over entity-specific inputs for measuring fair value and establishes a
three-level hierarchy for fair value measurements. In February 2008, the FASB permitted companies
to defer the effective date of these standards for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the consolidated
financial statements on a nonrecurring basis. On April 1, 2008, we adopted the fair value
measurements and disclosures for financial assets and financial liabilities and for nonfinancial
assets and nonfinancial liabilities that are remeasured at least annually. At that time, we
elected to defer adoption of the standards for one year, to April 1, 2009, for nonfinancial assets
and nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The standards were applied prospectively and their adoption
did not have a material effect on our consolidated financial statements. In April 2009, the FASB
issued new standards for estimating fair value when an asset or liability experiences a significant
decrease in volume and activity relative to its normal market activity. In addition, these
standards identify circumstances that may indicate whether a transaction is not orderly.
Retrospective application to a prior interim or annual reporting period was not permitted. On
April 1, 2009, we adopted this standard, which did not have a material effect on our consolidated
financial statements.
Effective October 1, 2009, we adopted amended standards on two issues: 1) determining the fair
value of a liability when a quoted price in an active market for an identical liability is not
available and 2) measuring and disclosing the fair value of certain investments on the basis of the
investments net asset value per share or its equivalent. This adoption did not have a material
effect on our consolidated financial statements. However, these amended standards may affect the
valuation of future investments.
In January 2010, the FASB issued amended standards that clarify and provide additional
disclosure requirements related to recurring and non-recurring fair value measurements. These
standards also amend requirements for employers disclosures about postretirement benefit plan
assets to conform to the fair value disclosure requirement. On January 1, 2010, we adopted these
amended standards, except for the disclosures about the roll forward of activity in level 3 fair
value measurements, which are effective for us on April 1, 2011. The adoption of these standards
on January 1, 2010 did not have a material effect on our consolidated financial statements.
63
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Business Combinations: On April 1, 2009, we adopted two sets of standards affecting business
combinations. One set of standards amends the recognition and measurement of identifiable assets
and goodwill acquired, liabilities assumed and any noncontrolling interest in the acquiree in a
business combination. These standards also provide disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. In
addition, adjustments made to valuation allowances on deferred taxes and acquired tax contingencies
related to acquisitions made prior to April 1, 2009 fall within the scope of these standards.
The second set of standards addresses accounting for assets acquired and liabilities assumed
that arise from contingencies in a business combination. These standards address application
issues raised on the initial recognition and measurement, subsequent measurement and accounting for
and disclosure of these assets and liabilities. The adoption of these standards did not have a
material effect on our consolidated financial statements; however, it may have an effect on the
accounting for any future acquisitions or divestitures.
Consolidation: On April 1, 2009, we adopted new standards on noncontrolling interests in
consolidated financial statements. These standards require reporting entities to present
noncontrolling interests in any of their consolidated entities as equity (as opposed to a liability
or mezzanine equity) and provide guidance on the accounting for transactions between an entity and
noncontrolling interests. This adoption did not have a material effect on our consolidated
financial statements; however, these standards may have an effect on any future investments or
divestitures of our investments.
On January 1, 2010, we adopted amended standards that clarify the accounting and disclosure
for a decrease in ownership in a subsidiary or an exchange of a group of assets that is a business
or nonprofit activity. This adoption did not have a material effect on our consolidated financial
statements; however, these standards may affect future divestitures of subsidiaries or groups of
assets within its scope.
Intangibles Goodwill and Other: On April 1, 2009, we adopted two new standards affecting
intangible assets. One of the standards addressed factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible
asset.
The second standard affected accounting for defensive intangible assets, which are acquired
assets that an entity does not intend to actively use, but will hold (lock up) to prevent others
from obtaining access to them. These standards do not address intangible assets that are used in
research and development activities. Neither of these standards had a material effect on our
consolidated financial statements.
Earnings Per Share: On April 1, 2009, we adopted new standards that address whether
instruments granted in share-based compensation transactions are participating securities. The new
standards conclude that unvested share-based awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are participating securities and shall be included
in the computation of basic earnings per share pursuant to the two-class method. This adoption did
not have a material effect on our consolidated financial statements.
Investments Equity Method and Joint Ventures: On April 1, 2009, we adopted new standards
on the initial measurement of an equity method investment, testing of the investment for
other-than-temporary impairment and accounting for any subsequent equity activities by the
investee. This adoption did not have a material effect on our consolidated financial statements.
Investments Debt and Equity Securities: On April 1, 2009, we adopted new standards that
revise the criteria for recognizing other-than-temporary impairments of debt securities for which
changes in fair value are not regularly recognized in earnings and the financial statement
presentation of such impairments. The standards also expand and increase the frequency of
disclosures related to other-than-temporary impairments of both debt and equity securities. This
adoption did not have a material effect on our consolidated financial statements.
64
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial Instruments: On June 30, 2009, we adopted new standards that require disclosures
about the fair value of financial instruments for interim and annual reporting periods. These new
standards do not require disclosures for earlier periods presented for comparative purposes at
initial adoption. This adoption did not have a material effect on our consolidated financial
statements, but did expand the disclosures presented. Refer to Financial Note 15, Financial
Instruments and Hedging Activities, for further discussion.
Subsequent Events: On June 30, 2009, we adopted new standards that establish general guidance
for accounting and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The adoption of these standards
require us to evaluate all subsequent events that occur after the balance sheet date through the
date and time our financial statements are issued. This adoption did not have a material effect on
our consolidated financial statements.
In February 2010, the FASB amended these standards to remove the requirement for an SEC filer
to disclose a date in both issued and revised financial statements. The amended standards
clarified the definition of revised as being the result of either correction of an error or
retrospective application of GAAP. We adopted these amended standards upon their issuance; they
did not have a material effect on our consolidated financial statements.
Equity: On January 1, 2010, we adopted amended standards to clarify the treatment of certain
distributions to shareholders that have both stock and cash components. The stock portion of such
distributions is considered a share issuance that is reflected in earnings per share prospectively
and is not a stock dividend. This adoption did not have a material affect on our consolidated
financial statements; however, they may affect any future stock distributions.
Compensation: On March 31, 2010, we adopted new standards on an employers disclosures about
plan assets of a defined benefit pension or other postretirement plan. Refer to Financial Note 13,
Pension Benefits, for the additional disclosure.
Newly Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the FASB issued new standards for multiple-deliverable
revenue arrangements. These new standards affect the determination of when individual deliverables
included in a multiple-element arrangement may be treated as separate units of accounting. In
addition, these new standards modify the manner in which the transaction consideration is allocated
across separately identified deliverables, eliminate the use of the residual value method of
allocating arrangement consideration and require expanded disclosure. These new standards will
become effective for us for multiple-element arrangements entered into or materially modified on or
after April 1, 2011. Earlier application is permitted with required transition disclosures based
on the period of adoption. We are currently evaluating the application date and the effect of
these standards on our consolidated financial statements.
In April 2010, the FASB issued new standards for vendors, who apply the milestone method of
revenue recognition to research and development arrangements. These new standards apply to
arrangements with payments that are contingent, at inception, upon achieving substantively
uncertain future events or circumstances. These new standards are effective on a prospective basis
for us for milestones achieved on or after April 1, 2011. Earlier application is permitted. We
are currently evaluating the application date and the effect of these standards on our consolidated financial statements.
Software: In October 2009, the FASB issued amended standards for the accounting for certain
revenue arrangements that include software elements. These new standards amend pre-existing
software revenue guidance by removing from its scope tangible products that contain both software
and non-software components that function together to deliver the products functionality. These
amended standards will become effective for us for revenue arrangements entered into or materially
modified on or after April 1, 2011. Earlier application is permitted with required transition
disclosures based on the period of adoption. We are currently evaluating the application date and
the effect of these standards on our consolidated financial statements. Both the revenue
recognition standards for multiple-element arrangements and these software standards must be
adopted in the same period and must use the same transition disclosures.
65
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Accounting for Transfers of Financial Assets: In December 2009, the FASB issued amended
standards on accounting for transfers of financial assets, including securitization transactions,
in which entities have continued exposure to risks related to transferred financial assets. These
amendments also expand the disclosure requirements for such transactions. These amended standards
will become effective for us on April 1, 2010. Based on our existing accounts receivable sales
facility agreement, we anticipate that accounts receivable transactions from April 1, 2010, forward
may, for U.S. GAAP purposes, be accounted for as secured borrowings rather than asset sales.
Consolidations: In December 2009, the FASB issued amended standards for consolidation of
VIEs primarily related to the determination of the primary beneficiary of the VIE. These amended
standards will become effective for us on April 1, 2010. Based on our existing relationships with
VIEs, we do not anticipate that these amended standards will have a material affect on our
consolidated financial statements upon adoption. However, these amended standards may have an
effect on accounting for any changes to the existing relationships or future investments.
2. Business Combinations and Investments
In 2009, we made the following acquisition:
On May 21, 2008, we acquired McQueary Brothers Drug Company (McQueary Brothers) of
Springfield, Missouri for approximately $190 million. McQueary Brothers is a regional distributor
of pharmaceutical, health and beauty products to independent and regional chain pharmacies in the
Midwestern U.S. This acquisition expanded our existing U.S. pharmaceutical distribution business.
The acquisition was funded with cash on hand. Financial results for McQueary Brothers have been
included within our Distribution Solutions segment since the date of acquisition.
The following table summarizes the fair values of the assets acquired and liabilities assumed
as of the acquisition date:
|
|
|
|
|
(In millions) |
|
|
|
|
|
Accounts receivable |
|
$ |
37 |
|
Inventory |
|
|
41 |
|
Goodwill |
|
|
126 |
|
Intangible assets |
|
|
67 |
|
Other assets |
|
|
11 |
|
Accounts payable and other liabilities |
|
|
(60 |
) |
Deferred tax liability |
|
|
(32 |
) |
|
|
|
|
Net assets acquired, less cash and cash equivalents |
|
$ |
190 |
|
|
During the first quarter of 2010, the acquisition accounting was completed. Approximately
$126 million of the purchase price allocation has been assigned to goodwill, which primarily
reflects the expected future benefits from synergies to be realized upon integrating the business.
Included in the purchase price allocation are acquired identifiable intangibles of $61 million
representing a customer relationship with a useful life of 7 years, a trade name of $2 million with
a useful life of less than one year and a not-to-compete agreement of $4 million with a useful life
of 4 years.
In 2008, we made the following acquisition:
On October 29, 2007, we acquired all of the outstanding shares of Oncology Therapeutics
Network (OTN) of San Francisco, California for approximately $519 million, including the
assumption of debt and net of $31 million of cash and cash equivalents acquired from OTN. During
the third quarter of 2009, the acquisition accounting was completed. OTN is a U.S. distributor of
specialty pharmaceuticals. The acquisition of OTN expanded our existing specialty pharmaceutical
distribution business. The acquisition was funded with cash on hand. Financial results for OTN
have been included within our Distribution Solutions segment since the date of acquisition.
66
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the fair values of the assets acquired and liabilities assumed
as of the acquisition date:
|
|
|
|
|
(In millions) |
|
|
|
|
|
Accounts receivable |
|
$ |
308 |
|
Inventory |
|
|
87 |
|
Goodwill |
|
|
240 |
|
Intangible assets |
|
|
128 |
|
Deferred tax assets |
|
|
62 |
|
Other assets |
|
|
36 |
|
Accounts payable and other liabilities |
|
|
(342 |
) |
|
|
|
|
Net assets acquired, less cash and cash equivalents |
|
$ |
519 |
|
|
Approximately $240 million of the purchase price allocation has been assigned to goodwill,
which primarily reflects the expected future benefits from synergies upon integrating the business.
Included in the purchase price allocation are acquired identifiable intangibles of $115 million
representing customer relationships with a weighted-average life of 9 years, developed technology
of $3 million with a weighted-average life of 4 years and trademarks and trade names of $10 million
with a weighted-average life of 5 years.
During the last three years, we also completed a number of other smaller acquisitions and
investments 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 and for certain recent acquisitions may be subject to change as
we continue to evaluate and implement various restructuring initiatives. Goodwill recognized for
our business acquisitions is generally not expected to be deductible for tax purposes. Pro forma
results of operations for our business acquisitions have not been presented because the effects
were not material to the consolidated financial statements on either an individual or an aggregate
basis.
3. Share-Based Compensation
We provide share-based compensation for our employees, officers and non-employee directors,
including stock options, an employee stock purchase plan, restricted stock (RS), restricted stock
units (RSUs) and performance-based restricted stock units (PeRSUs) (collectively, share-based
awards.) Most of our share-based awards are granted in the first quarter of each fiscal year.
Compensation expense for the share-based awards is recognized for the portion of the awards
that is ultimately expected to vest. We develop an estimate of the number of share-based awards,
which will ultimately vest primarily based on historical experience. The estimated forfeiture rate
established upon grant is re-assessed throughout the requisite service period. As required, the
forfeiture estimates are adjusted to reflect actual forfeitures when an award vests. The actual
forfeitures in future reporting periods could be higher or lower than current estimates. The
weighted-average forfeiture rate is approximately 7% at March 31, 2010.
The compensation expense recognized has been classified in the consolidated statements of
operations or capitalized on the consolidated balance sheets in the same manner as cash
compensation paid to our employees. There was no material share-based compensation expense
capitalized as part of the cost of an asset in 2010, 2009 and 2008.
67
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Impact on Net Income
The components of share-based compensation expense and the related tax benefit are shown in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
RSUs and RS (1) |
|
$ |
47 |
|
|
$ |
60 |
|
|
$ |
50 |
|
PeRSUs (2) |
|
|
39 |
|
|
|
13 |
|
|
|
22 |
|
Stock options |
|
|
19 |
|
|
|
18 |
|
|
|
11 |
|
Employee stock purchase plan |
|
|
9 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
Share-based compensation expense |
|
|
114 |
|
|
|
99 |
|
|
|
91 |
|
Tax benefit for share-based compensation expense (3) |
|
|
(41 |
) |
|
|
(34 |
) |
|
|
(31 |
) |
|
|
|
Share-based compensation expense, net of tax |
|
$ |
73 |
|
|
$ |
65 |
|
|
$ |
60 |
|
|
|
|
|
(1) |
|
This expense was primarily the result of PeRSUs awarded in prior years, which converted
to RSUs due to the attainment of goals during the applicable years performance period. |
|
(2) |
|
Represents estimated compensation expense for PeRSUs that are conditional upon attaining
performance objectives during the current years performance period. |
|
(3) |
|
Income tax expense is computed using the tax rates of applicable tax jurisdictions.
Additionally, a portion of pre-tax compensation expense is not tax-deductible. |
Stock Plans
The 2005 Stock Plan provides our employees, officers and non-employee directors share-based
long-term incentives. The 2005 Stock Plan permits the granting of up
to 42.5 million shares in the
form of stock options, RS, RSUs, PeRSUs and other share-based awards. As of March 31, 2010, 20
million shares remain available for future grant under the 2005 Stock Plan.
Stock Options
Stock options are granted at no less than fair market value and those options granted under
the 2005 Stock Plan generally have a contractual term of seven years and follow a four-year vesting
schedule. Prior to 2005, stock options typically had a contractual term of ten years and vested
over a four-year period. We expect option grants in 2010 and future years will have the same
general contractual term and vesting schedule as those options granted under the 2005 Stock Plan.
Compensation expense for stock options is recognized on a straight-line basis over the
requisite service period and is based on the grant-date fair value for the portion of the awards
that is ultimately expected to vest. We continue to use the Black-Scholes options-pricing model to
estimate the fair value of our stock options. Once the fair value of an employee stock option is
determined, current accounting practices do not permit it to be changed, even if the estimates used
are different from actual. The options-pricing model requires the use of various estimates and
assumptions as follows:
|
|
|
Expected stock price volatility is based on a combination of historical volatility of
our common stock and implied market volatility. We believe that this market-based input
provides a better estimate of our future stock price movements and is consistent with
employee stock option valuation considerations. |
|
|
|
|
Expected dividend yield is based on historical experience and investors current
expectations. |
|
|
|
|
The risk-free interest rate for periods within the expected life of the option is based
on the constant maturity U.S. Treasury rate in effect at the time of grant. |
|
|
|
|
Expected life of the options is based primarily on historical employee stock option
exercise and other behavior data and reflects the impact of changes in contractual life of
current option grants compared to our historical grants. |
68
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Weighted-average assumptions used to estimate the fair value of employee stock options
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
Expected stock price volatility |
|
|
33 |
% |
|
|
27 |
% |
|
|
24 |
% |
Expected dividend yield |
|
|
0.7 |
% |
|
|
0.6 |
% |
|
|
0.4 |
% |
Risk-free interest rate |
|
|
2 |
% |
|
|
3 |
% |
|
|
5 |
% |
Expected life (in years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
The following is a summary of options outstanding at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Number of |
|
Weighted- |
|
|
|
|
|
Number of |
|
|
|
|
Options |
|
Average |
|
Weighted- |
|
Options |
|
|
|
|
Outstanding At |
|
Remaining |
|
Average |
|
Exercisable at |
|
Weighted- |
Range of Exercise |
|
Year End |
|
Contractual Life |
|
Exercise |
|
Year End |
|
Average |
Prices |
|
(In millions) |
|
(Years) |
|
Price |
|
(In millions) |
|
Exercise Price |
|
$27.35 $41.02 |
|
|
11 |
|
|
|
3 |
|
|
$ |
35.68 |
|
|
|
8 |
|
|
$ |
34.53 |
|
$41.03 $54.70 |
|
|
3 |
|
|
|
3 |
|
|
|
45.95 |
|
|
|
3 |
|
|
|
45.87 |
|
$54.71 $68.37 |
|
|
2 |
|
|
|
5 |
|
|
|
59.55 |
|
|
|
1 |
|
|
|
60.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
3 |
|
|
|
41.26 |
|
|
|
12 |
|
|
|
38.85 |
|
|
The following table summarizes stock option activity during 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Average Exercise |
|
Contractual |
|
Intrinsic |
(In millions, except per share data and years) |
|
Shares |
|
Price |
|
Term (Years) |
|
Value (2) |
|
Outstanding, March 31, 2007 |
|
|
36 |
|
|
$ |
46.32 |
|
|
|
4 |
|
|
$ |
601 |
|
Granted |
|
|
1 |
|
|
|
62.12 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9 |
) |
|
|
36.43 |
|
|
|
|
|
|
|
|
|
Cancelled and forfeited |
|
|
(2 |
) |
|
|
69.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2008 |
|
|
26 |
|
|
|
48.59 |
|
|
|
3 |
|
|
|
298 |
|
Granted |
|
|
1 |
|
|
|
57.81 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1 |
) |
|
|
33.49 |
|
|
|
|
|
|
|
|
|
Cancelled and forfeited |
|
|
(7 |
) |
|
|
78.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2009 |
|
|
19 |
|
|
|
39.28 |
|
|
|
3 |
|
|
|
33 |
|
Granted |
|
|
2 |
|
|
|
40.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(5 |
) |
|
|
33.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2010 |
|
|
16 |
|
|
|
41.26 |
|
|
|
3 |
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest (1) |
|
|
16 |
|
|
|
40.67 |
|
|
|
3 |
|
|
|
393 |
|
Exercisable, March 31, 2010 |
|
|
12 |
|
|
|
38.85 |
|
|
|
2 |
|
|
|
325 |
|
|
|
|
|
(1) |
|
The number of options expected to vest takes into account an estimate of expected
forfeitures. |
|
(2) |
|
The aggregate intrinsic value is calculated as the difference between the period-end market
price of the Companys common stock and the option exercise price, times the number of
in-the-money option shares. |
69
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table provides data related to stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share data and years) |
|
2010 |
|
2009 |
|
2008 |
|
Weighted-average grant date fair value per stock option |
|
$ |
12.56 |
|
|
$ |
16.16 |
|
|
$ |
17.90 |
|
Aggregate intrinsic value on exercise |
|
$ |
115 |
|
|
$ |
30 |
|
|
$ |
220 |
|
Cash received upon exercise |
|
$ |
165 |
|
|
$ |
49 |
|
|
$ |
309 |
|
Tax benefits realized related to exercise |
|
$ |
37 |
|
|
$ |
14 |
|
|
$ |
83 |
|
Total fair value of shares vested |
|
$ |
16 |
|
|
$ |
13 |
|
|
$ |
8 |
|
Total compensation cost, net of estimated forfeitures,
related to unvested stock options not yet recognized,
pre-tax |
|
$ |
37 |
|
|
$ |
30 |
|
|
$ |
25 |
|
Weighted-average period in years over which stock
option compensation cost is expected to be recognized |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
RS, RSUs and PeRSUs
RS and RSUs, which entitle the holder to receive at the end of a vesting term a specified
number of shares of the Companys common stock are accounted for at fair value at the date of
grant. The fair value of RS and RSUs under our stock plans is determined by the product of the
number of shares that are expected to vest and the grant date market price of the Companys common
stock. The Compensation Committee determines the vesting terms at the time of grant. These awards
generally vest in four years. We recognize expense for RS and RSUs with a single vest date on a
straight-line basis over the requisite service period. We have elected to expense the grant date
fair value of RS and RSUs with only graded vesting and service conditions on a straight-line basis
over the requisite service period. RS contains certain restrictions on transferability and may not
be transferred until such restrictions lapse.
Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately and
are expensed upon grant. However, issuance of any underlying shares granted prior to the July 2008
Annual Meeting of Stockholders is deferred until the director is no longer performing services for
the Company. For those RSUs granted subsequent to July 2008, the director may choose to receive
payment immediately or defer receipt of the underlying shares if they meet director stock ownership
guidelines. At March 31, 2010, 94,000 RSUs for our directors are vested, but shares have not been
issued.
PeRSUs are RSUs for which the number of RSUs awarded may be conditional upon the attainment of
one or more performance objectives over a specified period. PeRSUs are accounted for as variable
awards until the performance goals are reached and the grant date is established. The fair value
of PeRSUs is determined by the product of the number of shares eligible to be awarded and expected
to vest, and the market price of the Companys common stock, commencing at the inception of the
requisite service period. During the performance period, the PeRSUs are re-valued using the market
price and the performance modifier at the end of a reporting period. At the end of the performance
period, if the goals are attained, the awards are granted and classified as RSUs and accounted for
on that basis. For PeRSUs granted prior to 2009 with multiple vest dates, we recognize the fair
value expense of these awards on a graded vesting basis over the requisite service period of four
years. PeRSUs granted during 2009 and after and the related RSUs (when they are granted) have a
single vest date and accordingly, we recognize expense on a straight-line basis over the requisite
service period of four years.
70
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes RS and RSU activity during 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date Fair |
(In millions, except per share data) |
|
Shares |
|
Value Per Share |
|
Nonvested, March 31, 2007 |
|
|
2 |
|
|
$ |
45.18 |
|
Granted |
|
|
1 |
|
|
|
61.92 |
|
|
|
|
|
|
|
|
|
Nonvested, March 31, 2008 |
|
|
3 |
|
|
|
54.13 |
|
Granted |
|
|
1 |
|
|
|
57.38 |
|
Vested |
|
|
(1 |
) |
|
|
57.61 |
|
|
|
|
|
|
|
|
|
Nonvested, March 31, 2009 |
|
|
3 |
|
|
|
54.70 |
|
Granted |
|
|
2 |
|
|
|
40.94 |
|
Vested |
|
|
(1 |
) |
|
|
50.42 |
|
|
|
|
|
|
|
|
|
Nonvested, March 31, 2010 |
|
|
4 |
|
|
|
49.21 |
|
|
The following table provides data related to RS and RSU activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Total fair value of shares vested |
|
$ |
74 |
|
|
$ |
101 |
|
|
$ |
20 |
|
Total compensation cost, net of
estimated forfeitures, related to
nonvested RSU awards not yet
recognized, pre-tax |
|
$ |
61 |
|
|
$ |
52 |
|
|
$ |
49 |
|
Weighted-average period in years over
which RSU cost is expected to be
recognized |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
In May 2009, the Compensation Committee approved 2 million PeRSU target share units
representing the base number of awards that could be granted, if goals are attained, and would be
granted in the first quarter of 2011 (the 2010 PeRSU). These target share units are not included
in the table above as they have not been granted in the form of RSUs. As of March 31, 2010, the
total compensation cost, net of estimated forfeitures, related to nonvested 2010 PeRSUs not yet
recognized was approximately $146 million, pre-tax (based on the period-end market price of the
Companys common stock) and the weighted-average period over which the cost is expected to be
recognized is 3 years.
Employee Stock Purchase Plan (ESPP)
The Company has an ESPP under which 16 million shares have been authorized for issuance. The
ESPP allows eligible employees to purchase shares of our common stock through payroll deductions.
The deductions occur over three-month purchase periods and the shares are then purchased at 85% of
the market price at the end of each purchase period. Employees are allowed to terminate their
participation in the ESPP at any time during the purchase period prior to the purchase of the
shares. The 15% discount provided to employees on these shares is included in compensation
expense. The shares related to funds outstanding at the end of a quarter are included in the
calculation of diluted weighted average shares outstanding. These amounts have not been
significant. In 2010, 2009 and 2008, 1 million shares were issued under the ESPP and 3 million
shares remain available for issuance at March 31, 2010.
71
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
4. Restructuring Activities and Other Workforce Reduction Charges
The following table summarizes the activity related to our restructuring liabilities for the
last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
Technology Solutions |
|
Corporate |
|
|
(In millions) |
|
Severance |
|
Exit-Related |
|
Severance |
|
Exit-Related |
|
Severance |
|
Total |
|
Balance, March 31,
2007 |
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
16 |
|
|
$ |
5 |
|
|
$ |
|
|
|
$ |
30 |
|
Expenses |
|
|
5 |
|
|
|
|
|
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
|
|
12 |
|
Asset impairments |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
7 |
|
|
|
|
Total charge |
|
|
5 |
|
|
|
3 |
|
|
|
1 |
|
|
|
8 |
|
|
|
2 |
|
|
|
19 |
|
Liabilities related
to acquisitions |
|
|
6 |
|
|
|
1 |
|
|
|
11 |
|
|
|
1 |
|
|
|
|
|
|
|
19 |
|
Cash payments |
|
|
(7 |
) |
|
|
|
|
|
|
(22 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(33 |
) |
Non-cash items |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
Balance, March 31,
2008 |
|
|
7 |
|
|
|
7 |
|
|
|
6 |
|
|
|
6 |
|
|
|
2 |
|
|
|
28 |
|
Expenses |
|
|
4 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
1 |
|
Liabilities related
to acquisitions |
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Cash payments |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(19 |
) |
Non-cash items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
Balance, March 31,
2009 |
|
|
6 |
|
|
|
3 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
13 |
|
Expenses |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
2 |
|
Cash payments |
|
|
(3 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
|
Balance, March 31,
2010 |
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
9 |
|
|
Our restructuring activities are primarily due to the consolidation of business functions and
facilities from newly acquired businesses.
Restructuring Activities and Asset Impairment Expenses
During 2010 and 2009, there were no material restructuring costs incurred.
During 2008, we incurred $19 million of restructuring expenses, which primarily consisted of:
|
|
|
$4 million of severance costs associated with the closure of two facilities within our
Distribution Solutions segment, |
|
|
|
$1 million and $3 million of severance and asset impairments associated with the
integration of OTN within our Distribution Solutions segment, and |
|
|
|
$5 million of severance and exit-related costs and a $4 million asset impairment charge
for the write-off of capitalized software costs associated with the termination of a
software project within our Technology Solutions segment. |
72
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Restructuring Activities Liabilities Related to Business Combinations
In connection with our OTN acquisition within our Distribution Solutions segment, to date we
recorded a total of $8 million of employee severance costs and $5 million of facility exit costs.
As of March 31, 2010, the majority of the restructuring accruals of $9 million, which
primarily consist of employee severance costs and facility exit and contract termination costs, are
anticipated to be disbursed through 2011. Accrued restructuring liabilities are included in other
accrued and other noncurrent liabilities in the consolidated balance sheets.
The majority of past initiatives were completed during 2010. Based on our current existing
initiatives, we expect to complete the majority of these activities by the end of 2011. Expenses
associated with these initiatives are not anticipated to be material. Approximately 970 employees,
consisting primarily of distribution, general and administrative staffs were planned to be
terminated as part of our restructuring plans since 2008, of which 891 employees had been
terminated as of March 31, 2010. Restructuring expenses are included in cost of sales and
operating expenses in our consolidated statements of operations.
Other Workforce Reduction Charges
In 2010, 2009 and 2008, we recorded $20 million ($9 million for our Distribution Solutions
segment and $11 million for our Technology Solutions segment), $32 million ($7 million for our
Distribution Solutions segment and $25 million for our Technology Solutions segment) and $8 million
of net charges (for our Technology Solutions segment) associated with various reductions in
workforce actions. Other workforce reduction charges also reflected related facility exit costs of
$4 million and $3 million in 2010 and 2009 for our Technology Solutions segment. Although these
actions do not constitute a restructuring plan, as defined under U.S. GAAP, they do represent
independent actions taken from time-to-time, as appropriate.
Total restructuring and other workforce reduction charges were recorded within our
consolidated statements of operations as follows: $5 million, $5 million and $7 million in cost of
sales in 2010, 2009 and 2008 and $17 million, $28 million and $20 million within operating
expenses.
5. Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Interest income |
|
$ |
16 |
|
|
$ |
31 |
|
|
$ |
89 |
|
Equity in earnings, net |
|
|
6 |
|
|
|
7 |
|
|
|
21 |
|
Gain on sale of investment |
|
|
17 |
|
|
|
24 |
|
|
|
|
|
Impairment of investments |
|
|
|
|
|
|
(63 |
) |
|
|
|
|
Other, net |
|
|
4 |
|
|
|
13 |
|
|
|
11 |
|
|
|
|
Total |
|
$ |
43 |
|
|
$ |
12 |
|
|
$ |
121 |
|
|
In October 2009, our Distribution Solutions segment sold its 50% equity interest in McKesson
Logistics Solutions L.L.C. (MLS), a Canadian logistics company, for a pre-tax gain of $17 million
or $14 million after-tax.
In July 2008, our Distribution Solutions segment sold its 42% equity interest in Verispan
L.L.C. (Verispan), a data analytics company, for a pre-tax gain of $24 million or $14 million
after-tax.
73
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We evaluate our investments for impairment when events or changes in circumstances indicate
that the carrying values of such investments may have experienced an other-than-temporary decline
in value. During the fourth quarter of 2009, we determined that the fair value of our interest in
Parata Systems, LLC (Parata) was lower than its carrying value and that such impairment was
other-than-temporary. Fair value was determined using a discounted cash flow analysis based on
estimated future results and market capitalization rates. We determined the impairment was
other-than-temporary based on our assessment of all relevant factors including deterioration in the
investees financial condition and weak market conditions. As a result, we recorded a pre-tax
impairment of $58 million ($55 million after-tax) on this investment, which is recorded within
other income, net in the consolidated statements of operations. Our investment in Parata is
accounted for under the equity method of accounting within our Distribution Solutions segment.
During the fourth quarter of 2009, we also recorded a pre-tax impairment of $5 million
($5 million after-tax) on another equity-held investment within our Distribution Solutions segment.
6. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Income from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
1,340 |
|
|
$ |
623 |
|
|
$ |
1,059 |
|
Foreign |
|
|
524 |
|
|
|
441 |
|
|
|
398 |
|
|
|
|
Total income from continuing
operations before income taxes |
|
$ |
1,864 |
|
|
$ |
1,064 |
|
|
$ |
1,457 |
|
|
The provision for income taxes related to continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
255 |
|
|
$ |
177 |
|
|
$ |
189 |
|
State and local |
|
|
25 |
|
|
|
(111 |
) |
|
|
59 |
|
Foreign |
|
|
44 |
|
|
|
35 |
|
|
|
22 |
|
|
|
|
Total current |
|
|
324 |
|
|
|
101 |
|
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
269 |
|
|
|
69 |
|
|
|
178 |
|
State and local |
|
|
13 |
|
|
|
62 |
|
|
|
16 |
|
Foreign |
|
|
(5 |
) |
|
|
9 |
|
|
|
4 |
|
|
|
|
Total deferred |
|
|
277 |
|
|
|
140 |
|
|
|
198 |
|
|
|
|
Income tax provision |
|
$ |
601 |
|
|
$ |
241 |
|
|
$ |
468 |
|
|
In 2009, we recorded a total income tax expense of $241 million, which included an income tax
benefit of $182 million related to the Average Wholesale Price (AWP) litigation charge described
in more detail in Financial Note 18, Other Commitments and Contingent Liabilities. The tax
benefit could change in the future depending on the resolution of the pending and expected claims.
In 2009, current income tax expense included $111 million of net income tax benefits for
discrete items of which, $87 million represents a non-cash benefit. These benefits primarily
relate to the recognition of previously unrecognized tax benefits and related accrued interest.
The recognition of these discrete items was primarily due to the lapsing of the statutes of
limitations.
74
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2008, the U.S. Internal Revenue Service (IRS) began its examination of our fiscal years
2003 through 2006. In 2009 and 2010, we received assessments from the Canada Revenue Agency
(CRA) for a total of $62 million related to transfer pricing for 2003, 2004 and 2005. We paid
the CRA assessments to stop the accrual of interest. We have appealed the assessment for 2003 and
have filed a notice of objection for 2004 and 2005. We believe that we have adequately provided
for any potential adverse results. In nearly all jurisdictions, the tax years prior to 2003 are no
longer subject to examination. We believe that we have made adequate provision for all remaining
income tax uncertainties.
In 2008, the IRS completed an examination of our consolidated income tax returns for 2000 to
2002 resulting in a signed Revenue Agent Report (RAR), which was subsequently approved by the
Joint Committee on Taxation. The IRS and the Company agreed to certain adjustments, primarily
related to transfer pricing and income tax credits. As a result of the approved RAR, we recognized
approximately $25 million of net federal and state income tax benefits in 2008.
Significant judgments and estimates are required in determining the consolidated income tax
provision. Although our major taxing jurisdictions are the U.S. and Canada, we are subject to
income taxes in numerous foreign jurisdictions. Annually, we file a federal consolidated income
tax return with the IRS and over 1,200 returns with various state and foreign jurisdictions. Our
income tax expense, deferred tax assets and liabilities reflect managements best assessment of
estimated current and future taxes to be paid.
The reconciliation between our effective tax rate on income from continuing operations and
statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Income tax provision at federal statutory rate |
|
$ |
652 |
|
|
$ |
372 |
|
|
$ |
510 |
|
State and local income taxes net of federal tax benefit |
|
|
25 |
|
|
|
18 |
|
|
|
43 |
|
Foreign tax rate differential |
|
|
(144 |
) |
|
|
(120 |
) |
|
|
(120 |
) |
Unrecognized tax benefits and settlements |
|
|
53 |
|
|
|
(21 |
) |
|
|
31 |
|
Tax credits |
|
|
(8 |
) |
|
|
(20 |
) |
|
|
(16 |
) |
Other, net |
|
|
23 |
|
|
|
12 |
|
|
|
20 |
|
|
|
|
Income tax provision |
|
$ |
601 |
|
|
$ |
241 |
|
|
$ |
468 |
|
|
At March 31, 2010, undistributed earnings of our foreign operations totaling $2.3 billion were
considered to be permanently reinvested. No deferred tax liability has been recognized for the
remittance of such earnings to the U.S. since it is our intention to utilize those earnings in the
foreign operations as well as to fund certain research and development activities for an indefinite
period of time, or to repatriate such earnings when it is tax efficient to do so. The
determination of the amount of deferred taxes on these earnings is not practicable because the
computation would depend on a number of factors that cannot be known until a decision to repatriate
the earnings is made.
75
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred tax balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Receivable allowances |
|
$ |
56 |
|
|
$ |
70 |
|
Deferred revenue |
|
|
107 |
|
|
|
170 |
|
Compensation and benefit related accruals |
|
|
349 |
|
|
|
274 |
|
AWP litigation accrual |
|
|
56 |
|
|
|
172 |
|
Loss and credit carryforwards |
|
|
481 |
|
|
|
529 |
|
Other |
|
|
235 |
|
|
|
357 |
|
|
|
|
Subtotal |
|
|
1,284 |
|
|
|
1,572 |
|
Less: valuation allowance |
|
|
(97 |
) |
|
|
(125 |
) |
|
|
|
Total assets |
|
$ |
1,187 |
|
|
$ |
1,447 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Basis difference for inventory valuation and other assets |
|
$ |
(1,363 |
) |
|
$ |
(1,286 |
) |
Basis difference for fixed assets and systems development costs |
|
|
(210 |
) |
|
|
(207 |
) |
Intangibles |
|
|
(209 |
) |
|
|
(238 |
) |
Other |
|
|
(63 |
) |
|
|
(158 |
) |
|
|
|
Total liabilities |
|
|
(1,845 |
) |
|
|
(1,889 |
) |
|
|
|
Net deferred tax liability |
|
$ |
(658 |
) |
|
$ |
(442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Current net deferred tax liability |
|
$ |
(975 |
) |
|
$ |
(695 |
) |
Long-term net deferred tax asset |
|
|
317 |
|
|
|
253 |
|
|
|
|
Net deferred tax liability |
|
$ |
(658 |
) |
|
$ |
(442 |
) |
|
We have federal, state and foreign income tax net operating loss carryforwards of
$122 million, $2.8 billion and $201 million. The federal and state net operating losses will
expire at various dates from 2011 through 2030. Substantially all of our foreign net operating
losses have indefinite lives. We believe that it is more likely than not that the benefit from
certain federal, state and foreign net operating loss carryforwards may not be realized. In
recognition of this risk, we have provided valuation allowances of $15 million and $45 million on
the deferred tax assets relating to these state and foreign net operating loss carryforwards. We
also have federal and state capital loss carryforwards of $40 million and $36 million. The federal
and state net capital losses will expire at various dates from 2012 through 2015. We believe that
it is more likely than not that the benefit from these capital loss carryforwards may not be
realized. In recognition of this risk, we have provided valuation allowances of $14 million and
$2 million.
We also have domestic income tax credit carryforwards of $222 million which are primarily
alternative minimum tax credit carryforwards that have an indefinite life. However, we believe
that it is more likely than not that the benefit from certain state tax credits of $2 million may
not be realized. In recognition of this risk, we have provided a valuation allowance of
$2 million. In addition, we have Canadian research and development credit carryforwards of
$14 million. The Canadian research and development credits will expire at various dates from 2018
to 2030.
76
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to our gross unrecognized tax benefits for
the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Unrecognized tax benefits at beginning of period |
|
$ |
526 |
|
|
$ |
496 |
|
|
$ |
465 |
|
Additions based on tax positions related to prior years |
|
|
50 |
|
|
|
77 |
|
|
|
|
|
Reductions based on tax positions related to prior years |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
Additions based on tax positions related to current year |
|
|
72 |
|
|
|
61 |
|
|
|
58 |
|
Reductions based on settlements |
|
|
(16 |
) |
|
|
(41 |
) |
|
|
(27 |
) |
Reductions based on the lapse of the applicable
statutes of limitations |
|
|
(1 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
Unrecognized tax benefits at end of period |
|
$ |
619 |
|
|
$ |
526 |
|
|
$ |
496 |
|
|
Of the total $619 million in unrecognized tax benefits at March 31, 2010, $396 million would
reduce income tax expense and the effective tax rate if recognized. During the next twelve months,
it is reasonably possible that audit resolutions and the expiration of statutes of limitations
could potentially reduce our unrecognized tax benefits by up to $23 million. However, this amount
may change because we continue to have ongoing negotiations with various taxing authorities
throughout the year.
We continue to report interest and penalties on tax deficiencies as income tax expense. At
March 31, 2010, before any tax benefits, our accrued interest on unrecognized tax benefits amounted
to $118 million. We recognized an income tax expense of $17 million, before any tax effect,
related to interest in our consolidated statements of operations during 2010. We have no material
amounts accrued for penalties.
7. Discontinued Operations
No charges for discontinued operations were incurred during 2010 and 2009. In 2008,
discontinued operations included $1 million from the Companys Acute Care business, which was sold
in 2007.
8. Earnings Per Common Share
Basic earnings per common share are computed by dividing net income by the weighted average
number of common shares outstanding during the reporting period. Diluted earnings per common share
are computed similar to basic earnings per common share except that it reflects the potential
dilution that could occur if dilutive securities or other obligations to issue common stock were
exercised or converted into common stock.
77
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The computations for basic and diluted earnings per common share from continuing and
discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share amounts) |
|
2010 |
|
2009 |
|
2008 |
|
Income from continuing operations |
|
$ |
1,263 |
|
|
$ |
823 |
|
|
$ |
989 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
Net income |
|
$ |
1,263 |
|
|
$ |
823 |
|
|
$ |
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
269 |
|
|
|
275 |
|
|
|
291 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
Restricted stock |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
Diluted |
|
|
273 |
|
|
|
279 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
4.70 |
|
|
$ |
2.99 |
|
|
$ |
3.40 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4.70 |
|
|
$ |
2.99 |
|
|
$ |
3.40 |
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4.62 |
|
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
|
|
|
(1) |
|
Certain computations may reflect rounding adjustments. |
Approximately 8 million, 5 million and 8 million stock options and restricted stock units
were excluded from the computations of diluted net earnings per common share in 2010, 2009 and 2008
as their exercise and grant-date price was higher than the Companys average stock price.
9. Receivables, Net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Customer accounts |
|
$ |
7,256 |
|
|
$ |
6,902 |
|
Other |
|
|
968 |
|
|
|
1,033 |
|
|
|
|
Total |
|
|
8,224 |
|
|
|
7,935 |
|
Allowances |
|
|
(149 |
) |
|
|
(161 |
) |
|
|
|
Net |
|
$ |
8,075 |
|
|
$ |
7,774 |
|
|
The allowances are primarily for estimated uncollectible accounts and sales returns to
vendors.
78
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
10. Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Land |
|
$ |
50 |
|
|
$ |
50 |
|
Building, machinery, equipment and other |
|
|
1,808 |
|
|
|
1,673 |
|
|
|
|
Total property, plant and equipment |
|
|
1,858 |
|
|
|
1,723 |
|
Accumulated depreciation |
|
|
(1,007 |
) |
|
|
(927 |
) |
|
|
|
Property, plant and equipment, net |
|
$ |
851 |
|
|
$ |
796 |
|
|
11. Goodwill and Intangible Assets, Net
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
Technology |
|
|
(In millions) |
|
Solutions |
|
Solutions |
|
Total |
|
Balance, March 31, 2008 |
|
$ |
1,672 |
|
|
$ |
1,673 |
|
|
$ |
3,345 |
|
Goodwill acquired, net of purchase price adjustments |
|
|
231 |
|
|
|
35 |
|
|
|
266 |
|
Goodwill written off related to the sale of a business |
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
Foreign currency translation adjustments and other |
|
|
(10 |
) |
|
|
(49 |
) |
|
|
(59 |
) |
|
|
|
Balance, March 31, 2009 |
|
$ |
1,869 |
|
|
$ |
1,659 |
|
|
$ |
3,528 |
|
Goodwill acquired, net of purchase price adjustments |
|
|
7 |
|
|
|
4 |
|
|
|
11 |
|
Acquisition accounting and other adjustments |
|
|
(26 |
) |
|
|
|
|
|
|
(26 |
) |
Foreign currency translation adjustments |
|
|
21 |
|
|
|
34 |
|
|
|
55 |
|
|
|
|
Balance, March 31, 2010 |
|
$ |
1,871 |
|
|
$ |
1,697 |
|
|
$ |
3,568 |
|
|
Information regarding intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Customer lists |
|
$ |
832 |
|
|
$ |
824 |
|
Technology |
|
|
190 |
|
|
|
187 |
|
Trademarks and other |
|
|
74 |
|
|
|
70 |
|
|
|
|
Gross intangibles |
|
|
1,096 |
|
|
|
1,081 |
|
Accumulated amortization |
|
|
(545 |
) |
|
|
(420 |
) |
|
|
|
Intangible assets, net |
|
$ |
551 |
|
|
$ |
661 |
|
|
Amortization expense of intangible assets was $121 million, $128 million and $107 million for
2010, 2009 and 2008. The weighted average remaining amortization periods for customer lists,
technology, trademarks and other intangible assets at March 31, 2010 were: 7 years, 2 years and 6
years. Estimated annual amortization expense of these assets is as follows: $112 million,
$106 million, $88 million, $76 million and $59 million for 2011 through 2015, and $110 million
thereafter. All intangible assets were subject to amortization as of March 31, 2010 and 2009.
79
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
12. Long-Term Debt and Other Financing
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
9.13% Series C Senior Notes due February, 2010 |
|
$ |
|
|
|
$ |
215 |
|
7.75% Notes due February, 2012 |
|
|
399 |
|
|
|
399 |
|
5.25% Notes due March, 2013 |
|
|
499 |
|
|
|
499 |
|
6.50% Notes due February, 2014 |
|
|
350 |
|
|
|
350 |
|
5.70% Notes due March, 2017 |
|
|
499 |
|
|
|
499 |
|
7.50% Notes due February, 2019 |
|
|
349 |
|
|
|
349 |
|
7.65% Debentures due March, 2027 |
|
|
175 |
|
|
|
175 |
|
ESOP related debt (see Financial Note 13) |
|
|
|
|
|
|
1 |
|
Other |
|
|
25 |
|
|
|
22 |
|
|
|
|
Total debt |
|
|
2,296 |
|
|
|
2,509 |
|
Less current portion |
|
|
(3 |
) |
|
|
(219 |
) |
|
|
|
Total long-term debt |
|
$ |
2,293 |
|
|
$ |
2,290 |
|
|
Long-Term Debt
On February 12, 2009, the Company issued 6.50% notes due February 15, 2014 (the 2014 Notes)
in an aggregate principal amount of $350 million and 7.50% notes due February 15, 2019 (the 2019
Notes) in an aggregate principal amount of $350 million. Interest is payable on February 15 and
August 15 of each year beginning on August 15, 2009. The 2014 Notes will mature on February 15,
2014 and the 2019 Notes will mature on February 15, 2019. The Company utilized net proceeds, after
discounts and offering expenses, of $693 million from the issuance of the 2014 Notes and 2019 Notes
for general corporate purposes.
On March 5, 2007, we issued 5.25% notes due March 1, 2013 (the 2013 Notes) in an aggregate
principal amount of $500 million and 5.70% notes due March 1, 2017 (the 2017 Notes, collectively
with the 2013 Notes, 2014 Notes, 2019 Notes, the Notes and each note constitutes a Series) in
an aggregate principal amount of $500 million for which interest is payable on March 1 and
September 1 of each year. The 2013 Notes will mature on March 1, 2013 and the 2017 Notes will
mature on March 1, 2017. We utilized net proceeds, after discounts and offering expenses, of
$990 million from the issuance of the 2013 Notes and 2017 Notes, together with cash on hand, to
repay outstanding interim indebtedness related to our January 2007 acquisition of Per-Se.
Each Series constitutes an unsecured and unsubordinated obligation of the Company and ranks
equally with all of the Companys existing and future unsecured and unsubordinated indebtedness
outstanding from time-to-time. Each Series is governed by an indenture common to all Notes and an
officers certificate specifying certain terms of each Series.
Upon 30 days notice to holders of a Series, we may redeem that Series at any time prior to
maturity, in whole or in part, for cash at redemption prices that include accrued and unpaid
interest and a make-whole premium, as specified in the indenture and officers certificate relating
to that Series. In the event of the occurrence of both (1) a change of control of the Company and
(2) a downgrade of a Series below an investment grade rating by each of Fitch Ratings, Moodys
Investors Service, Inc. and Standard & Poors Ratings Services within a specified period, an offer
will be made to purchase that Series from the holders at a price in cash equal to 101% of the then
outstanding principal amount of that Series, plus accrued and unpaid interest to, but not
including, the date of repurchase. The indenture and the related officers certificate for each
Series, subject to the exceptions and in compliance with the conditions as applicable, specify that
we may not incur liens, enter into sale and leaseback transactions or consolidate, merge or sell
all or substantially all of our assets. The indentures also contain customary events and default
provisions.
80
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In March 2010, we repaid our $215 million 9.13% Series C Senior Notes which had matured.
Accounts Receivable Sales Facility
In May 2009, we renewed our accounts receivable sales facility for an additional one year
period under terms similar to those previously in place. The renewed facility will expire in
mid-May 2010. Based on our existing accounts receivable sales facility agreement, we anticipate
that activity under this facility may, for U.S. GAAP purposes, be considered as a secured borrowing
rather than a sale under accounting standards that will become effective for us on April 1, 2010.
We anticipate renewing this facility before its expiration. The aggregate commitment of the
purchasers under this facility is $1.1 billion, although from time-to-time, the available amount
may be less than that amount based on concentration limits and receivable eligibility requirements.
Information regarding our outstanding balances related to our interests in accounts receivable
sold or qualifying receivables retained is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Receivables sold outstanding |
|
$ |
|
|
|
$ |
|
|
Receivables retained, net of allowance for doubtful accounts |
|
|
4,887 |
|
|
|
4,814 |
|
|
The following table summarizes the activity related to our interests in accounts receivable
sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Proceeds from accounts receivable sales |
|
$ |
|
|
|
$ |
5,780 |
|
|
$ |
1,075 |
|
Fees and charges (1) |
|
|
11 |
|
|
|
10 |
|
|
|
2 |
|
|
|
|
|
(1) |
|
Recorded in operating expenses in the consolidated statements of operations. |
The delinquency ratio for the qualifying receivables represented less than 1% of the
total qualifying receivables as of March 31, 2010 and March 31, 2009.
Revolving Credit Facility
We have a syndicated $1.3 billion five-year senior unsecured revolving credit facility, which
expires in June 2012. Borrowings under this credit facility bear interest based upon either a
Prime rate or the London Interbank Offering Rate. There were no borrowings under this facility in
2010 and $279 million for 2009. As of March 31, 2010 and 2009, there were no amounts outstanding
under this facility.
Commercial Paper
We issued and repaid commercial paper of nil and approximately $3.3 billion and $260 million
in 2010, 2009 and 2008. There were no commercial paper issuances outstanding at March 31, 2010 and
2009.
Debt Covenants
Our various borrowing facilities and long-term debt are subject to certain covenants. Our
principal debt covenant is our debt to capital ratio under our unsecured revolving credit facility,
which cannot exceed 56.5%. If we exceed this ratio, repayment of debt outstanding under the
revolving credit facility could be accelerated. As of March 31, 2010, this ratio was 23.4% and we
were in compliance with our other financial covenants.
81
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
13. Pension Benefits
We maintain a number of qualified and nonqualified defined pension benefit plans and defined
contribution plans for eligible employees.
Defined Pension Benefit Plans
Eligible U.S. employees who were employed by the Company prior to December 31, 1996 are
covered under the Company-sponsored defined benefit retirement plan. In 1997, we amended this plan
to freeze all plan benefits based on each employees plan compensation and creditable service
accrued to that date. The Company has made no annual contributions since this plan was frozen.
The benefits for this defined benefit retirement plan are based primarily on age of employees at
date of retirement, years of service and employees pay during the five years prior to retirement.
We also have defined benefit pension plans for eligible Canadian and United Kingdom employees as
well as an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives. We
also assumed a frozen qualified defined benefit plan through our acquisition of Per-Se
Technologies, Inc. (Per-Se) in 2007. The Per-Se plan was merged into our retirement plan in
2008. We adopted the measurement provisions of new accounting standards for benefit provisions in
the fourth quarter of 2009. As required, our defined benefit plan assets and obligations are now
measured as of the Companys fiscal year-end. We previously performed this measurement at December
31.
The net periodic expense for our pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Service costbenefits earned during the year |
|
$ |
4 |
|
|
$ |
6 |
|
|
$ |
7 |
|
Interest cost on projected benefit obligation |
|
|
35 |
|
|
|
33 |
|
|
|
31 |
|
Expected return on assets |
|
|
(24 |
) |
|
|
(39 |
) |
|
|
(39 |
) |
Amortization of unrecognized actuarial loss,
prior service costs and net transitional
obligation |
|
|
25 |
|
|
|
10 |
|
|
|
11 |
|
Settlement charges and other |
|
|
|
|
|
|
1 |
|
|
|
4 |
|
|
|
|
Net periodic pension expense |
|
$ |
40 |
|
|
$ |
11 |
|
|
$ |
14 |
|
|
The projected unit credit method is utilized in measuring net periodic pension expense over
the employees service life for the U.S. pension plans. Unrecognized actuarial losses exceeding
10% of the greater of the projected benefit obligation or the market value of assets are amortized
straight-line over the average remaining future service periods.
82
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations and plan assets for our pension plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 Month |
|
|
Year Ended |
|
Period Ended |
|
|
March |
|
March |
(In millions) |
|
31, 2010 |
|
31, 2009 |
|
Change in benefit obligations |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
456 |
|
|
$ |
543 |
|
Measurement date adjustment adoption of new standards |
|
|
|
|
|
|
(3 |
) |
Service cost |
|
|
4 |
|
|
|
6 |
|
Interest cost |
|
|
35 |
|
|
|
33 |
|
Actuarial loss (gain) |
|
|
132 |
|
|
|
(65 |
) |
Benefit payments |
|
|
(38 |
) |
|
|
(32 |
) |
Foreign exchange impact and other |
|
|
4 |
|
|
|
(26 |
) |
|
|
|
Benefit obligation at end of period (1) |
|
$ |
593 |
|
|
$ |
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period |
|
$ |
309 |
|
|
$ |
501 |
|
Measurement date adjustment adoption of new standards |
|
|
|
|
|
|
(9 |
) |
Actual return (loss) on plan assets |
|
|
97 |
|
|
|
(138 |
) |
Employer and participant contributions |
|
|
18 |
|
|
|
15 |
|
Benefits paid |
|
|
(38 |
) |
|
|
(32 |
) |
Foreign exchange impact and other |
|
|
5 |
|
|
|
(28 |
) |
|
|
|
Fair value of plan assets at end of period |
|
$ |
391 |
|
|
$ |
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period (2) |
|
$ |
(202 |
) |
|
$ |
(147 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized on the balance sheet |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
|
|
|
$ |
5 |
|
Current liabilities |
|
|
(4 |
) |
|
|
(10 |
) |
Noncurrent liabilities |
|
|
(198 |
) |
|
|
(142 |
) |
|
|
|
Total |
|
$ |
(202 |
) |
|
$ |
(147 |
) |
|
|
|
|
(1) |
|
The benefit obligation is the projected benefit obligation. |
|
(2) |
|
The unfunded status of our plans at March 31, 2010 and 2009 was primarily due to the decrease
in the fair value of our plan assets as a result of the volatility in the financial markets.
The 2010 funded status also reflects the unfavorable effect from the reduction in discount
rates. |
The accumulated benefit obligations for our pension plans were $574 million at March 31,
2010 and $441 million at March 31, 2009. The following table provides the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for all our pension plans
with an accumulated benefit obligation in excess of plan assets.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Projected benefit obligation |
|
$ |
503 |
|
|
$ |
403 |
|
Accumulated benefit obligation |
|
|
499 |
|
|
|
395 |
|
Fair value of plan assets |
|
|
307 |
|
|
|
251 |
|
|
83
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amounts recognized in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Net actuarial loss |
|
$ |
253 |
|
|
$ |
215 |
|
Prior service cost |
|
|
4 |
|
|
|
8 |
|
Net transition obligation |
|
|
1 |
|
|
|
1 |
|
|
|
|
Total |
|
$ |
258 |
|
|
$ |
224 |
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss
(income) during the reporting periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Net actuarial loss (gain) |
|
$ |
59 |
|
|
$ |
121 |
|
|
$ |
(2 |
) |
Prior service credit |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
(23 |
) |
|
|
(10 |
) |
|
|
(5 |
) |
Prior service cost |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
Total recognized in net periodic
benefit cost and other comprehensive
loss (income) |
|
$ |
32 |
|
|
$ |
109 |
|
|
$ |
(9 |
) |
|
We expect to amortize $1 million of prior service cost and $26 million of actuarial loss for
the pension plans from stockholders equity to pension expense in 2011. Comparable 2010 amounts
were $2 million and $23 million.
Projected benefit obligations relating to our unfunded U.S. plans were $137 million and
$110 million at March 31, 2010 and 2009. Pension obligations are funded based on the
recommendations of independent actuaries.
Expected benefit payments for our pension plans are as follows: $31 million, $36 million,
$39 million, $31 million and $126 million for 2011 to 2015 and $188 million for 2016 through 2020.
Expected benefit payments are based on the same assumptions used to measure the benefit obligations
and include estimated future employee service. Expected contributions to be made for our pension
plans are $7 million for 2011.
Weighted-average assumptions used to estimate the net periodic pension expense and the
actuarial present value of benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
Net periodic pension expense |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
7.68 |
% |
|
|
5.34 |
% |
|
|
5.33 |
% |
Rate of increase in compensation |
|
|
3.62 |
|
|
|
3.93 |
|
|
|
3.85 |
|
Expected long-term rate of return on plan assets |
|
|
7.90 |
|
|
|
7.75 |
|
|
|
7.53 |
|
Benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
5.33 |
% |
|
|
7.74 |
% |
|
|
6.18 |
% |
Rate of increase in compensation |
|
|
3.75 |
|
|
|
3.93 |
|
|
|
4.01 |
|
|
Our U.S. defined benefit pension plan liabilities are valued using a discount rate based on a
yield curve developed from a portfolio of high quality corporate bonds rated AA or better whose
maturities are aligned with the expected benefit payments of our plans. For March 31, 2010, we
used a weighted average discount rate of 5.29%, which represents a decrease of 266 basis points
from our 2009 weighted-average discount rate of 7.95%.
84
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Sensitivity to changes in the weighted-average discount rate for our U. S. pension plans is as
follows:
|
|
|
|
|
|
|
|
|
|
|
One Percentage Point |
|
One Percentage Point |
(In millions) |
|
Increase |
|
Decrease |
|
Increase (decrease) on projected benefit obligation |
|
$ |
(37 |
) |
|
$ |
44 |
|
Increase (decrease) on net periodic pension cost |
|
|
(3 |
) |
|
|
3 |
|
|
Plan Assets
Investment Strategy: The overall objective for McKessons pension plan assets is to generate
long-term investment returns consistent with capital preservation and prudent investment practices,
with a diversification of asset types and investment strategies. Periodic adjustments are made to
provide liquidity for benefit payments and to rebalance plan assets to their target allocations.
The target allocations for plan assets are 59% equity securities, 33% fixed income securities
and 8% to all other types of investments including cash and cash equivalents. Equity securities
include primarily exchange-traded common stock and preferred stock of companies from diversified
industries. Fixed income securities include corporate bonds of companies from diversified
industries, government securities, mortgage-backed securities, asset-backed securities and other.
Other types of investments include investments in real estate and venture capital funds, hedge
funds and cash and cash equivalents. Portions of the equity, fixed income and cash and
cash-equivalent investments are held in commingled funds.
We develop our expected long-term rate of return assumption based on the historical experience
of our portfolio and review of projected performance by asset class of broad, publicly traded
equity and fixed-income indices. Our target asset allocation was determined based on the risk
tolerance characteristics of the plans and at times may be adjusted to achieve our overall
investment objectives.
Fair Value Measurements: The following table represents our pension plan assets as of March
31, 2010, using the fair value hierarchy by asset class. The fair value hierarchy has three levels
based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values
determined based on unadjusted quoted prices in active markets for identical assets. Level 2
refers to fair values estimated using significant other observable inputs and Level 3 includes fair
values estimated using significant non-observable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Cash and cash equivalents |
|
$ |
10 |
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
27 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock |
|
|
104 |
|
|
|
1 |
|
|
|
|
|
|
|
105 |
|
Equity commingled funds |
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
126 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
23 |
|
Corporate bonds |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
Mortgage-backed securities |
|
|
|
|
|
|
17 |
|
|
|
1 |
|
|
|
18 |
|
Asset-backed securities and other |
|
|
|
|
|
|
15 |
|
|
|
1 |
|
|
|
16 |
|
Fixed income commingled funds |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
22 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and venture capital funds |
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
Hedge funds |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
Total |
|
$ |
114 |
|
|
$ |
262 |
|
|
$ |
26 |
|
|
$ |
402 |
|
|
|
|
|
|
|
|
Receivables (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Payables (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
391 |
|
|
|
|
|
(1) |
|
Represents pending trades at March 31, 2010. |
85
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Cash and cash equivalents Cash and cash equivalents consist of a short-term investment
fund that maintains daily liquidity and has a constant unit value of $1.00. The fund also invests
in short-term domestic fixed income securities and other securities with debt-like characteristics
emphasizing short-term maturities and quality. Cash and cash equivalents are generally classified
as Level 1 investments. Some cash and cash equivalents are held in commingled funds, which have a
daily net value derived from quoted prices for the underlying securities in active markets; these
are classified as Level 2 investments.
Common and preferred stock This investment class consists of common and preferred shares
issued by U.S. and non-U.S. corporations. Common shares are traded actively on exchanges and price
quotes are readily available. Preferred shares are not actively traded. Holdings of common shares
are generally classified as Level 1 investments. Preferred shares are classified as Level 2
investments.
Equity commingled funds Some equity securities consisting of common and preferred stock are
held in commingled funds, which have daily net asset values derived from quoted prices for the
underlying securities in active markets; these are classified as Level 2 investments.
Government securities This investment class consists of bonds and debentures issued by
central governments or federal agencies. Multiple prices and price types are obtained from pricing
vendors whenever possible, which enables cross-provider validations. We have obtained an
understanding of how these prices are derived, including the nature and observability of the inputs
used in deriving such prices. These securities are classified as Level 2 investments.
Corporate bonds This investment class consists of bonds and debentures issued by
corporations. Multiple prices and price types are obtained from pricing vendors whenever possible,
which enables cross-provider validations. We have obtained an understanding of how these prices
are derived, including the nature and observability of the inputs used in deriving such prices.
When inputs are observable, securities are classified as Level 2 investments; otherwise, securities
are classified as Level 3 investments.
Mortgage-backed securities This investment class consists of debt obligations secured by a
mortgage or collection of mortgages. Multiple prices and price types are obtained from pricing
vendors whenever possible, which enables cross-provider validations. We have obtained an
understanding of how these prices are derived, including the nature and observability of the inputs
used in deriving such prices. When inputs are observable, securities are classified as Level 2
investments; otherwise, securities are classified as Level 3 investments.
Asset-backed securities and other This investment class consists of debt obligations secured
by an asset or collection of assets. Multiple prices and price types are obtained from pricing
vendors whenever possible, which enables cross-provider validations. We have obtained an
understanding of how these prices are derived, including the nature and observability of the inputs
used in deriving such prices. When inputs are observable, securities are classified as Level 2
investments; otherwise, securities are classified as Level 3 investments.
Fixed income commingled funds Some of the fixed income securities are held in commingled
funds, which have daily net asset values derived from the underlying securities; these are
classified as Level 2 investments.
Real estate and venture capital funds The value of the real estate funds is reported by the
fund manager and is based on a valuation of the underlying properties. Inputs used in the
valuation include items such as cost, discounted future cash flows, independent appraisals and
market based comparable data. The real estate funds are classified as Level 3 investments. The
real estate fund is in the process of redemption. However, redemptions are restricted by the
funds liquidity. The plans also have an interest in venture capital funds structured as limited
partnerships that invest in privately-held companies. Due to the private nature of the partnership
investments, pricing inputs are not readily observable. Asset valuations are developed by the
general partners that manage the partnerships. These valuations are based on proprietary
appraisals, application of public market multiples to private company cash flows, utilization of
market transactions that provide valuation information for comparable companies and other methods.
Holdings of limited partnerships pertaining to venture capital investments are classified as
Level 3.
86
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Hedge funds The hedge funds are invested in fund-of-fund structures and consist of multiple
investments in interest and currency funds designed to hedge the risk of rate fluctuations. Given
the complex nature of valuation and the broad spectrums of investments, the hedge funds are
classified as Level 3 investments.
The following table represents a reconciliation of Level 3 plan assets held during the year
ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate and |
|
|
|
|
|
|
|
|
Venture |
|
|
|
|
|
|
(In millions) |
|
Capital Funds |
|
Hedge Funds |
|
Other |
|
Total |
|
Balance at March 31, 2009 |
|
$ |
25 |
|
|
$ |
5 |
|
|
$ |
2 |
|
|
$ |
32 |
|
Unrealized (loss) on plan assets still held |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
Balance at March 31, 2010 |
|
$ |
19 |
|
|
$ |
5 |
|
|
$ |
2 |
|
|
$ |
26 |
|
|
Concentration of Credit Risk: We evaluated our pension plans asset portfolios for the
existence of significant concentrations of credit risk as of March 31, 2010. Types of
concentrations that were evaluated include investment funds that represented 10% or more of the
pension plans net assets. As of March 31, 2010, 10% of our plan assets is comprised of Bartram
International Fund, which holds only actively traded stock.
Other Defined Benefit Plans
Under various U.S. bargaining unit labor contracts, we make payments into multi-employer
pension plans established for union employees. We are liable for a proportionate part of the
plans unfunded vested benefit upon our withdrawal from the plan; however, information regarding
the relative position of each employer with respect to the actuarial present value of accumulated
benefits and net assets available for benefits is not available. Contributions to the plans and
amounts accrued were not material for the years ended March 31, 2010, 2009 and 2008.
Defined Contribution Plans
We have a contributory profit sharing investment plan (PSIP) for U.S. employees not covered
by collective bargaining arrangements. Eligible employees may contribute to the PSIP up to 20% of
their monthly eligible compensation for pre-tax contributions and up to 67% of compensation for
catch-up contributions not to exceed IRS limits. The Company makes matching contributions in an
amount equal to 100% of the employees first 3% of pay contributed and 50% for the next 2% of pay
contributed. The Company also may make an additional annual matching contribution for each plan
year to enable participants to receive a full match based on their annual limit, effective 2008.
Prior to 2009, the Company provided for the PSIP contributions primarily with its common shares
through its leveraged employee stock ownership plan (ESOP).
The ESOP had purchased an aggregate of 24 million shares of the Companys common stock since
its inception. These purchases were financed by 10 to 20 year loans from or guaranteed by us. At
March 31, 2009, the ESOPs outstanding borrowing was reported as short-term debt of the Company and
the related receivables from the ESOP were shown as a reduction of stockholders equity. At March
31, 2010, there were no outstanding ESOP loans nor the related receivables from the ESOP as the
ESOP fully repaid the loans during 2010. The loans were repaid by the ESOP from interest earnings
on cash balances and common dividends on unallocated shares and Company cash contributions. The
ESOP loan maturities and rates were identical to the terms of related Company borrowings. Stock
was made available from the ESOP based on debt service payments on ESOP borrowings. ESOP expense
and other contribution expense, including interest expense on ESOP debt, was $1 million,
$53 million and $13 million in 2010, 2009 and 2008. ESOP expense for 2010 was negligible, as we
did not make additional contributions to the PSIP or ESOP, as discussed in the paragraph below.
ESOP expense for 2008 was significantly lower than 2009 due to the utilization of lower cost basis
shares in the ESOP to fund the Companys matching contributions. Approximately 1 million shares of
common stock were allocated to plan participants in 2008. In 2009, the Company made contributions
primarily in cash or with the issuance of treasury shares. At March 31, 2010, substantially all of
the 24 million common shares had been allocated to plan participants. As a result, we will need to
fund most of our future PSIP contributions with cash or treasury shares.
87
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The McKesson Corporation PSIP is a member of the settlement class in the Consolidated
Securities Litigation Action. On April 27, 2009, the court issued an order approving the
distribution of the settlement funds. On October 9, 2009, the PSIP received approximately
$119 million of the Consolidated Securities Litigation Action proceeds. Approximately $42 million
of the proceeds were attributable to the allocated shares of McKesson common stock owned by the
PSIP participants during the Consolidated Securities Litigation Action class-holding period and
were allocated to the respective participants on that basis in the third quarter of 2010.
Approximately $77 million of the proceeds were attributable to the unallocated shares (the
Unallocated Proceeds) of McKesson common stock owned by the PSIP in an ESOP suspense account. In
accordance with the plan terms, the PSIP distributed all of the Unallocated Proceeds to current
PSIP participants after the close of the plan year in April 2010. The receipt of the Unallocated
Proceeds by the PSIP was reimbursement for the loss in value of the Companys common stock held by
the PSIP in its ESOP suspense account during the Consolidated Securities Litigation Action
class-holding period and was not a contribution made by the Company to the PSIP or ESOP.
Accordingly, there were no accounting consequences to the Companys financial statements relating
to the receipt of the Unallocated Proceeds by the PSIP.
PSIP expense by segment for the last three years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Distribution Solutions |
|
$ |
|
|
|
$ |
23 |
|
|
$ |
5 |
|
Technology Solutions |
|
|
1 |
|
|
|
28 |
|
|
|
7 |
|
Corporate |
|
|
|
|
|
|
2 |
|
|
|
1 |
|
|
|
|
PSIP expense |
|
$ |
1 |
|
|
$ |
53 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (1) |
|
$ |
|
|
|
$ |
12 |
|
|
$ |
3 |
|
Operating expenses |
|
|
1 |
|
|
|
41 |
|
|
|
10 |
|
|
|
|
PSIP expense |
|
$ |
1 |
|
|
$ |
53 |
|
|
$ |
13 |
|
|
|
|
|
(1) |
|
Amounts recorded to cost of sales pertain solely to our McKesson Technology Solutions
segment. |
14. Postretirement Benefits
We maintain a number of postretirement benefits, primarily consisting of healthcare and life
insurance (welfare) benefits, for certain eligible U.S. employees. Eligible employees consist of
those who retired before March 31, 1999 and those who retired after March 31, 1999, but were an
active employee as of that date, after meeting other age-related criteria. We also provide
postretirement benefits for certain U.S. executives. We adopted the measurement provisions of new
accounting standards for postretirement plans in the fourth quarter of 2009. As required, our
defined benefit plan obligations are now measured as of the Companys fiscal year-end. We
previously performed this measurement at December 31.
The net periodic expense (income) for our postretirement welfare benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Service costbenefits earned during the year |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
Interest cost on projected benefit obligation |
|
|
9 |
|
|
|
10 |
|
|
|
10 |
|
Amortization of unrecognized actuarial loss
(gain) and prior service costs |
|
|
(25 |
) |
|
|
(14 |
) |
|
|
4 |
|
|
|
|
Net periodic postretirement expense (income) |
|
$ |
(15 |
) |
|
$ |
(3 |
) |
|
$ |
16 |
|
|
88
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations for our postretirement welfare plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 Month |
|
|
Year Ended |
|
Period Ended |
|
|
March |
|
March |
(In millions) |
|
31, 2010 |
|
31, 2009 |
|
Change in benefit obligations |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
133 |
|
|
$ |
157 |
|
Measurement date adjustment adoption
of new standards |
|
|
|
|
|
|
3 |
|
Service cost |
|
|
1 |
|
|
|
1 |
|
Interest cost |
|
|
9 |
|
|
|
10 |
|
Plan amendments and other |
|
|
|
|
|
|
6 |
|
Actuarial loss (gain) |
|
|
26 |
|
|
|
(30 |
) |
Benefit payments |
|
|
(15 |
) |
|
|
(14 |
) |
|
|
|
Benefit obligation at end of period |
|
$ |
154 |
|
|
$ |
133 |
|
|
The components of the amount recognized in accumulated other comprehensive income for the
Companys other postretirement plans at March 31, 2010 and 2009 were net actuarial gain of
$1 million and $52 million and net prior service credit of $2 million and $2 million. Other
changes in benefit obligations recognized in other comprehensive income were net actuarial loss of
$51 million for 2010 and net actuarial gain of $12 million and $33 million for 2009 and 2008.
We estimate that the amortization of the actuarial gain from stockholders equity to other
postretirement expense in 2011 will be $10 million ($25 million in 2010). The decrease in the gain
is due to completion of amortization of the 2007 actuarial gain in 2010 and a decrease in the
discount rate in 2011.
Other postretirement benefits are funded as claims are paid. Expected benefit payments for
our postretirement welfare benefit plans, net of expected Medicare
subsidy receipts of $2 million annually,
are as follows: $14 million annually for 2011 to 2015 and $63 million cumulatively for 2016 through
2020. Expected benefit payments are based on the same assumptions used to measure the benefit
obligations and include estimated future employee service. Expected contributions to be made for
our postretirement welfare benefit plans are $15 million for 2011.
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were
7.86%, 6.19% and 5.78% for 2010, 2009 and 2008. Weighted-average discount rates for the actuarial
present value of benefit obligations were 5.33%, 7.86% and 6.19% for 2010, 2009 and 2008.
Actuarial gain or loss for the postretirement welfare benefit plan is amortized to income or
expense over a three-year period. The assumed healthcare cost trends used in measuring the
accumulated postretirement benefit obligation were 8.5% and 9% for prescription drugs, 7.5% and 7%
for medical and 6% for dental in 2010 and 2009. The healthcare cost trend rate assumption has a
significant effect on the amounts reported. For 2010, 2009 and 2008, a one-percentage-point
increase or decrease in the assumed healthcare cost trend rate would impact total service and
interest cost components by approximately $1 million to $2 million and the postretirement benefit
obligation by approximately $9 million to $8 million.
89
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
15. Financial Instruments and Hedging Activities
At March 31, 2010 and 2009, the carrying amounts of cash and cash equivalents, restricted
cash, marketable securities, receivables, drafts and accounts payable and other current liabilities
approximated their estimated fair values because of the short maturity of these financial
instruments. All highly liquid debt instruments purchased with original maturity of three months
or less at the date of acquisition are included in cash and cash equivalents. Included in cash and
cash equivalents at March 31, 2010 and 2009, are money market fund investments of $2.3 billion and
$1.7 billion, which are reported at fair value. The fair value of these investments was determined
by using quoted prices for identical investments in active markets, which are considered to be
Level 1 inputs under the fair value measurements and disclosures guidance. The carrying value of
all other cash equivalents approximates fair value due to their relatively short-term nature.
The carrying amount and estimated fair value of our long-term debt and other financing was
$2.3 billion and $2.5 billion at March 31, 2010 and $2.5 billion each at March
31, 2009. The estimated fair value of our long-term debt and other financing was determined using
quoted market prices and other inputs that were derived from available market information and may
not be representative of actual values that could have been realized or that will be realized in
the future.
In the normal course of business, we are exposed to interest rate changes and foreign currency
fluctuations. We limit these risks through the use of derivatives such as interest rate swaps and
forward foreign exchange contracts. In accordance with our policy, derivatives are only used for
hedging purposes. We do not use derivatives for trading or speculative purposes. The volume of
activity related to derivative financial instruments was not material for 2010, 2009 and 2008.
16. Lease Obligations
We lease facilities and equipment almost solely under operating leases. At March 31, 2010,
future minimum lease payments required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year for years ending March 31 are:
|
|
|
|
|
|
|
Noncancellable |
|
|
|
Operating |
|
(In millions) |
|
Leases |
|
|
2011 |
|
$ |
106 |
|
2012 |
|
|
85 |
|
2013 |
|
|
55 |
|
2014 |
|
|
38 |
|
2015 |
|
|
29 |
|
Thereafter |
|
|
50 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
363 |
|
|
Rental expense under operating leases was $154 million, $146 million and $149 million in 2010,
2009 and 2008. We recognize rent expense on a straight-line basis over the term of the lease,
taking into account, when applicable, lessor incentives for tenant improvements, periods where no
rent payment is required and escalations in rent payments over the term of the lease. Deferred
rent is recognized for the difference between the rent expense recognized on a straight-line basis
and the payments made per the terms of the lease. Remaining terms for facilities leases generally
range from one to seven years, while remaining terms for equipment leases range from one to three
years. Most real property leases contain renewal options (generally
for five-year increments) and
provisions requiring us to pay property taxes and operating expenses in excess of base period
amounts. Sublease rental income was not material for any period presented.
90
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
17. Financial Guarantees and Warranties
Financial Guarantees
We have agreements with certain of our customers financial institutions under which we have
guaranteed the repurchase of inventory (primarily for our Canadian business) at a discount in the
event these customers are unable to meet certain obligations to those financial institutions.
Among other requirements, these inventories must be in resalable condition. The inventory
repurchase agreements mostly range from one to two years. Customer guarantees range from one to
five years and were primarily provided to facilitate financing for certain customers. The majority
of our other customer guarantees are secured by certain assets of the customer. We also have an
agreement with one software customer that, under limited circumstances, may require us to secure
standby financing. Because the amount of the standby financing is not explicitly stated, the
overall amount of this guarantee cannot reasonably be estimated. At March 31, 2010, the maximum
amounts of inventory repurchase guarantees and other customer guarantees were $124 million and
$17 million, none of which had been accrued.
At March 31, 2010, we had commitments of $2 million of cash contributions to our equity-held
investments, for which no amounts had been accrued and a loan commitment of $5 million to an
equity-held investment, of which $2 million had been funded and is included under other assets in
our consolidated balance sheet.
The expirations of the above noted financial guarantees and commitments are as follows:
$64 million, $24 million, $1 million, nil and $6 million from 2011 through 2015 and $51 million
thereafter.
In addition, at March 31, 2010, our banks and insurance companies have issued $111 million of
standby letters of credit and surety bonds, which were issued on our behalf mostly related to our
customer contracts and in order to meet the security requirements for statutory licenses and
permits, court and fiduciary obligations and our workers compensation and automotive liability
programs.
Our software license agreements generally include certain provisions for indemnifying
customers against liabilities if our software products infringe a third partys intellectual
property rights. To date, we have not incurred any material costs as a result of such
indemnification agreements and have not accrued any liabilities related to such obligations.
In conjunction with certain transactions, primarily divestitures, we may provide routine
indemnification agreements (such as retention of previously existing environmental, tax and
employee liabilities) whose terms vary in duration and often are not explicitly defined. Where
appropriate, obligations for such indemnifications are recorded as liabilities. Because the
amounts of these indemnification obligations often are not explicitly stated, the overall maximum
amount of these commitments cannot be reasonably estimated. Other than obligations recorded as
liabilities at the time of divestiture, we have historically not made significant payments as a
result of these indemnification provisions.
Warranties
In the normal course of business, we provide certain warranties and indemnification protection
for our products and services. For example, we provide warranties that the pharmaceutical and
medical-surgical products we distribute are in compliance with the Food, Drug and Cosmetic Act and
other applicable laws and regulations. We have received the same warranties from our suppliers,
which customarily are the manufacturers of the products. In addition, we have indemnity
obligations to our customers for these products, which have also been provided to us from our
suppliers, either through express agreement or by operation of law.
91
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We also provide warranties regarding the performance of software and automation products we
sell. Our liability under these warranties is to bring the product into compliance with previously
agreed upon specifications. For software products, this may result in additional project costs,
which are reflected in our estimates used for the percentage-of-completion method of accounting for
software installation services within these contracts. In addition, most of our customers who
purchase our software and automation products also purchase annual maintenance agreements.
Revenues from these maintenance agreements are recognized on a straight-line basis over the
contract period and the cost of servicing product warranties is charged to expense when claims
become estimable. Accrued warranty costs were not material to the consolidated balance sheets.
18. Other Commitments and Contingent Liabilities
In addition to commitments and obligations in the ordinary course of business, we are subject
to various claims, other 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. We record a provision for a liability when management believes that it is both probable
that a liability has been incurred and the amount of the loss can be reasonably estimated. We
believe we have made adequate provisions for any such matters. Management reviews these provisions
at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements,
rulings, advice of legal counsel and other information and events pertaining to a particular case.
Because litigation outcomes are inherently unpredictable, these decisions often involve a series of
complex assessments by management about future events that can rely heavily on estimates and
assumptions and it is possible that the ultimate cost of these matters could impact our earnings,
either negatively or positively, in the period of their resolution.
We are party to the significant legal proceedings described below. Based on our experience,
we believe that any damage amounts claimed in the specific matters discussed below are not
meaningful indicators of our potential liability. We believe that we have valid defenses to these
legal proceedings and are defending the matters vigorously. Nevertheless, the outcome of any
litigation is inherently uncertain. We are currently unable to estimate the remaining possible
losses in these unresolved legal proceedings. Should any one or a combination of more than one of
these proceedings be successful, or should we determine to settle any or a combination of these
matters, we may be required to pay substantial sums, become subject to the entry of an injunction
or be forced to change the manner in which we operate our business, which could have a material
adverse impact on our financial position or results of operations.
I. Accounting Litigation
Following the announcements by McKesson in April, May and July of 1999 that McKesson had
determined that certain software sales transactions in its Information Solutions segment, formerly
HBO & Company, Inc. (HBOC) and later known as McKesson Information Solutions LLC, were improperly
recorded as revenue and reversed, numerous lawsuits were filed against McKesson, HBOC, certain of
McKessons and HBOCs current and former officers or directors, and other defendants. Although almost all of these cases (collectively the Securities Litigation) have now been resolved, certain matters remain pending as more fully described below. On January 12, 2005, we announced that we reached an agreement to settle the previously-reported action in the Northern District of California
captioned: In re McKesson HBOC, Inc. Securities Litigation, (No. C-99-20743 RMW) (the Consolidated Securities Litigation Action).
The last two Securities Litigation lawsuits pending against the Company are Holcombe
T. Green and HTG Corp. v. McKesson Corporation, et al. (Georgia State Court, Fulton County, Case
No. 06-VS-096767-D) and Hall Family Investments, L.P. v. McKesson Corporation, et al. (Georgia
State Court, Fulton County, Case No. 06-VS-096763-F). Plaintiffs in those matters allege common
law fraud and deceit against the Company and certain of HBOCs former officers. In addition,
plaintiff Green seeks indemnification for attorneys fees that he allegedly incurred in connection
with a class action lawsuit, now settled, which was filed on behalf of participants in the McKesson
Corporation Profit Sharing Investment Plan against the Company and Green, among others. In the
fraud and deceit actions, plaintiffs seek actual and punitive damages, attorneys fees and costs of
suit in amounts unspecified in the complaint.
92
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company and HBOC answered the complaints in each of these actions, generally denying the
allegations and any liability to plaintiffs. In April 2007, we and other defendants filed motions
for summary judgment in both actions, arguing, in part, that plaintiffs could not as a matter of
law prove the materiality elements of their fraud and deceit causes of action. On December 13,
2007, the trial judge denied those motions. On January 3, 2008, McKesson appealed those rulings to
the Georgia Court of Appeals. On July 14, 2009, the Georgia Court of Appeals issued its opinion,
ruling as a matter of law that plaintiffs could not prove the materiality elements of their claims,
and further ruling that the trial court committed error in denying the defendants motions for
summary judgment. On July 23, 2009, plaintiffs petitioned the Georgia Supreme Court to take appeals
from the Georgia Court of Appeals decision. On October 19, 2009, the Georgia Supreme Court refused
to take those appeals, and on December 15, 2009, the Georgia Supreme Court denied plaintiffs
petition for reconsideration of its October 19, 2009, order. The Georgia Supreme Court remanded
both cases to the Georgia Court of Appeals, which in turn remanded them to the trial court with
instructions to enter judgment in favor of McKesson and other defendants as provided in the Court
of Appeals July 14, 2009, decision. The only remaining matters to be decided in these actions,
the claim of individual plaintiff Green for indemnity relating to his defense in an unrelated
action and fees and costs in both actions, were resolved in a settlement dated April 28, 2010, and
a dismissal of these two actions with prejudice will be filed in May 2010.
II. Average Wholesale Price Litigation
The following matters involve a drug reimbursement benchmark referred to as the AWP utilized
by some public and private payors to calculate at least some portion of the amount a pharmacy will
be reimbursed for dispensing a covered branded drug.
A. Private Payor AWP Actions
On June 2, 2005, a civil class action complaint was filed against the Company in the United
States District Court, District of Massachusetts, New England Carpenters Health Benefits Fund, et
al. v. First DataBank, Inc. and McKesson Corporation (Civil Action No. 1:05-CV-11148-PBS) (the
Private Payor RICO Action). Plaintiffs are four health benefit plans. The complaint alleges
that in late 2001 and early 2002 the Company and co-defendant First DataBank, Inc. (FDB)
conspired to improperly raise the published AWPs for certain prescription drugs, and that this
alleged conduct resulted in higher drug reimbursement payments by plaintiffs and others similarly
situated. Plaintiffs purport to represent a class of third party payors and consumers who paid any
portion of the price of certain prescription drugs to the extent their portion was based upon the
AWPs published by FDB during the period January 1, 2002, to March 15, 2005.
The complaint purports to state claims against the Company based on the federal Racketeer
Influenced and Corrupt Organizations Act (RICO,) 18 U.S.C. § 1962(c); Californias Business and
Professions Code §§ 17200 and 17500 and common law civil conspiracy. The complaint also alleges
two additional claims against defendant FDB only for violation of Californias Consumers Legal
Remedies Act, California Civil Code § 1750 and for common law negligent misrepresentation.
Plaintiffs seek injunctive relief, as well as compensatory and treble damages, attorneys fees and
costs.
On July 21, 2006, the plaintiffs filed a First Amended Complaint (FAC), asserting
essentially the same claims against the Company and adding an additional named plaintiff. The FAC
also included an alternative count under the consumer protection statutes of numerous states if the
court determined that California law was not applicable to the entire class. The FAC modified the
definition of the alleged class to include third party payors (but not consumers) whose
pharmaceutical payments for certain prescription drugs were based upon AWP (not limited to the AWP
published by FDB) during the time period August 1, 2001, to March 15, 2005.
93
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On November 30, 2006, plaintiffs filed a Second Amended Complaint (SAC) which added a class
of consumers that made percentage co-payments in addition to the third party payor class (consumer
co-pay class). In addition, the SAC added a claim under California Civil Code § 3345 for treble
damages for unfair practices. On November 6, 2007, plaintiffs filed a Third Amended Complaint
(TAC) largely repeating the allegations of the SAC and adding a new class of uninsured consumers
who paid usual and customary (U&C) prices for the prescription drugs at issue in the case (U&C
class). The TAC asserts the same claims asserted in the SAC on behalf of the third party payor
class, the consumer co-pay class and the U&C class, with the exception that the claims of the U&C
class are alleged to run through the present.
On March 19, 2008, the district court entered an order certifying the consumer co-pay class
for all purposes for the period August 1, 2001, to May 15, 2005, certifying the third party payor
class for liability and equitable relief for the period from August 1, 2001, to May 15, 2005, and
certifying the third party payor class for damages for the period August 1, 2001, to December 31,
2003.
On November 21, 2008, the Company announced that it had reached an agreement with plaintiffs
to pay $350 million in settlement of all claims on behalf of the three private payor classes
alleged in the Private Payor RICO Action relating to FDBs published AWPs, along with the claims
brought by these same private payors alleged in a previously dismissed antitrust action. The
Company also announced on November 21 that it recorded a reserve of $143 million for pending and
expected claims by public payor entities relating to FDBs published AWPs. As a result, in the
third quarter of 2009, we recorded a $493 million pre-tax charge. The private payor settlement
provides that the Company will pay $350 million into a settlement escrow in installments following
preliminary and final approvals of the settlement, which escrow account shall be used for
settlement administration costs, including notice, attorneys fees as approved by the court and
distribution to class members in a manner determined by plaintiffs subject to court approval.
On July 24, 2009, the trial court issued an order approving the settlement of these matters.
On August 21, 2009, a settlement class member filed a motion challenging the order of approval and
also a motion seeking leave to intervene in the case and on November 5, 2009, the trial court
denied both of those motions. On August 31, 2009, the trial court entered judgment on the
settlement and dismissed all private party claims against the Company. On September 29 and 30,
2009, four appeals to the First Circuit Court of Appeals were filed by settlement class members
challenging the final judgment. Between November 30 and December 22, 2009, all four appeals were
voluntarily dismissed.
These private payor actions have been concluded, the releases have become final and binding on
the classes and the settlement consideration has been paid and is no longer subject to return to
the Company. Accordingly, in the third quarter of 2010, the Company removed its AWP litigation
liability of $350 million and corresponding restricted cash balance as all criteria for the
extinguishment of this liability were met.
B. The Public Payor AWP Cases
Commencing in May of 2008, a series of complaints alleging claims nearly identical to the
Private Payor RICO Action were filed by various public payors governmental entities that paid any
portion of the price of certain prescription drugs. These actions were all filed in the United
States District Court for the District of Massachusetts and were ultimately consolidated under the
caption In re McKesson Governmental Entities Average Wholesale Price Litigation. The public
payor actions are assigned to the same court assigned to the related claims of private payors. A
description of these actions is as follows:
94
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The San Francisco Action
On May 20, 2008, an action was filed by the San Francisco Health Plan on behalf of itself and
a purported class of political subdivisions in the State of California and by the San Francisco
City Attorney on behalf of the People of the State of California in the United States District
Court for the District of Massachusetts against the Company as the sole defendant, alleging
violations of civil RICO, the California Cartwright Act, Californias false claims act, California
Business and Professions Code §§ 17200 and 17500 and seeking damages, treble damages, civil
penalties, restitution, interest and attorneys fees, all in unspecified amounts, San Francisco
Health Plan, et al. v. McKesson Corporation, (Civil Action No. 1:08-CV-10843-PBS) (San Francisco
Action). On July 3, 2008, an amended complaint was filed in the San Francisco Action adding a
claim for tortious interference. On January 13, 2009, a second amended complaint was filed in the
San Francisco Action that abandoned all previously alleged antitrust claims.
The Connecticut Action
On May 28, 2008, an action was filed by the State of Connecticut in the United States District
Court for the District of Massachusetts against the Company, again as the sole defendant, alleging
violations of civil RICO, the Sherman Act and the Connecticut Unfair Trade Practices Act and
seeking damages, treble damages, restitution, interest and attorneys fees, all in unspecified
amounts, State of Connecticut v. McKesson Corporation, (Civil Action No. 1:08-CV-10900-PBS)
(Connecticut Action). On January 13, 2009, an amended complaint was filed in the Connecticut
Action abandoning all previously alleged antitrust claims.
The Douglas County, Kansas Nationwide Class Action
On August 7, 2008, an action was filed in the United States District Court for the District of
Massachusetts by the Board of County Commissioners of Douglas County, Kansas on behalf of itself
and a purported national class of state, local and territorial governmental entities against the
Company and FDB alleging violations of civil RICO and federal antitrust laws and seeking damages
and treble damages, as well as injunctive relief, interest, attorneys fees and costs of suit, all
in unspecified amounts, Board of County Commissioners of Douglas County, Kansas v. McKesson
Corporation, et al., (Civil Action No. 1:08-CV-11349-PBS) (Douglas County, Kansas Action).
Separate class actions based on essentially the same factual allegations were subsequently
filed against the Company and FDB in the United States District Court for the District of
Massachusetts by the City of Panama City, Florida on August 18, 2008 (Florida Action), the State
of Oklahoma on October 15, 2008, (Oklahoma Action), the County of Anoka, Minnesota on November 3,
2008, (Minnesota Action), Baltimore, Maryland on November 7, 2008, (Maryland Action), Columbia,
South Carolina on December 12, 2008, (South Carolina Action) and Goldsboro, North Carolina on
December 15, 2008, (North Carolina Action) in each case on behalf of the filing entity and a
class of state and local governmental entities within the same state, alleging violations of civil
RICO, federal and state antitrust laws and various state consumer protection and deceptive and
unfair trade practices statutes and seeking damages and treble damages, civil penalties, as well as
injunctive relief, interest, attorneys fees and costs of suit, all in unspecified amounts.
On December 24, 2008, an amended and consolidated class action complaint was filed in the
Douglas County, Kansas Action. The amended complaint added the named plaintiffs from the Florida,
Oklahoma, Minnesota, Maryland, South Carolina and North Carolina Actions and abandoned the
previously alleged antitrust claims. On January 9, 2009, the Florida, Oklahoma, Minnesota,
Maryland, South Carolina and North Carolina Actions were voluntarily dismissed without prejudice.
On March 3, 2009, a second amended and consolidated class action complaint was filed in the Douglas
County, Kansas Action, adding the state of Montana as a plaintiff, adding Montana state law claims
and adding a claim for tortious interference.
95
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On February 10, 2009, plaintiffs in the Douglas County, Kansas Action filed a notice of
dismissal without prejudice of defendant FDB. On April 2, 2009, the Company filed answers to each
of the pending complaints in the San Francisco Action, the Connecticut Action and the County of
Douglas, Kansas Action denying the core factual allegations and asserting numerous affirmative
defenses. On April 9, 2009, the Company filed a demand for a jury in each of these actions.
On May 20, 2009, an action was filed in the United States District Court for the District of
Massachusetts by Oakland County, Michigan and the City of Sterling Heights, Michigan against the
Company as the sole defendant, alleging RICO violations, the Michigan Antitrust Reform Act, the
Michigan Consumer Protection Act, the California Cartwright Act and common law fraud and seeking
damages, treble damages, interest and attorneys fees, all in unspecified amounts, Oakland County,
Michigan et al. v. McKesson Corporation, (Civil Action No. 1:09-CV-10843-PBS) (Michigan Action).
On August 4, 2009, the court granted the Companys motion to stay the Michigan Action.
On February 19, 2010, discovery closed in the consolidated public payor actions. The parties
are engaged in briefing regarding class certification in the Douglas County, Kansas and San
Francisco Actions and trial in the Connecticut Action is set for July 19, 2010. No trial date is
set in the San Francisco and Douglas County, Kansas Actions.
The New Jersey United States Attorneys Office AWP Investigation
In June of 2007, the Company was informed that a qui tam action by an unknown relator was
previously filed in the United States District Court in the District of New Jersey, purportedly on
behalf of the United States, twelve states (California, Delaware, Florida, Hawaii, Illinois,
Louisiana, Massachusetts, Nevada, New Mexico, Tennessee, Texas and Virginia) and the District of
Columbia against the Company and seven other defendants. The Company has not been provided with
the original complaint, which was filed in 2005, and does not know the identity of the original
parties to the action. The Company was advised that the United States and the various states are
considering whether to intervene in the suit, but none has done so to date. The suit thus remains
under seal and has not been served on the Company.
In January 2009, the Company was provided with a courtesy copy of a third amended complaint
filed in the qui tam action. This complaint has also not been served on the Company. The third
amended complaint alleges multiple claims against the Company under the federal False Claims Act
and the various states and District of Columbias false claims statutes. These and additional
claims are also alleged against other parties. The claims arise out of alleged manipulation of AWP
by defendants which plaintiffs claim caused them to pay more than they should have in reimbursement
for prescription drugs covered by various government programs that base reimbursement payments on
AWP. The complaint is brought on behalf of the United States, the twelve states named above, ten
additional states (Georgia, Indiana, Michigan, Montana, New Hampshire, New Jersey, New York,
Oklahoma, Rhode Island and Wisconsin) and the District of Columbia and seeks damages including
treble damages and civil penalties (which the relator claims would be several billion dollars) as
provided under the various False Claims Act statutes, as well as attorneys fees and costs.
96
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
III. Other Litigation and Claims
On April 7, 2010, an action was filed in the Superior Court of the State of California for the
County of Los Angeles against, among others, the Company, its indirect subsidiary, NDCHealth
Corporation (NDC) and Relay Health, a trade name under which NDC conducts business, Rodriguez
et al. vs. Etreby Computer Company et al., (Civ. No. BC435303) (Rodriguez). The plaintiffs in
Rodriguez purport to represent a class of California residents whose individual confidential
medical information was allegedly illegally released and used by defendants, and plaintiffs also
purport to bring their claims as a private Attorney General action. The claims asserted in the
complaint against the Company defendants include negligence, statutory violations and violation of
California Business and Professions Code, Sections 17200 et seq. covering unfair, unlawful and
fraudulent business acts and practices. The statutory violations alleged by plaintiffs purport to
arise out of California Civil Code, Sections 56 through 56.37, also known as the Confidentiality of
Medical Information Act (CMIA). The complaint seeks compensatory and statutory damages under the
CMIA, equitable and injunctive relief, as well as interest and attorneys fees and costs, all in
unspecified amounts. The complaint was served on April 14, 2010, and no other activity has
occurred in the action.
On October 3, 2008, the United States filed a complaint in intervention in a pending qui tam
action in the United States District Court for the Northern District of Mississippi, naming as
defendants, among others, the Company and its former indirect subsidiary, McKesson Medical-Surgical
MediNet Inc. (MediNet), now merged into and doing business as McKesson Medical-Surgical MediMart
Inc., United States v. McKesson Corporation, et al., (Civil Action No. 2:08-CV-00214-SA). The
United States asserts in its complaint claims based on violations of the federal False Claims Act,
31 U.S.C Sections 3729-33, in connection with billing and supply services rendered by MediNet to
the long-term care facility operator co-defendants. The action seeks monetary damages in an
unstated amount. On December 3, 2008, the Company and co-defendants filed motions to dismiss the
complaint on grounds that the allegations lacked the particularity required by the Federal Rules of
Procedure and on grounds that the complaint failed to state a claim under the False Claims Act. On
September 29, 2009, the trial court denied those motions. On July 7, 2009, all defendants filed
motions to dismiss the action filed by the original Relator based on the contention that the
Relator was not the original source of the claims, which he attempts to pursue in his qui tam
action. On March 25, 2010, the trial court granted defendants motions to dismiss the Relator and
his complaint. Discovery in the United States intervention action is expected to commence in the
first quarter of 2011 and trial has been set for February 6, 2012.
On July 14, 2006, an action was filed in the United States District Court for the Eastern
District of New York against McKesson, two McKesson employees, several other drug wholesalers and
numerous drug manufacturers, RxUSA v. Alcon Laboratories et al., (Case No. 06-CV-3447 -DRH).
Plaintiff alleges that we, along with various other defendants, unlawfully engaged in
monopolization and attempted monopolization of the sale and distribution of pharmaceutical products
in violation of the federal antitrust laws, as well as in violation of New York States Donnelly
Act. We are also alleged to have violated the Sarbanes-Oxley Act of 2002; and our employees are
alleged to have violated the Donnelly Act, the Sarbanes-Oxley Act and Sections 1962 (c) and (d) of
the civil RICO statute. Plaintiff alleges generally that defendants have individually, and in
concert with one another, taken actions to create and maintain a monopoly and to exclude secondary
wholesalers, such as the plaintiff, from the wholesale pharmaceutical industry. The complaint
seeks monetary damages of approximately $1.6 billion and also seeks treble damages, attorneys fees
and injunctive relief. All defendants filed motions to dismiss all claims. The motions were
briefed and submitted to the trial court on March 13, 2007. On September 24, 2009, the trial court
issued its order granting with prejudice defendants motions to dismiss and on September 28,
2009, the trial court entered judgment dismissing all of plaintiffs claims. On October 23, 2009,
plaintiff filed a Notice of Appeal in the United States Court of Appeals for the Second Circuit
seeking reversal of the trial courts orders of dismissal and judgment. The briefing on the appeal
was completed on April 21, 2010, and it is not yet known whether the court will set the matter for
oral argument or will issue its decision on the submitted papers.
97
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 3, 2004, judgment was entered against the Company and one of our employees in the
action captioned Roby v. McKesson HBOC, Inc. et al. (Superior Court for Yolo County, California,
Case No. CV01-573). Former employee Charlene Roby (Roby) brought claims for wrongful
termination, disability discrimination and disability-based harassment against the Company and a
claim for disability-based harassment against her former supervisor. The jury awarded Roby
compensatory damages against the Company and against plaintiffs supervisor in the total amount of
$4 million and punitive damages in the amount of $15 million against the Company. Following
post-trial motions, the trial court reduced the amount of compensatory damages to $3 million, the
punitive damages awarded against both defendants and the compensatory damages awarded against the
individual employee defendant were not reduced. Defendants filed a Notice of Appeal, seeking
reduction or reversal of the compensatory and punitive damage awards and the award of attorneys
fees. On December 26, 2006, the Court of Appeals for the Third Appellate District of California
issued its decision reversing the verdict for harassment against Robys supervisor, reducing the
compensatory damages from $3 million to $1 million and reducing punitive damages from $15 million
to $2 million. Following the rejection of Robys petition for rehearing before the Court of
Appeals, plaintiff petitioned for review by the California Supreme Court, which was granted on
April 18, 2007. On November 30, 2009, the California Supreme Court issued its decision in this
matter, reducing the ratio of punitive damages to compensatory damages from that ordered by the
California Court of Appeals, and reinstating the harassment claim previously stricken by the Court
of Appeals with a revised award of $4 million, before interest. Both parties filed petitions for
rehearing before the California Supreme Court and those petitions were denied on February 12, 2010.
McKesson has paid the revised award. The only remaining issue to be resolved by the trial court
relates to Robys claim for fees and costs on appeal.
Between 1976 and 1987, the Companys former McKesson Chemical Company division operated a
repackaging facility in Santa Fe Springs, California. The Company has been actively remediating
the contamination at this site since 1994. Angeles Chemical Company (Angeles) conducted similar
repackaging activities at its property adjacent to the Companys site between 1976 and 2000. In
late 2001, Angeles filed an action against McKesson, Angeles Chemical Company v. McKesson
Corporation, et al. (United States District Court for the Central District of California Case
No. 01-10532-TJH) claiming that McKessons contamination migrated to Angeles property. The causes
of action in the latest complaint purport to state claims based on the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (as amended, the Superfund law or
its state law equivalent) and the Resource Conservation and Recovery Act, as well as allege various
state law claims, such as nuisance, trespass, negligence, defamation, interference with prospective
advantage, unfair business practices and for declaratory relief, among others. Angeles seeks
injunctive relief, as well as compensatory and punitive damages, attorneys fees and costs in an
unspecified amount. On January 5, 2010, the Company entered into a settlement agreement, which
fully resolves all outstanding disputes between the Company and the Angeles parties.
The Company is a defendant in approximately 519 cases alleging that the plaintiffs were
injured by Vioxx, an anti-inflammatory drug manufactured by Merck & Company (Merck). The cases
typically assert causes of action for strict liability, negligence, breach of warranty and false
advertising for improper design, testing, manufacturing and warnings relating to the manufacture
and distribution of Vioxx. None of the cases involving the Company is scheduled for trial. The
Company has tendered each of these cases to Merck and has reached an agreement with Merck to defend
and indemnify the Company.
The Company, through its former McKesson Chemical Company division, is named in approximately
450 cases involving the alleged distribution of asbestos. These cases typically involve either
single or multiple plaintiffs claiming personal injuries and unspecified compensatory and punitive
damages as a result of exposure to asbestos-containing materials. Pursuant to an indemnification
agreement signed at the time of the 1987 sale of McKesson Chemical Company to what is now called
Univar USA Inc. (Univar), the Company tendered each of these actions to Univar. Univar
subsequently raised questions concerning the extent of its obligations under the indemnification
agreement. Univar continued to defend the Company in some of these cases, but in February of 2005,
Univar began rejecting tenders and accordingly, the Company incurred defense costs and de minimis
settlement costs in connection with the more recently served actions. The Company filed an
arbitration demand against Univar pursuant to the indemnification agreement seeking a determination
that the liability for these cases is Univars responsibility. On February 9, 2010, the parties
executed a settlement agreement, which provides that Univar will defend and indemnify the Company
for all pending and future matters.
98
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
IV. Government Investigations and Subpoenas
From time-to-time, the Company receives subpoenas or requests for information from various
government agencies. The Company generally responds to such subpoenas and requests in a
cooperative, thorough and timely manner. These responses sometimes require considerable time and
effort and can result in considerable costs being incurred by the Company. Such subpoenas and
requests also can lead to the assertion of claims or the commencement of civil or criminal legal
proceedings against the Company and other members of the health care industry, as well as to
settlements. Examples of such requests and subpoenas include the following: (1) the Company has
responded to a request from the Federal Trade Commission for certain documents as part of a
non-public investigation to determine whether the Company may have engaged in anti-competitive
practices with other wholesale pharmaceutical distributors in order to limit competition for
provider customers seeking distribution services; (2) the Company has received and responded to a
Civil Investigative Demand from the Attorney Generals Office of the State of Tennessee related to
an investigation into possible violations of the Tennessee Medicaid False Claims Act in connection
with repackaged pharmaceuticals; (3) the Company has responded to a subpoena from the office of the
Attorney General of the State of New York requesting documents and other information concerning its
participation in the secondary or alternative source market for pharmaceutical products; (4) the
Company has received and have responded to subpoenas and requests for information from a number of
Offices of state Attorney Generals or other state agencies, relating to the pricing, including
FDBs AWPs, for branded and generic drugs; and (5) the Company has completed its response to a
subpoena, issued by the United States Attorneys Office (USAO) in Houston, which seeks documents
relating to billing and collection services performed by a Company subsidiary for certain
healthcare operations associated with the University of Texas from 2004 through the dates of the
subpoenas.
As previously reported, on January 26, 2007, the Company acquired Per-Se Technologies, Inc.
(Per-Se), which became a wholly owned subsidiary. Prior to its acquisition, Per-Se had publicly
disclosed that in December 2004, the SEC issued a formal order of investigation relating to
accounting matters at NDCHealth Corporation (NDCHealth), a then public company, which was
acquired by Per-Se in January 2006, prior to the Companys acquisition of Per-Se. In March 2005,
NDCHealth restated its financial statements for the fiscal years ended May 28, 2004, May 30, 2003
and May 31, 2002, and for the fiscal quarters ended August 22, 2004, and August 29, 2005, to
correct errors relating to certain accounting matters. NDCHealth produced documents to the SEC and
fully cooperated with the SEC in its investigation. The SEC has taken testimony from a number of
current and former NDCHealth employees. There has been no activity in this matter for some time
and the SEC has taken no action against NDCHealth or its successor to date.
V. Environmental Matters
Primarily as a result of the operation of the Companys former chemical businesses, which were
fully divested by 1987, the company is involved in various matters pursuant to environmental laws
and regulations. The Company has received claims and demands from governmental agencies relating
to investigative and remedial actions purportedly required to address environmental conditions
alleged to exist at eight sites where it, or entities acquired by it, formerly conducted operations
and the Company, by administrative order or otherwise, has agreed to take certain actions at those
sites, including soil and groundwater remediation. In addition, the Company is one of multiple
recipients of a New Jersey Department of Environmental Protection Agency directive and a separate
United States Environmental Protection Agency directive relating to potential natural resources
damages (NRD) associated with one of these eight sites. Although the Companys potential
allocation under either directive cannot be determined at this time, it has agreed to participate
with a potentially responsible party (PRP) group in the funding of an NRD assessment, the costs
of which are reflected in the aggregate estimates set forth below.
Based on a determination by the Companys environmental staff, in consultation with outside
environmental specialists and counsel, the current estimate of reasonably possible remediation
costs for these eight sites is $8.4 million, net of approximately $1.9 million that third parties
have agreed to pay in settlement or is expected, based either on agreements or nonrefundable
contributions which are ongoing, to be contributed by third parties. The $8.4 million is expected
to be paid out between April 2010 and March 2030. The Companys estimated liability for these
environmental matters has been accrued in the accompanying consolidated balance sheets.
99
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In addition, the Company has been designated as a PRP under the Superfund law for
environmental assessment and cleanup costs as the result of its alleged disposal of hazardous
substances at 18 sites. With respect to these sites, numerous other PRPs have similarly been
designated and while the current state of the law potentially imposes joint and several liability
upon PRPs, as a practical matter, costs of these sites are typically shared with other PRPs. The
estimated liability at those 18 sites is approximately $0.9 million. The aggregate settlements and
costs paid by the Company in Superfund matters to date have not been significant. The accompanying
consolidated balance sheets include this environmental liability.
VI. Other Matters
The Company is involved in various other litigation and governmental proceedings, not
described above, that arise in the normal course of business. While it is not possible to determine
with certainty the ultimate outcome or the duration of any such litigation or governmental
proceedings, the Company believes, based on current knowledge and the advice of counsel, that such
litigation and proceedings will not have a material impact on the Companys financial position or
results of operations.
19. Stockholders Equity
Each share of the Companys outstanding common stock is permitted one vote on proposals
presented to stockholders and is entitled to share equally in any dividends declared by the
Companys Board of Directors (the Board).
Share Repurchase Plans
In April 2010, the Board authorized the repurchase of up to an additional $1.0 billion of the
Companys common stock. 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. Information regarding our share repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases (1) |
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Value of Shares that |
|
|
|
Total |
|
|
|
|
|
|
May Yet Be |
|
|
|
Number of Shares |
|
|
Average Price Paid |
|
|
Purchased Under |
|
(In millions, except price per share data) |
|
Purchased (2) (3) |
|
|
Per Share |
|
|
the Programs |
|
|
Balance, March 31, 2007 |
|
|
|
|
|
|
|
|
|
$ |
|
|
Share repurchase plans approved |
|
|
|
|
|
|
|
|
|
|
|
|
April 2007 |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
September 2007 |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
Shares repurchased |
|
|
28 |
|
|
$ |
59.48 |
|
|
|
(1,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
|
|
|
|
|
|
|
|
$ |
314 |
|
Share repurchase plan approved |
|
|
|
|
|
|
|
|
|
|
|
|
April 2008 |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
Shares repurchased |
|
|
10 |
|
|
$ |
50.52 |
|
|
|
(484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
|
|
|
|
|
|
|
|
$ |
830 |
|
Shares repurchased |
|
|
8 |
|
|
$ |
41.47 |
|
|
|
(299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010 |
|
|
|
|
|
|
|
|
|
$ |
531 |
|
|
|
|
|
(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. |
|
(2) |
|
All of the shares purchased were part of the publicly announced programs. |
|
(3) |
|
The number of shares purchased reflects rounding adjustments. |
100
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In July 2008, the Board authorized the retirement of shares of the Companys common stock
that may be repurchased from time-to-time pursuant to its stock repurchase program. During the
second quarter of 2009, all of the 4 million repurchased shares, which we purchased for
$204 million, were formally retired 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, $165 million was recorded as a
decrease to retained earnings.
Accumulated Other Comprehensive Income (Loss)
Information regarding our other comprehensive income (loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2010 |
|
2009 |
|
Unrealized net loss and other components of benefit plans, net of tax |
|
$ |
(162 |
) |
|
$ |
(109 |
) |
Translation adjustments |
|
|
168 |
|
|
|
(70 |
) |
|
|
|
Total |
|
$ |
6 |
|
|
$ |
(179 |
) |
|
20. Related Party Balances and Transactions
Notes receivable outstanding from certain of our current and former officers and senior
managers totaled $16 million at March 31, 2010 and 2009. These notes related to purchases of
common stock under our various employee stock purchase plans. The notes bear interest at rates
ranging from 4.7% to 7.1% and were due at various dates through February 2004. Interest income on
these notes is recognized only to the extent that cash is received. These notes, which are
included in other capital in the consolidated balance sheets, were issued for amounts equal to the
market value of the stock on the date of the purchase and are at full recourse to the borrower. At
March 31, 2010, the value of the underlying stock collateral was $12 million. The collectability
of these notes is evaluated on an ongoing basis. At March 31, 2010 and 2009, we provided a reserve
of approximately $4 million and $9 million for the outstanding notes. Other receivable balances
held with related parties, consisting of loans made to certain officers and senior managers and an
equity-held investment, amounted to nil and $1 million at March 31, 2010 and 2009.
We incurred $11 million in 2010 and $10 million in 2009 and 2008 of annual rental expense paid
to an equity-held investment.
101
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
21. Segments of Business
We report our operations in two operating segments: McKesson Distribution Solutions and
McKesson Technology Solutions. The factors for determining the reportable segments included the
manner in which management evaluates the performance of the Company combined with the nature of the
individual business activities. We evaluate the performance of our operating segments based on
operating profit before interest expense, income taxes and results from discontinued operations.
The Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical
supplies and equipment and health and beauty care products throughout North America. This segment
also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers,
sells financial, operational and clinical solutions for pharmacies (retail, hospital, long-term
care) and provides consulting, outsourcing and other services. This segment includes a 49%
interest in Nadro, S.A. de C.V. (Nadro), one of the leading pharmaceutical distributors in Mexico
and a 39% interest in Parata, which sells automated pharmacy and supply management systems and
services to retail and institutional outpatient pharmacies.
The Technology Solutions segment delivers enterprise-wide clinical, patient care, financial,
supply chain, strategic management software solutions, pharmacy automation for hospitals, as well
as connectivity, outsourcing and other services, including remote hosting and managed services, to
healthcare organizations. The segment also includes our Payor group of businesses, which includes
our InterQual® claims payment solutions, medical management software businesses and our care
management programs. The segments customers include hospitals, physicians, homecare providers,
retail pharmacies and payors from North America, the United Kingdom, Ireland, other European
countries, Asia Pacific and Israel.
Revenues for our Technology Solutions segment are classified in one of three categories:
services, software and software systems and hardware. Services revenues primarily include fees
associated with installing our software and software systems, as well as revenues associated with
software maintenance and support, remote processing, disease and medical management, and other
outsourcing and professional services. Software and software systems revenues primarily include
revenues from licensing our software and software systems, including the segments clinical
auditing and compliance and InterQual® businesses.
Corporate includes expenses associated with Corporate functions and projects, certain employee
benefits and the results of certain equity-held investments. Corporate expenses are allocated to
the operating segments to the extent that these items can be directly attributable to the segment.
102
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial information relating to the reportable operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Direct distribution & services |
|
$ |
72,210 |
|
|
$ |
66,876 |
|
|
$ |
60,436 |
|
Sales to customers warehouses |
|
|
21,435 |
|
|
|
25,809 |
|
|
|
27,668 |
|
|
|
|
Total U.S. pharmaceutical distribution & services |
|
|
93,645 |
|
|
|
92,685 |
|
|
|
88,104 |
|
Canada pharmaceutical distribution & services |
|
|
9,072 |
|
|
|
8,225 |
|
|
|
8,106 |
|
Medical-Surgical distribution & services |
|
|
2,861 |
|
|
|
2,658 |
|
|
|
2,509 |
|
|
|
|
Total Distribution Solutions |
|
|
105,578 |
|
|
|
103,568 |
|
|
|
98,719 |
|
|
|
|
Technology Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
Services (2) |
|
|
2,439 |
|
|
|
2,337 |
|
|
|
2,240 |
|
Software & software systems |
|
|
571 |
|
|
|
572 |
|
|
|
591 |
|
Hardware |
|
|
114 |
|
|
|
155 |
|
|
|
153 |
|
|
|
|
Total Technology Solutions |
|
|
3,124 |
|
|
|
3,064 |
|
|
|
2,984 |
|
|
|
|
Total |
|
$ |
108,702 |
|
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
|
|
Operating profit (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (4) |
|
$ |
1,988 |
|
|
$ |
1,158 |
|
|
$ |
1,483 |
|
Technology Solutions (2) |
|
|
385 |
|
|
|
334 |
|
|
|
319 |
|
|
|
|
Total |
|
|
2,373 |
|
|
|
1,492 |
|
|
|
1,802 |
|
Corporate |
|
|
(342 |
) |
|
|
(284 |
) |
|
|
(208 |
) |
Litigation
credit, net |
|
|
20 |
|
|
|
|
|
|
|
5 |
|
Interest
expense |
|
|
(187 |
) |
|
|
(144 |
) |
|
|
(142 |
) |
|
|
|
Income from continuing operations before income taxes |
|
$ |
1,864 |
|
|
$ |
1,064 |
|
|
$ |
1,457 |
|
|
|
|
Depreciation and amortization (5) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
199 |
|
|
$ |
177 |
|
|
$ |
144 |
|
Technology Solutions |
|
|
212 |
|
|
|
205 |
|
|
|
180 |
|
Corporate |
|
|
63 |
|
|
|
59 |
|
|
|
47 |
|
|
|
|
Total |
|
$ |
474 |
|
|
$ |
441 |
|
|
$ |
371 |
|
|
|
|
Expenditures for long-lived assets (6) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
95 |
|
|
$ |
83 |
|
|
$ |
96 |
|
Technology Solutions |
|
|
31 |
|
|
|
43 |
|
|
|
54 |
|
Corporate |
|
|
73 |
|
|
|
69 |
|
|
|
45 |
|
|
|
|
Total |
|
$ |
199 |
|
|
$ |
195 |
|
|
$ |
195 |
|
|
|
|
Segment assets, at year end |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
19,803 |
|
|
$ |
18,674 |
|
|
$ |
18,382 |
|
Technology Solutions |
|
|
3,635 |
|
|
|
3,606 |
|
|
|
3,797 |
|
|
|
|
Total |
|
|
23,438 |
|
|
|
22,280 |
|
|
|
22,179 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
3,731 |
|
|
|
2,109 |
|
|
|
1,362 |
|
Other |
|
|
1,020 |
|
|
|
878 |
|
|
|
1,062 |
|
|
|
|
Total |
|
$ |
28,189 |
|
|
$ |
25,267 |
|
|
$ |
24,603 |
|
|
|
|
|
(1) |
|
Revenues derived from services represent less than 1% of this segments total revenues for
2010, 2009 and 2008. |
|
(2) |
|
Revenues and operating profit for 2008 for our Technology Solutions segment reflect the
recognition of $21 million of disease management deferred revenues for which expenses
associated with these revenues were previously recognized as incurred. |
|
(3) |
|
Operating profit includes net earnings of $7 million, $7 million and $21 million from equity
investments in 2010, 2009 and 2008. These earnings are primarily recorded within our
Distribution Solutions segment. |
|
(4) |
|
Operating profit for 2010 includes a $17 million pre-tax gain on the sale of our 50% equity
interest in MLS. Operating profit for 2009 includes the following pre-tax items: a
$63 million charge to write-down two equity-held investments, a $493 million charge associated
with the AWP litigation and a $24 million pre-tax gain on the sale of our 42% equity interest
in Verispan. |
|
(5) |
|
Depreciation and amortization includes amortization of intangibles, capitalized software held
for sale and capitalized software for internal use. |
|
(6) |
|
Long-lived assets consist of property, plant and equipment. |
103
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenues and property, plant and equipment by geographic areas were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2010 |
|
2009 |
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
99,387 |
|
|
$ |
98,194 |
|
|
$ |
93,389 |
|
International |
|
|
9,315 |
|
|
|
8,438 |
|
|
|
8,314 |
|
|
|
|
Total |
|
$ |
108,702 |
|
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
|
|
Property, plant and equipment, net, at year end |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
764 |
|
|
$ |
719 |
|
|
$ |
695 |
|
International |
|
|
87 |
|
|
|
77 |
|
|
|
80 |
|
|
|
|
Total |
|
$ |
851 |
|
|
$ |
796 |
|
|
$ |
775 |
|
|
International operations primarily consist of our operations in Canada, the United Kingdom,
Ireland, other European countries, Asia Pacific and Israel. We also have an equity-held investment
(Nadro) in Mexico. Net revenues were attributed to geographic areas based on the customers
shipment locations.
104
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
22. Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
(In millions, except per share amounts) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
Fiscal 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
26,657 |
|
|
$ |
27,130 |
|
|
$ |
28,272 |
|
|
$ |
26,643 |
|
|
$ |
108,702 |
|
Gross profit |
|
|
1,303 |
|
|
|
1,335 |
|
|
|
1,455 |
|
|
|
1,583 |
|
|
|
5,676 |
|
Net income (1) |
|
|
288 |
|
|
|
301 |
|
|
|
326 |
|
|
|
348 |
|
|
|
1,263 |
|
Earnings per common share (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
1.06 |
|
|
|
1.11 |
|
|
|
1.19 |
|
|
|
1.26 |
|
|
|
4.62 |
|
Basic |
|
|
1.07 |
|
|
|
1.13 |
|
|
|
1.21 |
|
|
|
1.29 |
|
|
|
4.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
26,704 |
|
|
$ |
26,574 |
|
|
$ |
27,130 |
|
|
$ |
26,224 |
|
|
$ |
106,632 |
|
Gross profit |
|
|
1,268 |
|
|
|
1,302 |
|
|
|
1,343 |
|
|
|
1,465 |
|
|
|
5,378 |
|
Net income (2)(3)(4)(5) |
|
|
235 |
|
|
|
327 |
|
|
|
(20 |
) |
|
|
281 |
|
|
|
823 |
|
Earnings per common
share (2)(3)(4)(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
0.83 |
|
|
|
1.17 |
|
|
|
(0.07 |
) |
|
|
1.01 |
|
|
|
2.95 |
|
Basic |
|
|
0.85 |
|
|
|
1.19 |
|
|
|
(0.07 |
) |
|
|
1.03 |
|
|
|
2.99 |
|
|
|
|
|
(1) |
|
Financial results for the third quarter and full year 2010 include a $17 million pre-tax gain
($14 million after-tax) on sale of our 50% interest in MLS. |
|
(2) |
|
Financial results for the second quarter and full year 2009 include a $24 million pre-tax
gain ($14 million after-tax) on sale of our 42% interest in Verispan. |
|
(3) |
|
Financial results for the second and fourth quarters and full year 2009 include $67 million,
$22 million and $89 million of income tax credits related to the recognition of previously
unrecognized tax benefits and related interest expense as a result of the lapsing of the
statutes of limitations. |
|
(4) |
|
Financial results for the third quarter and full year 2009 include a $493 million pre-tax
charge ($311 million after-tax) associated with the AWP litigation. |
|
(5) |
|
Financial results for the fourth quarter and full year 2009 include a $63 million pre-tax
impairment charge ($60 million after-tax) associated with two equity-held investments. |
23. Subsequent Events
In April 2010, our Technology Solutions segment entered into a definitive agreement to sell
its wholly-owned subsidiary, McKesson Asia Pacific Pty Limited, a provider of phone and web-based
healthcare services in Australia and New Zealand. This agreement is the result of an unsolicited
purchase offer. The divestiture is subject to regulatory approval. Upon completion of the sale,
any gain will be reported as discontinued operations in our consolidated financial statements.
On
May 4, 2010, we received $51 million cash proceeds representing our share of a
settlement of an antitrust class action lawsuit. This will be recorded as a reduction of cost of
sales in our consolidated statement of operations in the first quarter of 2011.
105
McKESSON CORPORATION
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, with the participation of other
members of the Companys management, have evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as
of the end of the period covered by this report, and have concluded that our disclosure controls
and procedures are effective based on their evaluation of these controls and procedures as required
by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Internal Control over Financial Reporting
Managements report on the Companys internal control over financial reporting (as such term
is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and the related report of our independent
registered public accounting firm are included on page 51 and page 52 of this Annual Report on Form
10-K, under the headings, Managements Annual Report on Internal Control Over Financial Reporting
and Report of Independent Registered Public Accounting Firm and are incorporated herein by
reference.
Changes in Internal Controls
There were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
that occurred during the most recent fiscal quarter (the registrants fourth fiscal quarter in the
case of an annual report) that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
106
McKESSON CORPORATION
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information about our Directors is incorporated by reference from the discussion under Item 1
of our Proxy Statement for the 2010 Annual Meeting of Stockholders (the Proxy Statement) under
the heading Election of Directors. Information about compliance with Section 16(a) of the
Exchange Act is incorporated by reference from the discussion under the heading Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy Statement. Information about our Audit
Committee, including the members of the committee and our Audit Committee Financial Expert, is
incorporated by reference from the discussion under the headings Audit Committee Report and
Audit Committee Financial Expert in our Proxy Statement.
Information about the Code of Ethics governing our Chief Executive Officer, Chief Financial
Officer, Controller and Financial Managers can be found on our Web site, www.mckesson.com,
under the Investors Corporate Governance tab. The Companys Corporate Governance Guidelines and
Charters for the Audit and Compensation Committees and the Committee on Directors and Corporate
Governance can also be found on our Web site under the Investors Corporate Governance tab.
The Company intends to disclose required information regarding any amendment to or waiver
under the Code of Ethics referred to above by posting such information on our Web site within four
business days after any such amendment or waiver.
Item 11. Executive Compensation
Information with respect to this item is incorporated by reference from the discussion under
the heading Executive Compensation in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information about security ownership of certain beneficial owners and management is
incorporated by reference from the discussion under the heading Principal Stockholders in our
Proxy Statement.
The following table sets forth information as of March 31, 2010 with respect to the plans
under which the Companys common stock is authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
Number of securities |
|
|
|
|
|
future issuance under |
|
|
to be issued upon |
|
Weighted-average |
|
equity compensation |
|
|
exercise of |
|
exercise price of |
|
plans (excluding |
Plan Category |
|
outstanding options, |
|
outstanding options, |
|
securities reflected in |
(In millions, except per share amounts) |
|
warrants and rights |
|
warrants and rights (1) |
|
the first column) |
|
Equity compensation plans approved by security holders(2)
|
|
|
15.8 |
|
|
$ |
43.50 |
|
|
23.7(3) |
Equity compensation plans not approved by security holders(4)
|
|
|
3.9 |
|
|
|
34.27 |
|
|
|
|
|
|
|
(1) |
|
The weighted-average exercise price set forth in this column is calculated excluding
outstanding restricted stock unit (RSU) awards, since recipients are not required to pay an
exercise price to receive the shares subject to these awards. |
|
(2) |
|
Represents option and RSU awards, outstanding under the following plans: (i) 1994 Stock
Option and Restricted Stock Plan; (ii) 1997 Non-Employee Directors Equity Compensation and
Deferral Plan; and (iii) the 2005 Stock Plan. |
|
(3) |
|
Represents 3,254,030 shares that remained available for purchase under the 2000 Employee
Stock Purchase Plan and 20,464,898 shares available for grant under the 2005 Stock Plan. |
|
(4) |
|
Represents options and RSU awards outstanding under the following plans: (i) 1999 Stock
Option and Restricted Stock Plan; and (ii) the 1998 Canadian Stock Incentive Plan. No further
awards will be made under any of these plans. |
107
McKESSON CORPORATION
The following are descriptions of equity plans that have been approved by the Companys
stockholders. The plans are administered by the Compensation Committee of the Board of Directors,
except for the portion of the 2005 Stock Plan related to Non-Employee Directors, which is
administered by the Committee on Directors and Corporate Governance.
2005 Stock Plan: The 2005 Stock Plan was adopted by the Board of Directors on May 25, 2005
and approved by the Companys stockholders on July 27, 2005. The 2005 Stock Plan permits the
granting of up to 42.5 million shares in the form of stock options, restricted stock (RS), RSUs,
performance-based restricted stock units (PeRSUs) and other share-based awards. For any one
share of common stock issued in connection with a RS, RSU, PeRSU or other share-based award, two
shares shall be deducted from the shares available for future grants. Shares of common stock not
issued or delivered as a result of the net exercise of a stock option, shares used to pay the
withholding taxes related to a stock award or shares repurchased on the open market with proceeds
from the exercise of options shall not be returned to the reserve of shares available for issuance
under the 2005 Stock Plan.
Stock options are granted at no less than fair market value and those options granted under
the 2005 Stock Plan generally have a contractual term of seven years. Prior to 2005, stock options
typically had a contractual term of ten years. Options generally become exercisable in four equal
annual installments beginning one year after the grant date or after four years from the date of
grant. The vesting of RS or RSUs is determined by the Compensation Committee at the time of grant.
RS and RSUs generally vest over four years. Vesting of PeRSUs ranges from one to three-year
periods following the end of the performance period and may follow the graded or cliff method of
vesting.
Non-employee directors may be granted an award on the date of each annual meeting of the
stockholders for up to 5,000 RSUs, as determined by the Board. Such non-employee director award is
fully vested on the date of the grant.
2000 Employee Stock Purchase Plan (the ESPP): The ESPP is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. In
March 2002, the Board amended the ESPP to allow for participation in the plan by employees of
certain of the Companys international and certain other subsidiaries. As to those employees, the
ESPP does not qualify under Section 423 of the Internal Revenue Code. Currently, 16 million shares
have been approved by stockholders for issuance under the ESPP.
The ESPP is implemented through a continuous series of three-month purchase periods (Purchase
Periods) during which contributions can be made toward the purchase of common stock under the
plan.
Each eligible employee may elect to authorize regular payroll deductions during the next
succeeding Purchase Period, the amount of which may not exceed 15% of a participants compensation.
At the end of each Purchase Period, the funds withheld by each participant will be used to
purchase shares of the Companys common stock. The purchase price of each share of the Companys
common stock is based on 85% of the fair market value of each share on the last day of the
applicable Purchase Period. In general, the maximum number of shares of common stock that may be
purchased by a participant for each calendar year is determined by dividing $25,000 by the fair
market value of one share of common stock on the offering date.
The following are descriptions of equity plans that have not been submitted for approval by
the Companys stockholders:
On July 27, 2005, the Companys stockholders approved the 2005 Stock Plan which had the effect
of terminating the 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive
Plan and certain 1999 one-time stock option plan awards, which plans had not been submitted for
approval by the Companys stockholders, and the 1997 Non-Employee Directors Equity Compensation
and Deferral Plan, which had previously been approved by the Companys stockholders. Prior grants
under these plans include stock options, RS and RSUs. Stock options under the terminated plans
generally have a ten-year life and vest over four years. RS contains certain restrictions on
transferability and may not be transferred until such restrictions lapse. Each of these plans has
outstanding equity grants, which are subject to the terms and conditions of their respective plans,
but no new grants will be made under these terminated plans.
108
McKESSON CORPORATION
Item 13. Certain Relationships and Related Transactions and Director Independence
Information with respect to certain transactions with management is incorporated by reference
from the Proxy Statement under the heading Certain Relationships and Related Transactions.
Additional information regarding certain related party balances and transactions is included in the
Financial Review section of this Annual Report on Form 10-K and Financial Note 20, Related Party
Balances and Transactions, to the consolidated financial statements.
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services is set forth under the heading
Ratification of Appointment of Deloitte & Touche LLP as the Companys Independent Registered
Public Accounting Firm for Fiscal 2011 in our Proxy Statement and all such information is
incorporated herein by reference.
109
McKESSON CORPORATION
PART IV
Item 15. Exhibits and Financial Statement Schedule
|
|
|
|
|
|
|
Page |
|
(a)(1) Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
(a)(2) Financial Statement Schedule |
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
All other schedules not included have been omitted because of the absence of
conditions under which they are required or because the required information, where
material, is shown in the financial statements, financial notes or supplementary
financial information. |
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
110
McKESSON CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
McKesson Corporation |
|
|
|
|
|
|
|
Dated: May 4, 2010
|
|
/s/ Jeffrey C. Campbell
Jeffrey C. Campbell
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
On behalf of the Registrant and pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the capacities and on
the date indicated:
|
|
|
|
|
*
|
|
* |
|
|
|
|
M. Christine Jacobs, Director
|
|
|
Chairman, President and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
Jeffrey C. Campbell
|
|
Marie L. Knowles, Director |
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
Nigel A. Rees
|
|
David M. Lawrence, M.D., Director |
|
|
Vice President and Controller |
|
|
|
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
Andy D. Bryant, Director
|
|
Edward A. Mueller, Director |
|
|
|
|
|
|
|
*
|
|
* |
|
|
|
|
Jane E. Shaw, Director
|
|
|
|
|
|
|
|
|
|
/s/ Laureen E. Seeger
|
|
|
Alton F. Irby III, Director
|
|
Laureen E. Seeger |
|
|
|
|
*Attorney-in-Fact |
|
|
|
|
|
|
|
|
|
Dated: May 4, 2010 |
|
|
111
McKESSON CORPORATION
Schedule Of Valuation And Qualifying Accounts Disclosure
SCHEDULE II
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2010, 2009 and 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions |
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
Charged to |
|
|
From |
|
|
Balance at |
|
|
|
Beginning of |
|
|
Costs and |
|
|
Other |
|
|
Allowance |
|
|
End of |
|
Description |
|
Year |
|
|
Expenses |
|
|
Accounts (3) |
|
|
Accounts (1) |
|
|
Year (2) |
|
Year Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts |
|
$ |
152 |
|
|
$ |
17 |
|
|
$ |
7 |
|
|
$ |
(45 |
) |
|
$ |
131 |
|
Other allowances |
|
|
12 |
|
|
|
6 |
|
|
|
10 |
|
|
|
(4 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
164 |
|
|
$ |
23 |
|
|
$ |
17 |
|
|
$ |
(49 |
) |
|
$ |
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts |
|
$ |
163 |
|
|
$ |
27 |
|
|
$ |
3 |
|
|
$ |
(41 |
) |
|
$ |
152 |
|
Other allowances |
|
|
9 |
|
|
|
6 |
|
|
|
1 |
|
|
|
(4 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
172 |
|
|
$ |
33 |
|
|
$ |
4 |
|
|
$ |
(45 |
) |
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts |
|
$ |
139 |
|
|
$ |
41 |
|
|
$ |
17 |
|
|
$ |
(34 |
) |
|
$ |
163 |
|
Other allowances |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
150 |
|
|
$ |
41 |
|
|
$ |
17 |
|
|
$ |
(36 |
) |
|
$ |
172 |
|
|
|