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, 2009
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 (§229.405 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
o 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 2008, was approximately $14.5
billion.
Number
of shares of common stock outstanding on April 30, 2009:
271,418,501.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2009 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
Item 1. Business
General
McKesson Corporation (McKesson, the Company, the Registrant or we and other similar
pronouns), is a Fortune 15 corporation providing supply, 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 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.
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 pharmacy software 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, and strategic management software solutions, pharmacy automation for
hospitals, as well as connectivity, outsourcing and other services. Our Payor group of businesses,
which includes our InterQual®, clinical auditing and compliance and medical management software
businesses and our care management programs, are also included in this segment. The segments
customers include hospitals, physicians, homecare providers, retail pharmacies and payors from
North America, the United Kingdom, other European countries and Asia Pacific.
Net revenues for our segments for the last three years were as follows:
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(Dollars in billions) |
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2009 |
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2008 |
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2007 |
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Distribution Solutions |
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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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$ |
90.7 |
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98 |
% |
Technology Solutions |
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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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2.3 |
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2 |
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Total |
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$ |
106.6 |
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100 |
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$ |
101.7 |
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93.0 |
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100 |
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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.
3
McKESSON CORPORATION
U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and other
healthcare-related products to customers in three primary customer segments: 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 master 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 Connect (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:
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Central Fill 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 420 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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EnterpriseRx McKesson EnterpriseRx is a fully integrated and centrally hosted pharmacy
management solution (Application Service Provider model). Built utilizing the latest
technology, EnterpriseRx 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 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:
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Health Mart® Health Mart® is a national network of more than
2,000 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 Advantage (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® 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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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. |
Institutional Healthcare Providers Electronic ordering/purchasing and supply chain
management systems that help improve efficiencies, save labor and improve asset utilization:
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Fulfill-Rx 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® The McKesson OneStop Generics program 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 Manager and Easy340B Solutions that help providers manage, track, and
report on the medication replenishment associated with the federal 340B Drug Pricing Program. |
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High Performance Pharmacy Framework that identifies and categorizes hospital pharmacy
best practices to help improve clinical outcomes and financial results. The High Performance
Pharmacy Assessment and Benchmarking tools enable 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. 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 reimbursement and patient access
program development. The business also supports manufacturers in product life cycle management as
well as physicians and patients in gaining cost effective access to needed therapies. McKesson
Specialty Care Solutions facilitates 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 which help organizations improve reimbursement
services and business efficiencies as well as clinical and patient support tools for improving
safety and therapy adherence.
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 Payor group of businesses, which includes
our InterQual,® clinical
auditing and compliance software businesses and our disease and medical management programs. This
segment markets its products and services to integrated delivery networks, hospitals, physician
practices, home healthcare providers, retail pharmacies and payors. The segment sells its
solutions and services internationally through subsidiaries and/or distribution agreements in
Canada, the United Kingdom, Ireland, other European countries, Asia Pacific and Israel.
6
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, the Technology Solutions segment also offers 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. It includes a clinical data repository, clinical decision
support, 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, the segment provides a suite of enterprise medical imaging and
information management systems, including a picture archiving communications system and a
comprehensive cardiovascular information system. The segments 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: The segments revenue cycle solutions are designed to reduce days in
accounts receivable, prevent insurance claim denials, reduce costs and improve productivity.
Examples of solutions include online patient billing, contract management, electronic claims
processing and coding compliance checking. The segments 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 consist of an integrated suite of
applications that enhance an organizations ability to plan and optimize the delivery of quality
patient care. These solutions automate the management of the workforce, supply chain, surgical and
anesthesia documentation and provide analytics for performance measurement. Linking resource
requirements to care protocols, the resource management solutions enhance predictability, improve
communication, reduce variability and lower overall costs associated with care delivery.
Automation: Automation solutions include technologies that help hospitals re-engineer and
improve their medication use and supply management processes. Examples include centralized
pharmacy automation for unit-dose medications, unit-based cabinet technologies for secure
medication storage and rapid retrieval, point-of-use supply automation systems for inventory
management and revenue capture and an automated medication administration system for ensuring
accuracy at the point of care. 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.
Physician practice solutions: The segment provides 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,
specialty or geographic location. The segments 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 their own 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.
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McKESSON CORPORATION
Connectivity: Through the segments vendor-neutral RelayHealth® and its intelligent network,
the company provides interactive solutions that streamline clinical, financial and administrative
communication between patients, providers, payors, pharmacies 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 billion financial and clinical transactions annually.
In addition to the product offerings described above, the Technology Solutions segment 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: The segment has worked with numerous healthcare organizations to support
the smooth operation of their information systems by providing the technical infrastructure
designed to maximize application accessibility, availability, security and performance.
Outsourcing Services: The segment helps organizations focus their resources on healthcare
while the segment manages their information technology or operations 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. The segment offers a wide array of quality service
options, 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 |
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Claims performance solutions to facilitate accurate and
efficient medical claim payments. |
Acquisitions, 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, Acquisitions and Investments and Discontinued Operations, to the consolidated financial
statements appearing in this Annual Report on Form 10-K.
Competition
In every area of healthcare distribution operations, our Distribution Solutions segment faces
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 which 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.
8
McKESSON CORPORATION
Our Technology Solutions segment experiences substantial competition from many firms,
including other computer services firms, consulting firms, shared service vendors, certain
hospitals and hospital groups, 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®, Closed Loop DistributionSM, Comets®,
ConsumerScriptSM,.com Pharmacy Solutions®, Econolink®, Empowering Healthcare®,
EnterpriseRx, Expect More From MooreSM, FrontEdge, Health Mart®, High Performance
PharmacySM, LoyaltyScript®, Lynx®, Max ImpactSM, McKesson®, McKesson
Advantage®, McKesson Empowering Healthcare®, McKesson Max Rewards®, McKesson OneStop Generics®,
McKesson Priority Express®,
McKesson Supply ManagerSM, MediNet, Medi-Pak®, Mobile
ManagerSM, Moore Medical®, MoorebrandSM, NOA®, Northstar
RXSM, Onmark®, Pharma360®, PharmacyRx, Pharmaserv®, PharmAssureSM,
ProIntercept®,
ProMed®, ProPBM®, RX PakSM, RX Savings Access®,
ServiceFirst®,
Staydry®,
Sunmark®, Supply Management OnlineSM, TrialScript®, Valu-Rite®, XVIII B Medi
Mart® 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, Ask-A-Nurse®,
Care Fully Connected, CareEnhance®, Connect-RN, Connect-Rx®, CRMS®, DataStat®, ePremis®, Episode
Profiler®, E-Script,
Fulfill-RxTM,
HealthQuest®,
Horizon Admin-Rx, Horizon Clinicals®,
HorizonWP®,
InterQual®,
Lytec®,
MedCarousel®,
Medisoft®,
One-Call®,
One-Staff®, ORSOS, PACMED,
PakPlus-Rx®,
Paragon®,
Pathways 2000®,
Patterns Profiler, Per-Se®, Per-Se Technologies®
(and logo), 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. All 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 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.
Other Information about the Business
Customers: During 2009, sales to our ten largest customers accounted for approximately 52% of
our total consolidated revenues. Sales to our two largest customers, CVS Caremark Corporation
(Caremark,) and Rite Aid Corporation (Rite Aid) accounted for 14% and 12% of our total
consolidated revenues. At March 31, 2009, accounts receivable from our ten largest customers were
approximately 49% of total accounts receivable. Accounts receivable from Caremark 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 9% of our purchases in 2009. 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 2009
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. However, we also have certain distribution
arrangements with manufacturers that include an inflation-based compensation component whereby we
benefit when the manufacturers increase their prices as we sell our inventory being held 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 adversely
impact our gross profit margin.
9
McKESSON CORPORATION
Research and Development: Our development expenditures primarily consist of our investment in
software development held for sale. We spent $438 million, $420 million and $359 million for
development activities in 2009, 2008 and 2007 and of these amounts, we capitalized 17%, 17% and
21%. 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 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: 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. Other than any expenditures that may be required in connection with those legal matters, 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 2009 and is not expected to be
material in the next year.
Employees:
On March 31, 2009, we employed approximately 32,500 persons compared to 32,900 in
2008 and 31,800 in 2007.
Financial Information About Foreign and Domestic Operations: Information as to foreign and
domestic operations is included in Financial Notes 1 and 22, Significant Accounting Policies and
Segments of Business, to the consolidated financial statements appearing in this Annual Report on
Form 10-K.
Item 1A. Risk Factors
Information regarding our risk factors is included in the Financial Review under the captions
Factors Affecting Forward-Looking Statements and Additional Factors That May Affect Future
Results, beginning on page 51 of this Annual Report on Form 10-K.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
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.
10
McKESSON CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the three months ended March 31, 2009.
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 chosen annually to serve until the first meeting of the Board
of Directors following the next annual meeting of stockholders and 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
|
|
|
50 |
|
|
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 13 years. |
|
|
|
|
|
|
|
Jeffrey C. Campbell
|
|
|
48 |
|
|
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 5
years. |
|
|
|
|
|
|
|
Paul C. Julian
|
|
|
53 |
|
|
Executive Vice President, Group President since
April 2004; Senior Vice President from August
1999 to April 2004; President of McKesson
Distribution Solutions since March 2000.
Service with the Company 13 years. |
|
|
|
|
|
|
|
Jorge L. Figueredo
|
|
|
48 |
|
|
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 1 year. |
|
|
|
|
|
|
|
Marc E. Owen
|
|
|
49 |
|
|
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 8
years. |
|
|
|
|
|
|
|
Laureen E. Seeger
|
|
|
47 |
|
|
Executive Vice President, General Counsel and
Secretary since March 2006; Vice President and
General Counsel of McKesson Provider
Technologies from February 2000 to March 2006.
Service with the Company 9 years. |
|
|
|
|
|
|
|
Randall N. Spratt
|
|
|
57 |
|
|
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; Senior Vice President,
Imaging, Technology and Business Process
Improvement from January 2000 to April 2003.
Service with the Company 23 years |
11
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). High and low prices for the common stock by quarter are
included in Financial Note 23, Quarterly Financial Information (Unaudited), to the
consolidated financial statements appearing in this Annual Report on Form 10-K. |
|
(b) |
|
Holders: The number of record holders of the Companys common stock at March 31, 2009 was
approximately 9,200. |
|
(c) |
|
Dividends: Dividend information is included in Financial Note 23, Quarterly Financial
Information (Unaudited), to the consolidated financial statements appearing in this Annual
Report on Form 10-K. |
|
|
|
In April 2008, the Companys Board of Directors (Board) approved a change in the Companys
dividend policy by increasing the amount of the Companys quarterly dividend from six cents to
twelve cents per share, applicable to ensuing quarterly dividend declarations until further
action by the Board. 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 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(2) (3) |
|
Per Share |
|
Program |
|
Programs |
|
January 1, 2009 January 31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
980 |
|
February 1, 2009 February 28, 2009 |
|
|
1 |
|
|
|
44.66 |
|
|
|
1 |
|
|
|
944 |
|
March 1, 2009 March 31, 2009 |
|
|
3 |
|
|
|
39.25 |
|
|
|
3 |
|
|
|
830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4 |
|
|
|
40.41 |
|
|
|
4 |
|
|
|
830 |
|
|
|
|
(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 purchases were part of the publicly announced programs. |
|
(3) |
|
The number of shares purchased reflects rounding adjustments. |
In April 2008, the Board approved a plan to repurchase $1.0 billion of the Companys common
stock of which $830 million remained available as of March 31, 2009. Stock repurchases may be made
from time to time in open market or private transactions.
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, we repurchased 4 million shares for $204 million and all of these shares were
formally retired by the Company. The retired shares constitute authorized but unissued shares.
12
McKESSON CORPORATION
(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, |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
McKesson Corporation |
|
$ |
100.00 |
|
|
$ |
126.38 |
|
|
$ |
175.41 |
|
|
$ |
197.91 |
|
|
$ |
177.74 |
|
|
$ |
120.18 |
|
S&P 500 Index |
|
$ |
100.00 |
|
|
$ |
106.69 |
|
|
$ |
119.21 |
|
|
$ |
133.31 |
|
|
$ |
126.54 |
|
|
$ |
78.34 |
|
Value Line
Healthcare Sector
Index |
|
$ |
100.00 |
|
|
$ |
105.11 |
|
|
$ |
117.52 |
|
|
$ |
125.09 |
|
|
$ |
117.35 |
|
|
$ |
91.93 |
|
|
|
|
|
* |
|
Assumes $100 invested in the Companys common stock and in each index on March 31, 2004 and
that all dividends are reinvested. |
Item 6. Selected Financial Data
Selected financial data is presented in the Five-Year Highlights section of this Annual Report
on Form 10-K.
13
McKESSON CORPORATION
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements discussion and analysis of the Companys results of operations and financial
condition are presented in the Financial Review section of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is included in the Financial Review section of this Annual
Report on
Form 10-K.
Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data are included as separate sections of this Annual
Report on
Form 10-K. See Item 15.
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 62 and page 63 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.
14
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 2009 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. The balance of the information required
by this item is contained in the discussion entitled Executive Officers of the Registrant in Item
4 of Part I of this Annual Report on Form 10-K.
Pursuant to Section 303A.12 (a) of the NYSE Listed Company Manual, the Companys Chief
Executive Officer submitted to the NYSE a certification, dated August 18, 2008, stating that, as of
such date, he was not aware of any violation by the Company of any NYSE corporate governance
listing standards.
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.
Copies of these documents may be obtained from:
|
|
|
|
|
Corporate Secretary |
|
|
McKesson Corporation |
|
|
One Post Street, 35th Floor |
|
|
San Francisco, CA 94104 |
|
|
(800) 826-9360 |
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.
15
McKESSON CORPORATION
The following table sets forth information as of March 31, 2009 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) |
|
|
14.8 |
|
|
$ |
43.74 |
|
|
|
15.9 |
(3) |
Equity compensation plans not approved
by security holders(4),(5) |
|
|
7.7 |
|
|
|
32.57 |
|
|
|
|
|
|
|
|
|
|
(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 4,379,566 shares which remained available for purchase under the 2000 Employee
Stock Purchase Plan (ESPP) and 11,505,221 shares available for grant under the 2005 Stock
Plan as of March 31, 2009. |
|
(4) |
|
Represents options and RSU awards outstanding under the following plans: (i) 1999 Stock
Option and Restricted Stock Plan; (ii) 1998 Canadian Stock
Incentive Plan; and (iii) certain
one time stock option plan awards. No further awards will be made under any of these plans. |
|
(5) |
|
As a result of acquisitions, the Company currently has two assumed option plans under which
options and RSU awards are exercisable for 39,804 shares of the Companys common stock. No further
awards will be made under any of the assumed plans and information regarding the assumed
options is not included in the table above. |
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 28 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.
16
McKESSON CORPORATION
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.
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 2010 in our Proxy Statement and all such information is
incorporated herein by reference.
17
McKESSON CORPORATION
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) |
|
Financial Statements, Financial Statement Schedule and Exhibits |
|
|
|
|
|
|
|
Page |
|
|
|
20 |
|
|
|
|
|
|
Financial statements and 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. |
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
25 |
|
18
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 5, 2009 |
/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:
|
|
|
*
|
|
* |
|
|
|
John H. Hammergren
|
|
Marie L. Knowles, Director |
Chairman, President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
*
|
|
* |
|
|
|
Jeffrey C. Campbell
|
|
David M. Lawrence M.D., Director |
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
|
|
|
|
*
|
|
* |
|
|
|
Nigel A. Rees
|
|
Edward A. Mueller, Director |
Vice President and Controller |
|
|
(Principal Accounting Officer) |
|
|
|
|
|
*
|
|
* |
|
|
|
Andy D. Bryant, Director
|
|
James V. Napier, Director |
|
|
|
*
|
|
* |
|
|
|
Wayne A. Budd, Director
|
|
Jane E. Shaw, Director |
|
|
|
*
|
|
/s/ Laureen E. Seeger |
|
|
|
Alton F. Irby III, Director
|
|
Laureen E. Seeger |
|
|
*Attorney-in-Fact |
|
|
|
* |
|
|
|
|
|
M. Christine Jacobs, Director
|
|
Dated: May 5, 2009 |
19
McKESSON CORPORATION
SCHEDULE II
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2009, 2008 and 2007
(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, 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 |
(4) |
Other allowances |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
150 |
|
|
$ |
41 |
|
|
$ |
17 |
|
|
$ |
(36 |
) |
|
$ |
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March
31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for
doubtful accounts |
|
$ |
124 |
|
|
$ |
24 |
|
|
$ |
15 |
|
|
$ |
(24 |
) |
|
$ |
139 |
(4) |
Other allowances |
|
|
7 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
131 |
|
|
$ |
28 |
|
|
$ |
15 |
|
|
$ |
(24 |
) |
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(1) |
|
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Written off |
|
$ |
27 |
|
|
$ |
32 |
|
|
$ |
24 |
|
|
Operation sold |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Credited to other accounts |
|
|
12 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45 |
|
|
$ |
34 |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Amounts shown as deductions from receivables |
|
$ |
164 |
|
|
$ |
172 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Primarily represents additions relating to acquisitions. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
Includes a $10 million allowance for non-current receivables. |
20
McKESSON CORPORATION
EXHIBIT INDEX
The agreements included as exhibits to this report are included to provide information
regarding their terms and not intended to provide any other factual or disclosure information about
the Company or the other parties to the agreements. The agreements may contain representations and
warranties by each of the parties to the applicable agreement that were made solely for the benefit
of the other parties to the applicable agreement, and;
|
|
should not in all instances be treated as categorical statements of fact, but rather as a
way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
|
|
|
may apply standards of materiality in a way that is different from what may be viewed as
material to you or other investors; and |
|
|
|
were made only as of the date of the applicable agreement or such other date or dates as
may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time.
Exhibits identified under Incorporated by Reference in the table below are on file with the
Commission and are incorporated by reference as exhibits hereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
Incorporated by Reference |
Number |
|
Description |
|
Form |
|
File Number |
|
Exhibit |
|
Filing Date |
|
3.1
|
|
Amended and Restated Certificate of
Incorporation of the Company as filed
with the Delaware Secretary of State
on July 25, 2007.
|
|
10-Q
|
|
1-13252
|
|
|
3.1 |
|
|
October 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated By-Laws of the
Company, dated as of April 22, 2009.
|
|
8-K
|
|
1-13252
|
|
|
3.2 |
|
|
April 28, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Indenture, dated as of March 11, 1997,
between the Company, as Issuer, and
The First National Bank of Chicago, as
Trustee.
|
|
10-K
|
|
1-13252
|
|
|
4.4 |
|
|
June 19, 1997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Indenture, dated as of January 29,
2002, between the Company, as Issuer,
and the Bank of New York, as Trustee.
|
|
10-K
|
|
1-13252
|
|
|
4.6 |
|
|
June 12, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Indenture, dated as of March 5, 2007,
by and between the Company, as Issuer,
and The Bank of New York Trust
Company, N.A., as Trustee.
|
|
8-K
|
|
1-13252
|
|
|
4.1 |
|
|
March 5, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1*
|
|
McKesson Corporation 1994 Stock Option
and Restricted Stock Plan as amended
through July 31, 2001.
|
|
10-K
|
|
1-13252
|
|
|
10.4 |
|
|
June 12, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2*
|
|
McKesson Corporation 1999 Stock Option
and Restricted Stock Plan, as amended
through May 26, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.2 |
|
|
May 7, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3*
|
|
McKesson Corporation 1997 Non-Employee
Directors Equity Compensation and
Deferral Plan, as amended through
January 29, 2003.
|
|
10-K
|
|
1-13252
|
|
|
10.4 |
|
|
June 10, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4*
|
|
McKesson Corporation Supplemental
Profit Sharing Investment Plan, as
amended and restated on January 29,
2003.
|
|
10-K
|
|
1-13252
|
|
|
10.6 |
|
|
June 6, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5*
|
|
McKesson Corporation Supplemental
Profit Sharing Investment Plan II, as
amended and restated on October 24,
2008.
|
|
10-Q
|
|
1-13252
|
|
|
10.1 |
|
|
October 29, 2008 |
21
McKESSON CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
Incorporated by Reference |
Number |
|
Description |
|
Form |
|
File Number |
|
Exhibit |
|
Filing Date |
10.6*
|
|
McKesson Corporation Deferred
Compensation Administration Plan,
amended and restated effective October
28, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.6 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7*
|
|
McKesson Corporation Deferred
Compensation Administration Plan II,
as amended and restated effective
October 28, 2004, including Amendment
No. 1 thereto effective July 25, 2007.
|
|
10-K
|
|
1-13252
|
|
|
10.7 |
|
|
May 7, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8*
|
|
McKesson Corporation Deferred
Compensation Administration Plan III,
as amended and restated on October 24,
2008.
|
|
10-Q
|
|
1-13252
|
|
|
10.2 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9*
|
|
McKesson Corporation 1994 Option Gain
Deferral Plan, as amended and restated
as of October 28, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.8 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10*
|
|
McKesson Corporation Executive Benefit
Retirement Plan, as amended and
restated on October 24, 2008.
|
|
10-Q
|
|
1-13252
|
|
|
10.3 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.11*
|
|
McKesson Corporation Executive
Survivor Benefits Plan, as amended and
restated as of October 28, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.11 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12*
|
|
McKesson Corporation Severance Policy
for Executive Employees, as amended
and restated on December 29, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13*
|
|
McKesson Corporation Change in Control
Policy for Selected Executive
Employees, as amended and restated on
April 21, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14*
|
|
McKesson Corporation 2005 Management
Incentive Plan, as amended and
restated on October 24, 2008 and
effective as of January 1, 2009.
|
|
10-Q
|
|
1-13252
|
|
|
10.5 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15*
|
|
Form of Statement of Terms and
Conditions Applicable to Awards
Pursuant to the McKesson Corporation
2005 Management Incentive Plan,
effective April 1, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16*
|
|
McKesson Corporation Long-Term
Incentive Plan, as amended and
restated on October 24, 2008 and
effective as of January 1, 2009.
|
|
10-Q
|
|
1-13252
|
|
|
10.6 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17*
|
|
McKesson Corporation Stock Purchase
Plan, as amended through July 31,
2002.
|
|
10-K
|
|
1-13252
|
|
|
10.19 |
|
|
June 6, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18*
|
|
McKesson Corporation 2005 Stock Plan,
as amended and restated on July 23,
2008.
|
|
10-Q
|
|
1-13252
|
|
|
10.7 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19*
|
|
Forms of (i) Statement of Terms and
Conditions applicable to Options,
Restricted Stock, Restricted Stock
Units and Performance Shares, (ii)
Stock Option Grant Notice and (iii)
Restricted Stock Unit Agreement, under
the McKesson Corporation 2005 Stock
Plan, as amended and restated on July
23, 2008.
|
|
|
|
|
|
|
|
|
|
|
22
McKESSON CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
Incorporated by Reference |
Number |
|
Description |
|
Form |
|
File Number |
|
Exhibit |
|
Filing Date |
10.20
|
|
Deed of Settlement and Amendment in
Relation to Human Resources and
Payroll Services Contract dated as of
June 22, 2005 between the Secretary of
State for Health for the United
Kingdom and McKesson Information
Solutions UK Limited.
|
|
10-Q
|
|
1-13252
|
|
|
10.1 |
|
|
August 1, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Amended and Restated Receivables
Purchase Agreement, dated as of June
11, 2004, among the Company, as
servicer, CGSF Funding Corporation, as
seller, the several conduit purchasers
from time to time party to the
Agreement, the several committed
purchasers from time to time party to
the Agreement, the several managing
agents from time to time party to the
Agreement, and Bank One, N.A. (Main
Office Chicago), as collateral agent.
|
|
10-K
|
|
1-13252
|
|
|
10.20 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Amended and Restated Credit Agreement,
dated as of June 8, 2007 among the
Company and McKesson Canada
Corporation, collectively, the
Borrowers, Bank of America, N.A., as
Administrative Agent, Bank of America,
N.A. (acting through its Canada
branch), as Canadian Administrative
Agent, JPMorgan Chase Bank and
Wachovia Bank, National Association,
as Co-Syndication Agents, Wachovia
Bank, National Association, as L/C
Issuer, The Bank of Nova Scotia and
The Bank of Tokyo-Mitsubishi UFJ,
LTD., Seattle branch, as
Co-Documentation Agents, and The Other
Lenders Party Hereto Banc of America
Securities LLC, as sole lead arranger
and sole book manager.
|
|
8-K
|
|
1-13252
|
|
|
10.1 |
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Purchase Agreement, dated as of
December 31, 2002, between McKesson
Capital Corp. and General Electric
Capital Corporation.
|
|
10-K
|
|
1-13252
|
|
|
10.41 |
|
|
June 6, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Services Agreement, dated as of
December 31, 2002, between McKesson
Capital Corp. and General Electric
Capital Corporation.
|
|
10-K
|
|
1-13252
|
|
|
10.42 |
|
|
June 6, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Interim Credit Agreement, dated as of
January 26, 2007, among the Company,
Bank of America N.A., as
Administrative Agent, Wachovia Bank,
National Association, as Syndication
Agent, the other Lenders party there
to, and Banc of America Securities LLC
and Wachovia Capital Markets, LLC, as
Joint Lead Arrangers and Joint Book
Managers.
|
|
8-K
|
|
1-13252
|
|
|
10.1 |
|
|
January 26, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26*
|
|
Amended and Restated Employment
Agreement, dated as of November 1,
2008, by and between the Company and
its Chairman, President and Chief
Executive Officer.
|
|
10-Q
|
|
1-13252
|
|
|
10.10 |
|
|
October 29, 2008 |
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
Incorporated by Reference |
Number |
|
Description |
|
Form |
|
File Number |
|
Exhibit |
|
Filing Date |
10.27*
|
|
Amended and Restated Employment
Agreement, dated as of November 1,
2008, by and between the Company and
its Former Executive Vice President
and President, McKesson Technology
Solutions.
|
|
10-Q
|
|
1-13252
|
|
|
10.11 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.28*
|
|
Amended and Restated Employment
Agreement, dated as of November 1,
2008, by and between the Company and
its Executive Vice President and Group
President.
|
|
10-Q
|
|
1-13252
|
|
|
10.12 |
|
|
October 29, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Computation of Ratio of Earnings to
Fixed Charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
List of Subsidiaries of the Registrant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Consent of Independent Registered
Public Accounting Firm, Deloitte &
Touche LLP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Power of Attorney.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive
Officer Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, and
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial
Officer Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities
Exchange Act of 1934 as amended, and
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Management contract or compensation plan or arrangement in which directors and/or executive
officers are eligible to participate. |
|
|
|
Filed herewith. |
|
|
|
Furnished herewith. |
|
|
|
Confidential treatment has been granted for certain portions of this exhibit and such
confidential portions have been filed with the Commission. |
Registrant agrees to furnish to the Commission upon request a copy of each instrument defining
the rights of security holders with respect to issues of long-term debt of the registrant, the
authorized principal amount of which does not exceed 10% of the total assets of the registrant.
24
McKESSON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
|
|
|
|
|
|
|
Page |
|
|
|
26 |
|
|
|
|
27 |
|
|
|
|
62 |
|
|
|
|
63 |
|
Consolidated Financial Statements: |
|
|
|
|
|
|
|
64 |
|
|
|
|
65 |
|
|
|
|
66 |
|
|
|
|
67 |
|
|
|
|
68 |
|
25
McKESSON CORPORATION
FIVE-YEAR HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended March 31, |
(In millions, except per share amounts and ratios) |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
Operating Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
|
$ |
79,096 |
|
Percent change |
|
|
4.8 |
% |
|
|
9.4 |
% |
|
|
6.9 |
% |
|
|
10.0 |
% |
|
|
16.3 |
% |
Gross profit |
|
|
5,378 |
|
|
|
5,009 |
|
|
|
4,332 |
|
|
|
3,777 |
|
|
|
3,342 |
|
Income (loss) from continuing operations before income
taxes |
|
|
1,064 |
|
|
|
1,457 |
|
|
|
1,297 |
|
|
|
1,171 |
|
|
|
(266 |
) |
Income (loss) after income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
823 |
|
|
|
989 |
|
|
|
968 |
|
|
|
745 |
|
|
|
(173 |
) |
Discontinued operations |
|
|
|
|
|
|
1 |
|
|
|
(55 |
) |
|
|
6 |
|
|
|
16 |
|
Net income (loss) |
|
|
823 |
|
|
|
990 |
|
|
|
913 |
|
|
|
751 |
|
|
|
(157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
3,065 |
|
|
|
2,438 |
|
|
|
2,730 |
|
|
|
3,527 |
|
|
|
3,658 |
|
Days sales outstanding for: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer receivables |
|
|
24 |
|
|
|
22 |
|
|
|
21 |
|
|
|
22 |
|
|
|
23 |
|
Inventories |
|
|
31 |
|
|
|
33 |
|
|
|
32 |
|
|
|
29 |
|
|
|
34 |
|
Drafts and accounts payable |
|
|
43 |
|
|
|
44 |
|
|
|
43 |
|
|
|
41 |
|
|
|
40 |
|
Total assets |
|
|
25,267 |
|
|
|
24,603 |
|
|
|
23,943 |
|
|
|
20,961 |
|
|
|
18,775 |
|
Total debt, including capital lease obligations |
|
|
2,512 |
|
|
|
1,797 |
|
|
|
1,958 |
|
|
|
991 |
|
|
|
1,211 |
|
Stockholders equity |
|
|
6,193 |
|
|
|
6,121 |
|
|
|
6,273 |
|
|
|
5,907 |
|
|
|
5,275 |
|
Property acquisitions |
|
|
195 |
|
|
|
195 |
|
|
|
126 |
|
|
|
166 |
|
|
|
135 |
|
Acquisitions of businesses, net |
|
|
358 |
|
|
|
610 |
|
|
|
1,938 |
|
|
|
589 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at year-end |
|
|
271 |
|
|
|
277 |
|
|
|
295 |
|
|
|
304 |
|
|
|
299 |
|
Shares on which earnings (loss) per common share were
based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
279 |
|
|
|
298 |
|
|
|
305 |
|
|
|
316 |
|
|
|
294 |
|
Basic |
|
|
275 |
|
|
|
291 |
|
|
|
298 |
|
|
|
306 |
|
|
|
294 |
|
Diluted earnings (loss) per common share (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
3.17 |
|
|
$ |
2.36 |
|
|
$ |
(0.59 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.18 |
) |
|
|
0.02 |
|
|
|
0.06 |
|
Total |
|
|
2.95 |
|
|
|
3.32 |
|
|
|
2.99 |
|
|
|
2.38 |
|
|
|
(0.53 |
) |
Cash dividends declared |
|
|
134 |
|
|
|
70 |
|
|
|
72 |
|
|
|
74 |
|
|
|
71 |
|
Cash dividends declared per common share |
|
|
0.48 |
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.24 |
|
Book value
per common share
(2)(3) |
|
|
22.87 |
|
|
|
22.10 |
|
|
|
21.26 |
|
|
|
19.43 |
|
|
|
17.64 |
|
Market value per common share year end |
|
|
35.04 |
|
|
|
52.37 |
|
|
|
58.54 |
|
|
|
52.13 |
|
|
|
37.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital employed (4) |
|
|
8,705 |
|
|
|
7,918 |
|
|
|
8,231 |
|
|
|
6,898 |
|
|
|
6,486 |
|
Debt to capital ratio (5) |
|
|
28.9 |
% |
|
|
22.7 |
% |
|
|
23.8 |
% |
|
|
14.4 |
% |
|
|
18.7 |
% |
Net debt to net capital employed (6) |
|
|
6.1 |
% |
|
|
6.6 |
% |
|
|
0.1 |
% |
|
|
(24.1 |
)% |
|
|
(12.6 |
)% |
Average stockholders equity (7) |
|
|
6,214 |
|
|
|
6,344 |
|
|
|
6,022 |
|
|
|
5,736 |
|
|
|
5,264 |
|
Return on stockholders equity (8) |
|
|
13.2 |
% |
|
|
15.6 |
% |
|
|
15.2 |
% |
|
|
13.1 |
% |
|
|
(3.0 |
)% |
|
|
|
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 (loss), 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.
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.
We conduct our business through two operating segments: Distribution Solutions and Technology
Solutions. See Financial Note 22, 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) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Revenues |
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
$ |
92,977 |
|
Litigation Charge (Credits), Net |
|
|
493 |
|
|
|
(5 |
) |
|
|
(6 |
) |
Income from Continuing Operations
Before Income Taxes |
|
$ |
1,064 |
|
|
$ |
1,457 |
|
|
$ |
1,297 |
|
Income Tax Provision |
|
|
(241 |
) |
|
|
(468 |
) |
|
|
(329 |
) |
|
|
|
Income from Continuing Operations |
|
|
823 |
|
|
|
989 |
|
|
|
968 |
|
Discontinued Operations, Net |
|
|
|
|
|
|
1 |
|
|
|
(55 |
) |
|
|
|
Net Income |
|
$ |
823 |
|
|
$ |
990 |
|
|
$ |
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
3.17 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
(0.18 |
) |
|
|
|
Total |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
2.99 |
|
|
|
|
Weighted Average Diluted Shares |
|
|
279 |
|
|
|
298 |
|
|
|
305 |
|
|
|
|
Revenues increased 5% to $106.6 billion and 9% to $101.7 billion in 2009 and 2008. The
increase in revenues primarily reflects market growth rates in our Distribution Solutions segment,
which accounted for 97% of our consolidated revenues. Revenues for 2009 also benefited from our
acquisitions of Oncology Therapeutics Network (OTN) in October 2007 and McQueary Brothers Drug
Company (McQueary Brothers) in May 2008. Revenues for 2008 also benefited from our acquisitions
of OTN and Per-Se Technologies, Inc. (Per-Se) in January 2007.
Gross profit increased 7% to $5.4 billion and 16% to $5.0 billion in 2009 and 2008. As a
percentage of revenues, gross profit increased 11 basis points (bp) to 5.04% and 27 bp to 4.93%
in 2009 and 2008. 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. Gross profit margin increased in 2008 primarily reflecting a greater
proportion of higher margin Technology Solutions products and an improvement in our Distribution
Solutions segment margin.
Operating expenses were $4.2 billion, $3.5 billion and $3.1 billion in 2009, 2008 and 2007.
Operating expenses increased primarily due to additional expenses incurred to support our sales
growth, expenses associated with our business acquisitions and higher employee compensation
expenses. In addition, operating expenses for 2009 include a pre-tax charge of $493 million for
the Average Wholesale Price (AWP) Litigation as further discussed under the caption Operating
Expenses in this Financial Review.
27
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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. Excluding these items, other income, net decreased
over the last two years primarily due to a decrease in interest income due to lower average cash
and cash equivalents balances and interest rates.
Interest expense increased slightly in 2009 and 43% to $142 million in 2008. 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. Interest
expense in 2008 reflects additional expense associated with the issuance of $1.0 billion of
long-term debt in the fourth quarter of 2007 as part of our $1.8 billion acquisition of Per-Se.
Income from continuing operations before income taxes was $1.1 billion, $1.5 billion and $1.3
billion in 2009, 2008 and 2007 reflecting the above noted factors.
Our reported income tax rates were 22.7%, 32.1% and 25.4% in 2009, 2008 and 2007.
Fluctuations in our reported income tax rates are primarily due to changes in income within states
and foreign countries that have lower tax rates as well as other discrete tax events that occurred
during the year. In 2009, income tax expense included $111 million of net income tax benefits for
discrete items, which primarily consists of 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. In 2007, we recorded an $83 million credit to our income
tax provision relating to the reversal of income tax reserves related to uncertain tax matters
surrounding our Consolidated Securities Litigation Action costs. These tax reserves were initially
established in 2005 and were favorably resolved in 2007.
In 2007, our results from discontinued operations were an after-tax loss of $55 million or
$0.18 per diluted share which included the divestiture of our Distribution Solutions segments
Acute Care medical-surgical supply business. This business was sold for net cash proceeds of $160
million and resulted in an after-tax loss of $66 million, which included a $79 million non-tax
deductible write-off of goodwill.
Net income was $823 million, $990 million and $913 million in 2009, 2008 and 2007 and diluted
earnings per share was $2.95, $3.32 and $2.99.
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
Distribution Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pharmaceutical direct distribution & services |
|
$ |
66,876 |
|
|
$ |
60,436 |
|
|
$ |
54,127 |
|
|
|
|
|
U.S. pharmaceutical sales to customers warehouses |
|
|
25,809 |
|
|
|
27,668 |
|
|
|
27,555 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
92,685 |
|
|
|
88,104 |
|
|
|
81,682 |
|
|
|
|
|
Canada pharmaceutical distribution & services |
|
|
8,225 |
|
|
|
8,106 |
|
|
|
6,692 |
|
|
|
|
|
Medical-Surgical distribution & services |
|
|
2,658 |
|
|
|
2,509 |
|
|
|
2,364 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Distribution Solutions |
|
|
103,568 |
|
|
|
98,719 |
|
|
|
90,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
2,337 |
|
|
|
2,240 |
|
|
|
1,537 |
|
|
|
|
|
Software and software systems |
|
|
572 |
|
|
|
591 |
|
|
|
536 |
|
|
|
|
|
Hardware |
|
|
155 |
|
|
|
153 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Technology Solutions |
|
|
3,064 |
|
|
|
2,984 |
|
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues increased 5% to $106.6 billion in 2009 and 9% to $101.7 billion in 2008. The growth
in revenues was primarily driven by our Distribution Solutions segment, which accounted for 97% of
revenues.
28
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
U.S. pharmaceutical direct distribution and services revenues increased in 2009 compared with
2008 primarily reflecting market growth rates (which include growing drug utilization and price
increases, offset in part by the increased use of lower priced generics), our acquisitions of OTN
in October 2007 and McQueary Brothers in May 2008, expanded business with existing customers and a
shift of revenues from sales to customers warehouses to direct store delivery. U.S.
pharmaceutical direct distribution and services revenues increased in 2008 compared with 2007
primarily due to market growth rates, new and expanded business and to a lesser extent, due to our
acquisition of OTN. OTN is a U.S. distributor of specialty pharmaceuticals and McQueary Brothers
is a regional distributor of pharmaceutical, health and beauty products to independent and regional
chain pharmacies in the Midwestern U.S.
U.S. pharmaceutical sales to customers warehouses decreased in 2009 compared with 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, these revenues were
also impacted by a shift to direct store delivery. These decreases were partially offset by
expanded business with existing customers. U.S. pharmaceutical sales to customers warehouses
increased in 2008 compared with 2007 primarily as a result of new and expanded agreements with
customers, which were partially offset by a customers loss of business and reduced revenues
associated with the consolidation of certain 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.
The customer mix of our U.S. pharmaceutical distribution revenues was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Direct Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Independents |
|
|
13 |
% |
|
|
13 |
% |
|
|
13 |
% |
Institutions |
|
|
32 |
|
|
|
30 |
|
|
|
29 |
|
Retail Chains |
|
|
26 |
|
|
|
24 |
|
|
|
23 |
|
|
|
|
Subtotal |
|
|
71 |
|
|
|
67 |
|
|
|
65 |
|
Sales to retail customers warehouses |
|
|
29 |
|
|
|
33 |
|
|
|
35 |
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
From 2007 to 2009, the percentage of total direct and warehouse revenue attributed to the
Companys retail chain customers declined compared to our other customer groups. 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.
29
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Canadian pharmaceutical distribution and services revenues for 2009 increased slightly
primarily reflecting new and expanded business and market growth rates, which were almost fully
offset by unfavorable foreign exchange rates and the loss of a customer. Revenues for 2008
increased primarily reflecting market growth rates, favorable foreign exchange rates and new and
expanded business, partially offset by six fewer days of sales compared to 2007. Canadian revenues
in 2009 were negatively impacted by 9% unfavorable foreign exchange rates and in 2008 and 2007,
benefited from 12% and 5% favorable foreign exchange rates.
Medical-Surgical distribution and services revenues increased over the last two years
primarily reflecting market growth rates and acquisitions. In addition, revenues in 2008 were
impacted by the discontinuance of the distribution of a product line and by one less week of sales
compared to 2007. Revenues associated with this product line are now recorded by our U.S.
pharmaceutical distribution business.
Technology Solutions revenues increased in 2009 primarily due to increased services revenues
reflecting the segments expanded customer base and outsourcing revenues. These increases were
partially offset by unfavorable foreign exchange rates and a decrease in software revenues,
particularly in the hospital and physician office customer segments. Technology Solutions
revenues increased in 2008 primarily reflecting the acquisition of Per-Se, a leading provider of
financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies,
increased services revenues, the segments expanded customer base and clinical software
implementations.
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
2007 |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
3,955 |
|
|
$ |
3,586 |
|
|
$ |
3,252 |
|
Technology Solutions |
|
|
1,423 |
|
|
|
1,423 |
|
|
|
1,080 |
|
|
|
|
Total |
|
$ |
5,378 |
|
|
$ |
5,009 |
|
|
$ |
4,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
3.82 |
% |
|
|
3.63 |
% |
|
|
3.58 |
% |
Technology Solutions |
|
|
46.44 |
|
|
|
47.69 |
|
|
|
48.24 |
|
Total |
|
|
5.04 |
|
|
|
4.93 |
|
|
|
4.66 |
|
|
|
|
Gross profit increased 7% to $5.4 billion in 2009 and 16% to $5.0 billion in 2008. As a
percentage of revenues, gross profit increased 11 bp in 2009 and 27 bp in 2008. Gross profit
margin increased in 2009 primarily due to margin improvements in our Distribution Solutions
segment, partially offset by a decline in our Technology Solutions segment reflecting a change in
product mix and the recognition of $21 million of disease management deferred revenues in 2008 for
which associated expenses were previously recognized as incurred. Gross profit margin increased in
2008 primarily reflecting a greater proportion of higher margin Technology Solutions products, the
recognition of $21 million of disease management deferred revenues and an improvement in our
Distribution Solutions segments margin.
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 last-in, first-out
(LIFO) net inventory credits ($8 million LIFO net expense in 2009 compared with a $14 million
LIFO net credit in 2008).
30
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 other
accounting methods, thereby mitigating the effects of inflation and deflation on operating profit.
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, we estimate that the Companys total gross profit margin on
sales to customers warehouses represented about 5% of the segments total gross profit dollars.
As previously discussed, from 2007 to 2009, the percentage of total direct and warehouse revenue
attributed to our retail chain customers declined compared to our other customer groups. This
decline resulted in a positive impact on the Companys gross profit margin.
In 2008, our Distribution Solutions segments gross profit margin increased slightly compared
to 2007. Gross profit margin was impacted by higher buy side margins, the benefit of increased
sales of generic drugs with higher margins, a decline in impairment charges associated with the
write-down of certain abandoned assets within our Pharmacy Systems and Automation group and an
increase associated with a lower proportion of revenues within the segment attributed to sales to
customers warehouses. These increases were partially offset by a decline in sell margin and LIFO
inventory credits ($14 million in 2008 compared with $64 million in 2007).
In 2007, we contributed $36 million in cash and $45 million in net assets primarily from our
Pharmacy Systems and Automation business to Parata Systems, LLC (Parata,) in exchange for a
significant minority interest in Parata. Parata is a manufacturer of pharmacy robotic equipment.
In connection with the investment, we abandoned certain assets which resulted in a $15 million
charge to cost of sales and we incurred $6 million of other expenses related to the transaction
which were recorded within operating expenses. We did not recognize any additional gains or losses
as a result of this transaction as we believed the fair value of our investment in Parata
approximated the carrying value of consideration contributed to Parata.
In 2009, our Technology Solutions segments gross profit margin decreased compared to the
prior year primarily reflecting a change in product mix and the recognition in 2008 of $21 million
of disease management deferred revenues for which associated expenses were previously recognized as
incurred. In 2008, Technology Solutions segments gross profit margin decreased primarily
reflecting a change in product mix which included a higher proportion of lower margin Per-Se
services revenues. Partially offsetting this decrease was the recognition of $21 million of
disease management deferred revenues for which associated expenses were previously recognized as
incurred.
31
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
2007 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (1) |
|
$ |
2,777 |
|
|
$ |
2,138 |
|
|
$ |
1,896 |
|
Technology Solutions |
|
|
1,096 |
|
|
|
1,115 |
|
|
|
884 |
|
Corporate |
|
|
309 |
|
|
|
283 |
|
|
|
294 |
|
|
|
|
Subtotal |
|
|
4,182 |
|
|
|
3,536 |
|
|
|
3,074 |
|
Securities Litigation credits, net |
|
|
|
|
|
|
(5 |
) |
|
|
(6 |
) |
|
|
|
Total |
|
$ |
4,182 |
|
|
$ |
3,531 |
|
|
$ |
3,068 |
|
|
|
|
Operating Expenses as a Percentage of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
2.68 |
% |
|
|
2.17 |
% |
|
|
2.09 |
% |
Technology Solutions |
|
|
35.77 |
|
|
|
37.37 |
|
|
|
39.48 |
|
Total |
|
|
3.92 |
|
|
|
3.47 |
|
|
|
3.30 |
|
|
|
|
|
|
|
(1) |
|
Operating expenses for 2009 include the $493 million AWP Litigation charge. |
Operating expenses increased 18% to $4.2 billion in 2009 and 15% to $3.5 billion in 2008.
Operating expenses for 2009 include a pre-tax charge of $493 million for the AWP Litigation.
Excluding this charge, operating expenses increased primarily due to additional expenses incurred
to support our sales growth, expenses associated with our business acquisitions and higher employee
compensation expenses.
In 2009, we recorded a $493 million charge for the AWP Litigation. As discussed in Financial
Note 18, Other Commitments and Contingent Liabilities, to the accompanying consolidated financial
statements, we reached an agreement to settle all private party
claims relating to First DataBank,
Inc.s published drug reimbursement benchmarks for $350 million. The settlement terms, which are
subject to final court approval, include an express denial of liability of any kind. We also
recorded a reserve 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 reserve for the pending and expected AWP-related claims by public payors
resulted in a pre-tax, non-cash charge of $493 million ($311 million after-tax). We do not
currently expect to have difficulties funding the settlement payments associated with the claims by
private parties and any settlement or other resolution of the claims by public payors.
In 2009, 2008 and 2007, we recorded share-based compensation expense of $99 million, $91
million and $60 million. At the beginning of our fiscal 2007, we adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which requires the recognition of
expense resulting from transactions in which we acquire goods and services by issuing our shares,
share options or other equity instruments. Due to the accelerated vesting of share-based awards
prior to 2007, share-based compensation expense has increased over the past two years as
share-based compensation is granted and amortized over the requisite service period. The rate of
increase from 2009 and 2008 was mitigated by a decrease in our stock price and a change in terms
of the grants. Share-based compensation charges are affected by a number of variables as further
described under the caption Critical Accounting Policies and Estimates included in this financial
review. As a result, actual future share-based compensation expense may differ from historical
levels of expense. Additional information regarding our share based payments is also included in
Financial Note 3, Share-Based Payment, to the consolidated financial statements appearing in
this Annual Report on Form 10-K.
32
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Over the last three years, we recorded the following reduction in workforce and restructuring
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Reduction in workforce charges (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
|
|
Technology Solutions |
|
|
25 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total |
|
|
32 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges (credits) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (2) |
|
|
4 |
|
|
|
8 |
|
|
|
2 |
|
Technology Solutions (3) (4) |
|
|
(2 |
) |
|
|
9 |
|
|
|
13 |
|
Corporate |
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
Total |
|
|
1 |
|
|
|
19 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reduction in workforce and restructuring charges |
|
$ |
33 |
|
|
$ |
27 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (5) |
|
$ |
5 |
|
|
$ |
7 |
|
|
$ |
|
|
Operating expenses |
|
|
28 |
|
|
|
20 |
|
|
|
15 |
|
|
|
|
Total reduction in workforce and restructuring charges |
|
$ |
33 |
|
|
$ |
27 |
|
|
$ |
15 |
|
|
|
|
|
|
|
(1) |
|
Although reductions in workforce actions do not constitute a restructuring plan (as defined
under U.S. generally accepted accounting principles (GAAP,)) they do represent independent
actions taken from time to time, as appropriate. |
|
(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) |
|
Expenses for 2007 primarily consisted of $8 million for employee severance costs associated
with the reallocation of product development and marketing resources and the realignment of an
international business within our Technology Solutions segment. |
|
(5) |
|
Amounts recorded to cost of sales pertain solely to our Technology Solutions segment. |
Up to 2009, we have provided contributions for our profit sharing investment plan (PSIP) for
U.S. employees primarily through a leveraged employee stock ownership plan (ESOP). In 2008 and
2007, we granted 1 million shares per year to plan participants. ESOP expense and other
contribution expense, including interest expense on ESOP debt, was $53 million, $13 million and $13
million in 2009, 2008 and 2007. ESOP expense for 2008 and 2007 was significantly lower than 2009
due to the utilization of lower cost basis shares in the ESOP to fund the Companys matching
contributions. At March 31, 2009, almost all of the 24 million common shares in the ESOP 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.
As previously reported on the PSIPs Annual
Report on Form 11-K for the year ended March 31, 2008, the PSIP is a member of the settlement class in the Consolidated Securities
Litigation Action (refer to Financial Note 18, Other Commitments and Contingent Liabilities, to the consolidated financial
statements appearing in this Annual Report on Form 10-K). On April 27, 2009, the court issued an order approving the distribution of the
settlement funds. At this time, we do not know the date on which the distribution of settlement funds to the PSIP will occur.
33
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
On a segment basis, Distribution Solutions operating expenses increased over the past two
years primarily due to the $493 million AWP Litigation charge in 2009, business acquisitions
(including OTN and McQueary Brothers) and additional costs incurred to support our sales volume
growth. Operating expenses as a percentage of revenues increased primarily due to the AWP
Litigation charge as well as additional costs incurred to support our sales volume growth.
Share-based compensation expense for this segment was $26 million for 2009 and 2008 and $17 million
for 2007.
Technology Solutions segments operating expenses decreased in 2009 and increased in 2008.
Operating expenses for 2009 benefited from 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 increased in 2008 primarily reflecting higher
employee compensation, an increase in net research and development expenses, additional costs for
business acquisitions and higher bad debt expense. Operating expenses as a percentage of revenues
for this segment have decreased over the last two years primarily reflecting the segments cost
containment efforts and a more favorable business mix. Share-based compensation expense for this
segment was $40 million, $35 million and $19 million for 2009, 2008 and 2007.
Corporate expenses increased in 2009 compared with 2008 primarily reflecting an increase in
accounts receivable sales facility fees, compensation expense and additional costs incurred to
support various initiatives. Corporate expenses decreased in 2008 compared with 2007 primarily
reflecting a decrease in legal expenses associated with our Securities Litigation, a decrease in
charitable contributions and a decrease in other long-term compensation. Share-based compensation
expense for Corporate was $33 million, $30 million and $24 million for 2009, 2008 and 2007.
Other Income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
By Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
(20 |
) |
|
$ |
35 |
|
|
$ |
39 |
|
Technology Solutions |
|
|
7 |
|
|
|
11 |
|
|
|
10 |
|
Corporate |
|
|
25 |
|
|
|
75 |
|
|
|
83 |
|
|
|
|
Total |
|
$ |
12 |
|
|
$ |
121 |
|
|
$ |
132 |
|
|
|
|
In 2009, other income, net includes 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, L.L.C.
(Verispan,) a data analytics company. The impairment charge and the gain on sale of our
investment were both recorded within our Distribution Solutions segment. Excluding these items,
other income, net decreased over the last two years primarily due to a decrease in interest income
due to lower cash balances and interest rates. Interest income, which is primarily recorded in
Corporate expenses, was $31 million, $89 million and $103 million in 2009, 2008 and 2007.
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 a 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.
34
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In 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) |
|
2009 |
|
2008 |
|
2007 |
|
Segment Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (1) |
|
$ |
1,158 |
|
|
$ |
1,483 |
|
|
$ |
1,395 |
|
Technology Solutions |
|
|
334 |
|
|
|
319 |
|
|
|
206 |
|
|
|
|
Subtotal |
|
|
1,492 |
|
|
|
1,802 |
|
|
|
1,601 |
|
Corporate Expenses, net |
|
|
(284 |
) |
|
|
(208 |
) |
|
|
(211 |
) |
Securities Litigation credits, net |
|
|
|
|
|
|
5 |
|
|
|
6 |
|
Interest Expense |
|
|
(144 |
) |
|
|
(142 |
) |
|
|
(99 |
) |
|
|
|
Income from Continuing Operations Before Income Taxes |
|
$ |
1,064 |
|
|
$ |
1,457 |
|
|
$ |
1,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
1.12 |
% |
|
|
1.50 |
% |
|
|
1.54 |
% |
Technology Solutions |
|
|
10.90 |
|
|
|
10.69 |
|
|
|
9.20 |
|
|
|
|
|
|
|
(1) |
|
Operating profit for 2009 for our Distribution Solutions segment includes the $493 million
pre-tax 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 our equity investment in Verispan. |
Segment operating profit includes gross profit, net of operating expenses, and other income
for our two operating segments.
In 2009, operating profit margin in our Distribution Solutions segment decreased compared with
2008 primarily reflecting an increase in operating expenses as a percentage of revenues and a
decrease in other income, partially offset by a higher gross profit margin. Operating profit in
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 2008, operating profit margin in our Distribution Solutions segment
decreased slightly compared with 2007 primarily reflecting higher operating expenses as a
percentage of revenues, partially offset by an improved gross profit margin.
Operating profit margin in our Technology Solutions segment increased over the last two years
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 has benefited from
cost containment efforts.
Corporate expenses, net of other income, increased in 2009 compared with 2008 primarily due to
a decrease in interest income and an increase in operating expenses. Corporate expenses, net of
other income, decreased in 2008 compared with 2007 primarily due to a decrease in operating
expenses, partially offset by a decrease in interest income.
Securities Litigation Credits, Net: In 2008 and 2007, we recorded net credits of $5 million
and $6 million relating to various settlements for our Securities Litigation. Recent developments
pertaining to our Securities Litigation are described in Financial Note 18, Other Commitments and
Contingent Liabilities, to the accompanying consolidated financial statements.
35
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Interest Expense: Interest expense increased slightly in 2009 and 43% to $142 million in
2008. 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. Interest expense in 2008 reflects additional expense associated with the issuance
of $1.0 billion of long-term debt in the fourth quarter of 2007 as part of our $1.8 billion
acquisition of Per-Se. 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 22.7%, 32.1% and 25.4% in 2009, 2008 and 2007. In
addition to the items noted below, fluctuations in our reported tax rate are primarily due to
changes within state and foreign tax rates resulting from 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, income tax expense included $111 million of net income tax benefits for discrete
items, which primarily consists of 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. Of the $111 million of net tax benefits, $87 million represents a
non-cash benefit to McKesson. In addition, included within these discrete items is an income tax
benefit of $3 million pertaining to our $63 million pre-tax impairment of two equity-held
investments. The income tax benefit on the impairment is net of a valuation allowance of $22
million.
In June 2008, the U.S. Internal Revenue Service (IRS) began its examination of fiscal years
2003 through 2006. On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(Stabilization Act), which included a retroactive reinstatement of the federal research and
development credit, was signed into law. The Stabilization Act extends the federal research and
development credit to December 31, 2009. In 2009, we recorded a benefit to our income tax
provision as a result of these research and development credits. In Canada, we received an
assessment from the Canada Revenue Agency (CRA) for a total of $19 million related to transfer
pricing for 2004. We plan to appeal the assessment. We believe we have adequately provided for
any potential adverse results for 2004 and future years. 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 approved by the Joint Committee
on Taxation during the third quarter of 2008. The IRS and the Company have 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 Canada, we received an assessment from the CRA for a total of $9 million related to transfer
pricing for 2003. We have filed an appeal with the Tax Court of Canada. We believe we have
adequately provided for any potential adverse results for 2003. During 2008, we also favorably
concluded various foreign examinations, which resulted in the recognition of approximately $4
million of income tax benefits. Income tax expense for 2008 was also impacted by a non-tax
deductible $13 million increase in a legal reserve.
In 2007, we recorded a credit to current income tax expense of $83 million which primarily
pertained to our receipt of a private letter ruling from the IRS holding that our payment of
approximately $960 million to settle our Consolidated Securities Litigation Action is fully
tax-deductible. We previously established tax reserves to reflect the lack of certainty regarding
the tax deductibility of settlement amounts paid in the Consolidated Securities Litigation Action
and related litigation. In 2007, we also recorded $24 million in income tax benefits arising
primarily from settlements and adjustments with various taxing authorities and research and
development investment tax credits from our Canadian operations.
36
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Discontinued Operations:
Results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, (1) |
(In millions) |
|
2008 |
|
2007 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(9 |
) |
Other |
|
|
1 |
|
|
|
|
|
Income taxes |
|
|
(1 |
) |
|
|
4 |
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sales of discontinued operations |
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
|
|
|
$ |
(49 |
) |
Other |
|
|
|
|
|
|
10 |
|
Income taxes |
|
|
|
|
|
|
(11 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(66 |
) |
Other |
|
|
|
|
|
|
11 |
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(55 |
) |
|
|
|
|
|
|
(1) |
|
No charges for discontinued operations were incurred during 2009. |
In 2007, we sold our Distribution Solutions segments Medical-Surgical Acute Care business to
Owens & Minor, Inc. (OMI) for net cash proceeds of approximately $160 million. Revenues
associated with the Acute Care business prior to its disposition were $597 million for 2007.
Financial results for 2007 for this discontinued operation include an after-tax loss of $66
million, which primarily consists of an after-tax loss of $61 million for the business disposition
and $5 million of after-tax losses associated with operations, other asset impairment charges and
employee severance costs. The after-tax loss of $61 million for the business disposition includes
a $79 million non-tax deductible write-off of goodwill, as further described below.
In connection with the divestiture, we allocated a portion of our Distribution Solutions
segments Medical-Surgical Distribution business goodwill to the Acute Care business as required
by SFAS No. 142, Goodwill and Other Intangible Assets. The allocation was based on the relative
fair values of the Acute Care business and the continuing businesses that are being retained by the
Company. The fair value of the Acute Care business was determined based on the net cash proceeds
resulting from the divestiture. As a result, we allocated $79 million of the segments goodwill to
the Acute Care business.
Additionally, as part of the divestiture, we entered into a transition services agreement
(TSA) with OMI under which we provided certain services to the Acute Care business during a
transition period of approximately six months. Financial results from the TSA, as well as employee
severance charges over the transition period, were recorded as part of discontinued operations.
The continuing cash flows generated from the TSA were not material to our consolidated financial
statements and the TSA was completed as of March 31, 2007.
In the second quarter of 2007, we also sold a wholly-owned subsidiary, Pharmaceutical Buyers
Inc., for net cash proceeds of $10 million. The divestiture resulted in an after-tax gain of $5
million resulting from the tax basis of the subsidiary exceeding its carrying value. Financial
results for this business, which were previously included in our Distribution Solutions segment,
were not material to our consolidated financial statements.
37
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The results for discontinued operations for 2007 also include an after-tax gain of $6 million
associated with the collection of a note receivable from a business sold in 2003 and the sale of a
small business.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, financial results for these businesses have been classified as discontinued operations for
all periods presented.
Net Income: Net income was $823 million, $990 million and $913 million in 2009, 2008 and 2007
and diluted earnings per share was $2.95, $3.32 and $2.99. The net income and diluted earnings per
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 Shares Outstanding: Diluted earnings per share was calculated based
on a weighted average number of shares outstanding of 279 million, 298 million and 305 million for
2009, 2008 and 2007. The decrease in the number of weighted average diluted shares outstanding
over the past two years primarily reflects a decrease in the number of common shares outstanding as
a result of stock repurchased, partially offset by exercised stock options.
International Operations
International operations accounted for 7.9%, 8.2% and 7.5% of 2009, 2008 and 2007 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 22, Segments of Business, to the
accompanying consolidated financial statements.
Acquisitions and Investment
|
|
|
|
|
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. 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. 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. |
38
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
|
|
|
|
|
In 2007, we made the following acquisitions and investment: |
|
|
|
|
|
On January 26, 2007, we acquired all of the outstanding shares of
Per-Se of Alpharetta, Georgia for $28.00 per share in cash plus
the assumption of Per-Ses debt, or approximately $1.8 billion in
aggregate, including cash acquired of $76 million. Per-Se is a
leading provider of financial and administrative healthcare
solutions for hospitals, physicians and retail pharmacies. The
acquisition of Per-Se is consistent with the Companys strategy of
providing products that help solve clinical, financial and
business processes within the healthcare industry. The
acquisition was initially funded with cash on hand and through the
use of an interim credit facility. In March 2007, we issued $1
billion of long-term debt, with such net proceeds after offering
expenses from the issuance, together with cash on hand, being used
to fully repay borrowings outstanding under the interim credit
facility (refer to Financial Note 12, Long-Term Debt and Other
Financing to the accompanying consolidated financial statements).
Financial results for Per-Se are primarily included within our
Technology Solutions segment. |
|
|
|
|
|
Approximately $1,258 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
$402 million representing customer relationships with a weighted-average life of 10 years,
developed technology of $56 million with a weighted-average life of 5 years and trademark and
trade names of $13 million with a weighted-average life of 5 years. |
|
|
|
|
|
In connection with the purchase price allocation, we have estimated the fair value of the
support obligations assumed from Per-Se in connection with the acquisition. The estimated fair
value of these obligations was determined utilizing a cost build-up approach. The cost build-up
approach determines fair value by estimating the costs relating to fulfilling the obligations
plus a normal profit margin. The sum of the costs and operating profit approximates, in theory,
the amount that we would be required to pay a third party to assume these obligations. As a
result, in allocating the purchase price, we recorded an adjustment to reduce the carrying value
of Per-Ses deferred revenue by $17 million to $30 million, which represents our estimate of the
fair value of the obligation assumed. |
|
|
|
|
|
Our Technology Solutions segment acquired RelayHealth Corporation
(RelayHealth) based in Emeryville, California. RelayHealth is a
provider of secure online healthcare communication services
linking patients, healthcare professionals, payors and pharmacies.
This segment also acquired two other entities, one specializing
in patient billing solutions designed to simplify and enhance
healthcare providers financial interactions with their patients
and the other a provider of integrated software for electronic
health records, medical billing and appointment scheduling for
independent physician practices. The total cost of these three
entities was $90 million, which was paid in cash. Goodwill
recognized in these transactions amounted to $63 million. |
|
|
|
|
|
Our Distribution Solutions segment acquired Sterling Medical
Services, LLC (Sterling,) which is based in Moorestown, New
Jersey. Sterling is a national provider and distributor of
disposable medical supplies, health management services and
quality management programs to the home care market. This segment
also acquired a medical supply sourcing agent. The total cost of
these two entities was $95 million, which was paid in cash.
Goodwill recognized in these transactions amounted to $47 million. |
|
|
|
|
|
We contributed $36 million in cash and $45 million in net assets
primarily from our Pharmacy Systems and Automation business to
Parata, in exchange for a significant minority interest in Parata.
Parata is a manufacturer of pharmacy robotic equipment. |
39
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 not generally 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, Acquisitions and Investment, to the accompanying consolidated
financial statements for further discussions regarding our acquisitions and investing activities.
2010 Outlook
Information regarding the Companys 2010 outlook is contained in our Form 8-K dated May 4,
2009. This Form 8-K should be read in conjunction with the sections Factors Affecting
Forward-looking Statements and Additional Factors That May Affect Future Results included in
this Financial Review.
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 accompanying consolidated financial statements. 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. An allowance is recorded 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, 2009, revenues and accounts receivable from our ten largest customers
accounted for approximately 52% of consolidated revenues and approximately 49% of accounts
receivable. At March 31, 2009, revenues and accounts receivable from our two largest customers,
CVS Caremark Corporation (Caremark) and Rite Aid Corporation (Rite Aid), represented
approximately 14% and 12% of total consolidated revenues and 14% and 10% of accounts receivable.
As a result, our sales and credit concentration is significant. Any defaults in payment or a
material reduction in purchases from this or any other large customer could have a significant
negative impact on our financial condition, results of operations and liquidity.
40
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
2009 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 future
increase in our allowance for doubtful accounts as a percentage of net revenue.
At March 31, 2009, trade and notes receivables were $7,029 million prior to allowances of $152
million. In 2009, 2008 and 2007 our provision for bad debts was $29 million, $41 million and $24
million. At March 31, 2009 and 2008, the allowance as a percentage of trade and notes receivables
was 2.2% and 2.5%. An increase or decrease of 0.1% in the 2009 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 state 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 on the last-in,
first-out (LIFO) method and Canadian inventories are stated 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 $8.5 billion and
$9.0 billion at March 31, 2009 and 2008.
The LIFO method was used to value approximately 88% of our inventories at March 31, 2009 and
2008. At March 31, 2009 and 2008, our LIFO reserves, net of LCM adjustments (discussed below),
were $85 million and $77 million. LIFO reserves include both pharmaceutical and non-pharmaceutical
products. In 2009, 2008 and 2007, we recognized net LIFO expense of $8 million and net LIFO
credits of $14 million and $64 million within our consolidated statements of operations. A LIFO
expense is recognized when the net effect of price increases on branded pharmaceuticals and
non-pharmaceutical products held in inventory exceeds the impact of price declines and shifts
towards generic pharmaceutical products, 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 pharmaceutical products exceeds the impact of price increases on branded
pharmaceuticals and non-pharmaceutical products held in inventory. In
2009, our $8 million net LIFO expense related to our
non-pharmaceutical products.
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 $107 million and $43 million
higher than FIFO as of March 31, 2009 and 2008. As a result, in 2009 and 2008, we recorded LCM
charges of $64 million and $43 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 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.
41
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Acquisitions: We account for acquired businesses using the purchase 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. Amounts allocated to acquired
in-process research and development are expensed at the date of acquisition. 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.
There are several methods that can 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. 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, Acquisitions and Investment, to the accompanying
consolidated financial statements for additional information regarding our acquisitions.
Goodwill: As a result of acquiring businesses, we have $3,528 million and $3,345 million of
goodwill at March 31, 2009 and 2008. We maintain goodwill assets on our books unless the assets
are deemed 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, but are not limited to, 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.
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 carrying value exceeds fair value,
a second step would be performed to calculate the amount of impairment, which would be recorded as
a charge in the consolidated statements of operations. Fair values can be determined using market,
income or cost approaches. To estimate the fair value of a business using the market approach, we
compare the business to similar businesses or guideline companies whose securities are actively
traded in public markets or the income approach, where 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.
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 the guideline companies, the subsequent
selection of an appropriate market value multiple for the business based on a comparison of the
business to the guideline companies, the determination of applicable premiums and discounts based
on any differences in marketability between the business and the guideline companies, projected
earnings and revenues for the business and when considering the income approach, include 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 the
income approach include long-term growth rates and cash flow forecasts for the business.
42
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 can 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 2009 and 2008, we concluded that there was no impairment of our goodwill. In September
2006, we sold our Distribution Solutions segments Acute Care medical-surgical supply business and
allocated $79 million of the segments goodwill to the divested business. The allocation was based
on the relative fair values of the Acute Care business and continuing businesses that were retained
by the Company.
Supplier Incentives: We receive fees for service and other incentives from our suppliers,
such as volume-related rebates and cash discounts, relating to the purchase or distribution of
inventory. 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 our suppliers relating to
various price and rebate incentives, including deductions or billings taken against payments
otherwise due to them from us. These reserve estimates are established based on our best 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 to us
including the vendors financial condition. We evaluate amounts due from our suppliers on a
continual basis and adjust the reserve estimates when appropriate based on changes in factual
circumstances. As of March 31, 2009 and 2008, supplier reserves were $113 million and $82 million.
All of the supplier reserves at March 31, 2009 and 2008 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 $11 million in 2009. The ultimate outcome of any amounts due from our suppliers may
be different from our estimate.
Income Taxes: Our income tax expense, 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
under Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes. 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 state, federal 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 of $1,572 million and $1,290 million at March 31, 2009 and 2008 and
deferred tax liabilities of $1,889 million and $1,555 million. Deferred tax assets primarily
consist of net loss carryforwards and timing differences on our compensation and benefit related
accruals as well as on our AWP Litigation accrual. Deferred tax liabilities primarily consist of
basis differences for inventory valuation (including inventory valued at LIFO) and other assets.
We established valuation allowances of $125 million and $27 million, against certain deferred tax
assets, which primarily relates 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. Management is
currently not
aware of any such changes that could have a material effect on the Companys results of
operations, cash flows or financial position.
43
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 $11 million, or $0.04 per diluted share, for 2009.
Share-Based Payment: Our compensation programs include share-based payments. We account for
all share-based payment 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 utilize the short-cut method
for calculating the tax effects of share-based compensation.
We estimate the grant-date fair value of employee stock options using the Black-Scholes
option-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.
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, but are not limited to, 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. In 2009, 2008 and 2007, share-based compensation
expense was $0.23, $0.20 and $0.13 per diluted share.
Loss Contingencies: We are subject to various claims, pending and potential legal actions for
product liability and other damages, investigations relating to governmental laws and regulations
and other matters arising out of the normal conduct of business. Each significant matter is
regularly reviewed and assessed for potential financial exposure. If a potential loss is
considered probable and can be reasonably estimated, we accrue a liability in the consolidated
financial statements. The assessment of probability and estimation of amount is highly subjective
and requires significant judgment due to uncertainties related to these matters and is based on the
best information available at the time. The accruals are adjusted, as appropriate, as additional
information becomes available. We regularly review contingencies to determine the adequacy of the
accruals and related disclosures. The amount of actual loss may differ significantly from these
estimates.
44
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 $1,351 million in 2009, compared with $869 million
in 2008 and $1,539 million in 2007. 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. Operating
activities for 2009 reflect an increase in receivables primarily associated with our revenue growth
as well as longer payment terms for customers and improvement in our net financial inventory
(inventory, net of accounts payable). 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 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.
Operating activities for 2007 benefited from improved accounts receivable management,
reflecting changes in our customer mix, our termination of a customer contract and an increase in
accounts payable associated with improved payment terms. These benefits were partially offset by
increases in inventory needed to support our growth and timing of inventory receipts. Operating
activities for 2007 also include payments of $25 million for the settlements of Securities
Litigation cases.
Net cash used in investing activities was $727 million in 2009, compared with $5 million in
2008 and $2,108 million in 2007. Investing activities for 2009 include $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 include $610 million
in 2008 of cash paid for business acquisitions, including OTN. Investing activities for 2007
reflect $1,938 million of cash paid for our business acquisitions (including $1.8 billion for
Per-Se). Investing activities for 2007 also reflect $179 million of cash proceeds from the sale of
various businesses, including net cash proceeds of $160 million for the sale of our Acute Care
business.
Financing activities provided cash of $178 million in 2009, utilized cash of $1,470 million in
2008 and provided cash of $379 million in 2007. 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 $699 million from the issuance of the notes, after offering expenses, will be 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 include $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.
45
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Financing activities for 2007 include our March 2007 issuance of $500 million of 5.25% notes
due 2013 and $500 million of 5.70% notes due 2017. Net proceeds
of $997 million from the issuance
of the notes, after offering expenses, were used, together with cash on hand, to repay $1.0 billion
of short-term borrowings then outstanding under the interim facility we entered into in connection
with the acquisition of Per-Se. Financing activities for 2007 also include $1.0 billion of cash
paid for stock repurchases and $72 million of dividends paid, partially offset by $399 million of
cash receipts from common stock issuances.
The Companys Board of Directors (the Board) has authorized the repurchase of McKessons
common stock from time to time in open market or private transactions, which is described in more
detail in Financial Note 19, Stockholders Equity, to the accompanying consolidated financial
statements. During 2009, 2008 and 2007, the Company repurchased $484 million, $1,686 million and
$1,001 million of its common stock at average prices of $50.52, $59.48 and $51.46. As of March 31,
2009, $830 million remained available for future repurchases under the outstanding April 2008 Board
approved share repurchase plan.
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.
In April 2008, the Board approved a change in the Companys dividend policy by increasing the
amount of the Companys quarterly dividend from six cents to
twelve cents per share, applicable to ensuing quarterly dividend declarations until further action by the Board. 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 most recent 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.
Selected Measures of Liquidity and Capital Resources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
2007 |
|
Cash and cash equivalents |
|
$ |
2,109 |
|
|
$ |
1,362 |
|
|
$ |
1,954 |
|
Working capital |
|
|
3,065 |
|
|
|
2,438 |
|
|
|
2,730 |
|
Debt, net of cash and cash equivalents |
|
|
403 |
|
|
|
435 |
|
|
|
4 |
|
Debt to capital ratio (1) |
|
|
28.9 |
% |
|
|
22.7 |
% |
|
|
23.8 |
% |
Net debt to net capital employed (2) |
|
|
6.1 |
% |
|
|
6.6 |
% |
|
|
0.1 |
% |
Return on stockholders equity (3) |
|
|
13.2 |
% |
|
|
15.6 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
(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. |
46
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Our cash and equivalents balance as of March 31, 2009 included approximately $900 million 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, 2009, 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, inventories, net of
drafts and accounts payable 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 new customer build-up requirements.
Consolidated working capital increased at March 31, 2009 compared with 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.
Consolidated working capital decreased at March 31, 2008 compared with March 31, 2007 primarily due
to a decrease in cash and cash equivalents, a decrease in net financial inventory (inventory, net
of drafts and accounts payable) and an increase in other accrued liabilities. These decreases in
working capital were partially offset by an increase in account receivables and the one-time
benefit associated with a $420 million reclassification of short-term tax liabilities to long-term
liabilities as a result of our implementation of FIN No. 48.
Our ratio of net debt to net capital employed decreased at March 31, 2009 compared with March
31, 2008 primarily reflecting an increase in cash and cash equivalents, partially offset by our
issuance of $700 million of long-term debt. This ratio increased at March 31, 2008 compared with
March 31, 2007 primarily reflecting a decrease in cash and cash equivalents.
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. A dividend of $0.06 per share was declared by the Board on
January 23, 2008 and was paid on April 1, 2008 to stockholders of record at the close of business
on March 3, 2008. In April 2008, the Board approved a change in the Companys dividend policy by
increasing the amount of the Companys quarterly dividend from six cents to twelve cents per share,
applicable to ensuing quarterly dividend declarations until further action by the Board. 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 2009, 2008 and 2007, we paid total cash dividends of $116 million, $70 million and $72
million.
47
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Contractual Obligations:
The table below presents our significant financial obligations and commitments at March 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years |
(In millions) |
|
Total |
|
Within 1 |
|
Over 1 to 3 |
|
Over 3 to 5 |
|
After 5 |
|
On balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1) |
|
$ |
2,509 |
|
|
$ |
219 |
|
|
$ |
419 |
|
|
$ |
848 |
|
|
$ |
1,023 |
|
Interest on borrowings (2) |
|
|
1,052 |
|
|
|
166 |
|
|
|
293 |
|
|
|
205 |
|
|
|
388 |
|
Other (3) |
|
|
683 |
|
|
|
379 |
|
|
|
55 |
|
|
|
44 |
|
|
|
205 |
|
Off balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations (4) |
|
|
3,574 |
|
|
|
3,353 |
|
|
|
110 |
|
|
|
82 |
|
|
|
29 |
|
Customer guarantees (5) |
|
|
114 |
|
|
|
51 |
|
|
|
24 |
|
|
|
1 |
|
|
|
38 |
|
Operating lease obligations
(6) |
|
|
427 |
|
|
|
105 |
|
|
|
162 |
|
|
|
81 |
|
|
|
79 |
|
|
|
|
Total |
|
$ |
8,359 |
|
|
$ |
4,273 |
|
|
$ |
1,063 |
|
|
$ |
1,261 |
|
|
$ |
1,762 |
|
|
|
|
|
|
|
(1) |
|
Represents maturities of the Companys long-term obligations including capital lease
obligations. See Financial Note 12, Long-Term Debt and Other Financing, for further
information. |
|
(2) |
|
Primarily represents interest that will be due in the future on our fixed rate long-term debt
obligations. |
|
(3) |
|
Primarily includes our AWP Litigation accrual and our estimated payments for pension and postretirement plans. |
|
(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, 2009, the maximum amounts of inventory repurchase
guarantees and other customer guarantees were $102 million and $10 million. We consider it
unlikely that we would make significant payments under these guarantees and accordingly, no
amounts had been accrued at March 31, 2009. Refer to Financial Note 17, Financial Guarantees
and Warranties, for further information. |
|
(6) |
|
Represents minimum rental payments and the related future interest payments for operating
leases. See Financial Note 16, Lease Obligations, for further information. |
At March 31, 2009, the liability recorded for uncertain tax positions, excluding associated
interest and penalties, was approximately $526 million pursuant to FIN No. 48, Accounting for
Uncertainty in Income Taxes. 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 FIN No. 48 liability has been excluded from the
contractual obligations table.
In addition, our banks and insurance companies have issued $115 million of standby letters of
credit and surety bonds on our behalf mostly in order to meet the security requirements for
statutory licenses and permits, court and fiduciary obligations and our workers compensation and
automotive liability programs.
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.
48
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Accounts Receivable Sales Facility:
In June 2008, we renewed our accounts receivable sales facility under substantially similar
terms to those previously in place, except that we increased the committed balance from $700
million to $1.0 billion. The renewed facility expires in June 2009. We anticipate renewing this
facility before its expiration. Through this facility, McKesson Corporation 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 corporations administered by financial institutions.
Sales of undivided interests in the receivables by the SPE to the Conduits are accounted for
as a sale in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, 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 our
accounts receivable and terms of the facility, approximates fair value. McKesson receives cash in
the amount of the face value for 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.
Should we default under the accounts receivable sales facility, the Conduits are entitled to
receive only collections on receivables owned by the SPE.
Information regarding our outstanding balances related to our interests in accounts receivable
sold or qualifying receivables retained is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
Receivables sold outstanding (1) |
|
$ |
|
|
|
$ |
|
|
Receivables retained, net of allowance for doubtful accounts |
|
|
4,814 |
|
|
|
4,251 |
|
|
|
|
|
|
|
(1) |
|
Deducted from receivables, net in the consolidated balance sheets. |
The following table summarizes the activity related to our interests in accounts receivable
sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
Proceeds from accounts receivable sales |
|
$ |
5,780 |
|
|
$ |
1,075 |
|
|
$ |
|
|
Fees and charges (1) (2) |
|
|
10 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Recorded in operating expenses in the consolidated statements of operations. |
|
(2) |
|
Fee charges related to the sale of receivables to the Conduits for the year ended March 31,
2007 were not material. |
The delinquency ratio for the qualifying receivables represented less than 1% of the total
qualifying receivables as of March 31, 2009 and 2008.
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.
49
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revolving Credit Facility
We have a $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. Total borrowings under this facility were $279 million for
2009. There were no borrowings for 2008. As of March 31, 2009 and 2008, there were no amounts
outstanding under this facility.
In January 2007, we entered into a $1.8 billion interim credit facility. The interim credit
facility was a single-draw 364-day unsecured facility with terms substantially similar to those
contained in the Companys existing revolving credit facility. We utilized $1.0 billion of this
facility to fund a portion of our purchase of Per-Se.
Commercial Paper
We issued and repaid approximately $3.3 billion and $260 million in commercial paper during
2009 and 2008. There were no commercial paper issuances outstanding at March 31, 2009 and 2008.
Our senior debt credit ratings from S&P, Fitch, and Moodys are currently BBB+, BBB+ and Baa3,
and our commercial paper ratings are currently A-2, F-2 and P-3. Our ratings outlook is positive
with S&P and stable with Fitch and Moodys. Our various borrowing facilities and certain long-term
debt instruments are subject to covenants. Our principal debt covenant is our debt to capital
ratio, which cannot exceed 56.5%. If we exceed this ratio, repayment of debt outstanding under the
revolving credit facility and $215 million of term debt could be accelerated. At March 31, 2009,
this ratio was 28.9% and we were in compliance with all other covenants. A reduction in our credit
ratings or the lack of compliance with our covenants could result in a negative impact on our
ability to finance our operations.
Funds necessary for the resolution of future debt maturities and our other cash requirements
are expected to be met by existing cash balances, cash flows from operations, existing credit
sources and other capital market transactions.
MARKET RISKS
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 2009, interest expense
would not have been materially different from that reported.
Our cash and cash equivalent balances earn interest at variable rates. Given recent declines
in interest rates, our interest income may be negatively impacted. If the underlying weighted
average interest rate on our cash and cash equivalent balances changed by 50 bp in 2009, interest
income would have increased or decreased by approximately $7 million.
As of March 31, 2009 and 2008, the net fair value liability of financial instruments with
exposure to interest rate risk was approximately $2,545 million and $1,861 million. Fair value was
estimated on the basis of quoted market prices, although trading in these debt securities is
limited and may not reflect fair value. 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 expose 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, 2009, 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.
50
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in Critical
Accounting Policies and Estimates appearing within this Financial Review and Financial Note 20,
Related Party Balances and Transactions, to the accompanying consolidated financial statements.
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 accompanying consolidated financial statements.
FACTORS AFFECTING 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, contains certain
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 under Additional Factors That May Affect Future Results. The reader should not
consider this list to be a complete statement of all risks and uncertainties.
These and other risks and uncertainties are described herein and in other information
contained in our publicly available Securities and Exchange Commission (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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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.
51
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 negative impact on our
revenues and net income.
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 an 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 an adverse impact on our results of operations.
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 an adverse impact on our results of operations.
At-Risk Launches: 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.
52
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 and (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. 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. These pedigree tracking laws and regulations could increase the overall regulatory
burden and costs associated with our pharmaceutical distribution business and could have an adverse
impact on our results of operations. In addition, the U.S. Federal 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 technologies. The FDA must develop a standardized numerical identifier by April 1, 2010.
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 (e.g., 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.
53
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 an
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 delays the adoption of CMSs final rule and
prevents CMS from publishing AMP data until October 1, 2009. We expect that the use of an AMP
benchmark 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 for generic pharmaceuticals and cause corresponding declines in our profitability. There
can be no assurance that the changes under the DRA would not have an adverse impact on our
business.
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 recently enacted American Recovery and Reinvestment
Act of 2009 requires meaningful use of certified healthcare information technology products by
healthcare providers in order to receive stimulus funds from the federal government, but the
certification standards have not yet been established. 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, delays in promulgating these
standards may result in postponement or cancellation of our customers decisions to purchase our
products.
54
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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.
Healthcare Reform Legislation: In addition to many of the targeted environmental and policy
issues outlined above, the national debate on whether and how to expand coverage to the uninsured,
to improve the quality of care and to reduce health costs and healthcare inflation will, if enacted
in whole or in part, impose major changes to the marketplace, some of which may impact either our
results of operations or the manner in which we operate our business.
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 which 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 computer services firms, consulting firms, shared service vendors, certain
hospitals and hospital groups, 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 an adverse impact on our results of operations.
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.
Certain of our U.S. pharmaceutical distribution business agreements entered into with branded
pharmaceutical manufacturers are partially inflation-based. A slowing in the frequency or rate of
branded price increases could have an 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 an adverse impact on our results
of operations.
Substantial defaults in payment, a material reduction in purchases or the loss of a large customer
could have an 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 the year ended March 31, 2009, sales to our ten largest customers
accounted for approximately 52% of our total consolidated revenues. Sales to our two largest
customers, Caremark and Rite Aid, represented approximately 14% and 12% of our 2009 total
consolidated revenues. At March 31, 2009, accounts receivable from our ten largest customers were
approximately 49% of total accounts receivable. Accounts receivable from Caremark and Rite Aid
were approximately 14% and 10% of total accounts receivable. We also have agreements with group
purchasing organizations, each of which functions as a purchasing agent on behalf of member
hospitals, pharmacies and other healthcare providers. As a result, our sales and credit
concentration is significant. A default in payment, a material reduction in purchases or the loss
of a large customer could have an adverse impact on our financial condition, results of operations
and liquidity.
55
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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
adversely affect 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 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 an 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.
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 an 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 by contract our liability to customers; 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 or may not be available in sufficient amounts to cover
one or more large claims against us. 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 an 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 revenues or increase our expenses.
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 an adverse impact on our
consolidated results of operations and a disproportionate impact on the results of operations of
our Technology Solutions segment.
56
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 an adverse impact
on our results of operations.
The loss of third party licenses utilized by our technology businesses may adversely impact our
operating results.
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.
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. 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 an adverse impact on our results
of operations.
System errors or failures of our products to conform to specifications could cause unforeseen
liabilities.
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.
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.
57
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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.
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 an adverse impact on our results of operations.
58
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 and federal laws regulate the confidentiality of patient records and the circumstances
under which those records may be released. These regulations govern the disclosure and use of
confidential patient medical record information and require the users of such information to
implement specified security measures. Regulations currently in place governing electronic health
data transmissions continue to evolve and are often unclear and difficult to apply. Although our
systems have been updated and modified to comply with the current requirements of state laws and
the Federal Health Insurance Portability and Accountability Act of 1996, 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 an adverse impact on our business.
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.
The length of our sales and implementation cycles for our Technology Solutions segment could have
an adverse impact on our future operating results.
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 an 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 GAAP to test our goodwill for
impairment, annually or more frequently if indicators for potential impairment exist. Indicators
that are considered include, but are not limited to, 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 an 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.
59
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Our operating results and our financial condition may be adversely affected by foreign 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.
Tax legislation initiatives or challenges to our tax positions could adversely affect our net
earnings.
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, challenges in retaining the customers of the combined businesses and
potential adverse effects 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.
Recent 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.
60
McKESSON CORPORATION
FINANCIAL
REVIEW (Concluded)
Our $1.0 billion accounts receivable sales facility is generally renewed annually and will
expire in June 2009. We used this facility in 2009 to fund working capital requirements, as
needed. We will seek to renew this facility before it expires, although the fees associated with
it may be higher than those currently charged due to the condition of the credit markets. 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 adversely affect the Companys earnings and cash
flow.
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 GAAP, which are 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.
61
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, 2009.
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, 2009. This audit report
appears on page 63 of this Annual Report on Form 10-K.
May 5, 2009
|
|
|
/s/ John H. Hammergren |
|
|
|
|
|
Chairman, President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
/s/ Jeffrey C. Campbell |
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
|
62
McKESSON CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors of McKesson Corporation:
We have audited the accompanying consolidated balance sheets of McKesson Corporation and
subsidiaries (the Company) as of March 31, 2009 and 2008, 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, 2009. Our audit also included the supplementary 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, 2009, 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,
2009 and 2008, and the results of their operations and their cash flows for each of the three
fiscal years in the period ended March 31, 2009, 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, 2009, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109, on April 1,
2007 and Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, on March 31, 2007.
/s/ Deloitte & Touche LLP
San Francisco, California
May 5, 2009
63
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
106,632 |
|
|
$ |
101,703 |
|
|
$ |
92,977 |
|
Cost of Sales |
|
|
101,254 |
|
|
|
96,694 |
|
|
|
88,645 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
5,378 |
|
|
|
5,009 |
|
|
|
4,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
743 |
|
|
|
744 |
|
|
|
673 |
|
Distribution |
|
|
943 |
|
|
|
886 |
|
|
|
771 |
|
Research and development |
|
|
364 |
|
|
|
347 |
|
|
|
284 |
|
Administrative |
|
|
1,639 |
|
|
|
1,559 |
|
|
|
1,346 |
|
Litigation charge (credits), net |
|
|
493 |
|
|
|
(5 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
4,182 |
|
|
|
3,531 |
|
|
|
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
1,196 |
|
|
|
1,478 |
|
|
|
1,264 |
|
Other Income, Net |
|
|
12 |
|
|
|
121 |
|
|
|
132 |
|
Interest Expense |
|
|
(144 |
) |
|
|
(142 |
) |
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Income
Taxes |
|
|
1,064 |
|
|
|
1,457 |
|
|
|
1,297 |
|
Income Tax Expense |
|
|
(241 |
) |
|
|
(468 |
) |
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
|
823 |
|
|
|
989 |
|
|
|
968 |
|
Discontinued operations, net |
|
|
|
|
|
|
1 |
|
|
|
(5 |
) |
Discontinued operations loss on sales, net |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
823 |
|
|
$ |
990 |
|
|
$ |
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
3.17 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
Discontinued operations loss on sales, net |
|
|
|
|
|
|
|
|
|
|
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
2.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.99 |
|
|
$ |
3.40 |
|
|
$ |
3.25 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
Discontinued operations loss on sales, net |
|
|
|
|
|
|
|
|
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2.99 |
|
|
$ |
3.40 |
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
279 |
|
|
|
298 |
|
|
|
305 |
|
Basic |
|
|
275 |
|
|
|
291 |
|
|
|
298 |
|
See Financial Notes
64
McKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,109 |
|
|
$ |
1,362 |
|
Receivables, net |
|
|
7,774 |
|
|
|
7,213 |
|
Inventories, net |
|
|
8,527 |
|
|
|
9,000 |
|
Prepaid expenses and other |
|
|
261 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Total |
|
|
18,671 |
|
|
|
17,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
|
796 |
|
|
|
775 |
|
Capitalized Software Held for Sale, Net |
|
|
221 |
|
|
|
199 |
|
Goodwill |
|
|
3,528 |
|
|
|
3,345 |
|
Intangible Assets, Net |
|
|
661 |
|
|
|
661 |
|
Other Assets |
|
|
1,390 |
|
|
|
1,837 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
25,267 |
|
|
$ |
24,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Drafts and accounts payable |
|
$ |
11,739 |
|
|
$ |
12,032 |
|
Deferred revenue |
|
|
1,145 |
|
|
|
1,210 |
|
Current portion of long-term debt |
|
|
219 |
|
|
|
2 |
|
Other accrued liabilities |
|
|
2,503 |
|
|
|
2,104 |
|
|
|
|
|
|
|
|
Total |
|
|
15,606 |
|
|
|
15,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
2,290 |
|
|
|
1,795 |
|
Other Noncurrent Liabilities |
|
|
1,178 |
|
|
|
1,339 |
|
|
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: 2009 and 2008 800 |
|
|
|
|
|
|
|
|
Shares issued: 2009 351, 2008 351 |
|
|
4 |
|
|
|
4 |
|
Additional Paid-in Capital |
|
|
4,417 |
|
|
|
4,252 |
|
Retained Earnings |
|
|
6,103 |
|
|
|
5,586 |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
(179 |
) |
|
|
152 |
|
Other |
|
|
(8 |
) |
|
|
(13 |
) |
Treasury Shares, at Cost, 2009 80 and 2008 74 |
|
|
(4,144 |
) |
|
|
(3,860 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
6,193 |
|
|
|
6,121 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
25,267 |
|
|
$ |
24,603 |
|
|
|
|
|
|
|
|
See Financial Notes
65
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended March 31, 2009, 2008 and 2007
(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 |
|
Balances, March 31, 2006 |
|
|
330 |
|
|
$ |
3 |
|
|
$ |
3,238 |
|
|
$ |
(75 |
) |
|
$ |
3,871 |
|
|
$ |
55 |
|
|
$ |
(25 |
) |
|
|
(26 |
) |
|
$ |
(1,160 |
) |
|
$ |
5,907 |
|
|
|
|
|
Issuance of shares under
employee plans |
|
|
11 |
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
397 |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
Tax benefit related to issuance
of shares under employee
plans |
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
ESOP note collections |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Notes rescinded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
33 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913 |
|
|
|
913 |
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(1,000 |
) |
|
|
(1,000 |
) |
|
|
|
|
Cash dividends declared,
$0.24 per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72 |
) |
|
|
|
|
Adjustment to initially apply
FASB Statement No. 158,
net of tax of $37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
40 |
|
|
|
|
|
|
|
6 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2007 |
|
|
341 |
|
|
$ |
3 |
|
|
$ |
3,722 |
|
|
$ |
(19 |
) |
|
$ |
4,712 |
|
|
$ |
31 |
|
|
$ |
(14 |
) |
|
|
(46 |
) |
|
$ |
(2,162 |
) |
|
$ |
6,273 |
|
|
$ |
952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
95 |
|
Unrealized net gain/loss 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 FIN No. 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
|
|
(273 |
) |
Unrealized net gain/loss and
other components of
benefit plans, net of tax
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Financial Notes
66
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
823 |
|
|
$ |
990 |
|
|
$ |
913 |
|
Discontinued operations, net of income taxes |
|
|
|
|
|
|
(1 |
) |
|
|
55 |
|
Adjustments to reconcile to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
133 |
|
|
|
124 |
|
|
|
112 |
|
Amortization |
|
|
308 |
|
|
|
247 |
|
|
|
183 |
|
Provision for bad debts |
|
|
29 |
|
|
|
41 |
|
|
|
24 |
|
Litigation charge (credits), net |
|
|
493 |
|
|
|
(5 |
) |
|
|
(6 |
) |
Deferred taxes (benefits) on Litigation charge (credits), net |
|
|
(172 |
) |
|
|
2 |
|
|
|
2 |
|
Impairment of investments |
|
|
63 |
|
|
|
|
|
|
|
|
|
Other deferred taxes |
|
|
320 |
|
|
|
196 |
|
|
|
165 |
|
Income tax reserve reversals |
|
|
(87 |
) |
|
|
|
|
|
|
(83 |
) |
Share-based compensation expense |
|
|
99 |
|
|
|
91 |
|
|
|
60 |
|
Excess tax benefit from share-based payment arrangements |
|
|
(8 |
) |
|
|
(83 |
) |
|
|
(70 |
) |
Other non-cash items |
|
|
(4 |
) |
|
|
(24 |
) |
|
|
(66 |
) |
Changes in operating assets and liabilities, net of business
acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(708 |
) |
|
|
(288 |
) |
|
|
(209 |
) |
Inventories |
|
|
370 |
|
|
|
(676 |
) |
|
|
(928 |
) |
Drafts and accounts payable |
|
|
(189 |
) |
|
|
762 |
|
|
|
872 |
|
Deferred revenue |
|
|
(55 |
) |
|
|
98 |
|
|
|
181 |
|
Taxes |
|
|
(47 |
) |
|
|
336 |
|
|
|
227 |
|
Consolidated Securities Litigation Action settlement payments |
|
|
|
|
|
|
(962 |
) |
|
|
(25 |
) |
Other |
|
|
(17 |
) |
|
|
21 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,351 |
|
|
|
869 |
|
|
|
1,539 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions |
|
|
(195 |
) |
|
|
(195 |
) |
|
|
(126 |
) |
Capitalized software expenditures |
|
|
(197 |
) |
|
|
(161 |
) |
|
|
(180 |
) |
Acquisitions of businesses, less cash and cash equivalents
acquired |
|
|
(358 |
) |
|
|
(610 |
) |
|
|
(1,938 |
) |
Proceeds from sale of businesses |
|
|
63 |
|
|
|
|
|
|
|
179 |
|
Restricted cash for Litigation charges |
|
|
(55 |
) |
|
|
962 |
|
|
|
|
|
Other |
|
|
15 |
|
|
|
(1 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(727 |
) |
|
|
(5 |
) |
|
|
(2,108 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings |
|
|
3,630 |
|
|
|
260 |
|
|
|
1,000 |
|
Repayments of short-term borrowings |
|
|
(3,630 |
) |
|
|
(260 |
) |
|
|
(1,000 |
) |
Proceeds from issuances of long-term debt, net |
|
|
699 |
|
|
|
|
|
|
|
997 |
|
Repayment of long-term debt |
|
|
(4 |
) |
|
|
(162 |
) |
|
|
(31 |
) |
Capital stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuances |
|
|
97 |
|
|
|
354 |
|
|
|
399 |
|
Share repurchases, including shares surrendered for tax
withholding |
|
|
(298 |
) |
|
|
(1,698 |
) |
|
|
(1,003 |
) |
Share repurchases, retirements |
|
|
(204 |
) |
|
|
|
|
|
|
|
|
Excess tax benefits from share-based payment arrangements |
|
|
8 |
|
|
|
83 |
|
|
|
70 |
|
Dividends paid |
|
|
(116 |
) |
|
|
(70 |
) |
|
|
(72 |
) |
Other |
|
|
(4 |
) |
|
|
23 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
178 |
|
|
|
(1,470 |
) |
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(55 |
) |
|
|
14 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
747 |
|
|
|
(592 |
) |
|
|
(185 |
) |
Cash and cash equivalents at beginning of year |
|
|
1,362 |
|
|
|
1,954 |
|
|
|
2,139 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
2,109 |
|
|
$ |
1,362 |
|
|
$ |
1,954 |
|
|
|
|
|
|
|
|
|
|
|
See Financial Notes
67
McKESSON CORPORATION
FINANCIAL NOTES
1. Significant Accounting Policies
McKesson Corporation (McKesson, the Company, or we and other similar pronouns) is a
corporation providing supply, information and care management products and services designed to
reduce costs and improve quality across the healthcare industry.
Basis of Presentation: 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 we are the primary beneficiary.
Significant intercompany transactions and balances have been eliminated. 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.
We conduct our business through two segments, Distribution Solutions and Technology Solutions
as further described in Financial Note 22, Segments of Business.
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 accounting
principles generally accepted in the United States of America (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 a 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, 2009, are money market fund investments of $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 Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements. The carrying value of all other cash equivalents approximates fair value due to
their relatively short-term nature.
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.
Marketable Securities Available for Sale: We carry our marketable securities which are
available for sale at fair value and 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, 2009 and 2008, marketable securities were not material.
68
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Concentrations of Credit Risk and Receivables: Our trade receivables subject us to a
concentration of credit risk with customers primarily in our Distribution Solutions segment. At
March 31, 2009, revenues and accounts receivable from our ten largest customers accounted for
approximately 52% of consolidated revenues and approximately 49% of accounts receivable. At March
31, 2009, revenues and accounts receivable from our two largest customers, CVS Caremark Corporation
and Rite Aid Corporation, represented approximately 14% and 12% of total consolidated revenues and
14% and 10% of accounts receivable. Accordingly, any defaults in payment by or a reduction in
purchases from our large customers could have a significant negative 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 state 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 on the last-in,
first-out (LIFO) method and Canadian inventories are stated 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 $8.5 billion and
$9.0 billion at March 31, 2009 and 2008.
The LIFO method was used to value approximately 88% of our inventories at March 31, 2009 and
2008. At March 31, 2009 and 2008, our LIFO reserves, net of LCM adjustments (discussed below),
were $85 million and $77 million. LIFO reserves include both pharmaceutical and non-pharmaceutical
products. In 2009, 2008 and 2007, we recognized net LIFO expense of $8 million and net LIFO
credits of $14 million and $64 million within our consolidated statements of operations. A LIFO
expense is recognized when the net effect of price increases on branded pharmaceuticals and
non-pharmaceutical products held in inventory exceeds the impact of price declines and shifts
towards generic pharmaceutical products, 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 pharmaceutical products 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 $107 million and $43 million
higher than FIFO as of March 31, 2009 and 2008. As a result, in 2009 and 2008, we recorded LCM
charges of $64 million and $43 million 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.
69
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) |
|
2009 |
|
2008 |
|
2007 |
|
Amounts capitalized |
|
$ |
74 |
|
|
$ |
73 |
|
|
$ |
76 |
|
Amortization expense |
|
|
50 |
|
|
|
44 |
|
|
|
43 |
|
Third-party royalty fees paid |
|
|
50 |
|
|
|
52 |
|
|
|
43 |
|
|
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. Other than our
goodwill impairment relating to the disposition of our Acute Care business (see Financial Note 7,
Discontinued Operations,) there have been no goodwill impairments during the years presented.
Intangible assets: Substantially 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, 2009 and 2008, capitalized
software held for internal use was $475 million and $458 million, net of accumulated amortization
of $567 million and $467 million and was included in other assets in the consolidated balance
sheets.
70
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
Revenue Recognition: Revenues for our Distribution Solutions segment are recognized when we
deliver product 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. We accrue sales returns based on estimates at the
time of sale to the customer. Sales returns from customers were approximately $1,216 million,
$1,093 million and $1,113 million in 2009, 2008 and 2007. 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
$25.8 billion in 2009, $27.7 billion in 2008 and $27.6 billion in 2007. 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.
Based on the criteria of Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting
Revenue Gross as a Principal Versus Net as an Agent, our 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.
Revenues for our Technology Solutions segment are generated primarily by licensing 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.
71
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 contract method.
Maintenance and support agreements are marketed under annual or multi-year agreements and are
recognized ratably over the period covered by the agreements. Remote processing service fees are
recognized monthly as the service is performed. Outsourcing service revenues are recognized as the
service is performed.
We also offer our products on an application service provider (ASP) basis, making available
our software functionality 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 ASP basis is recognized on a monthly basis over the term of the contract starting when the
hosting services begin.
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, a portion, or
all, of the revenue must be refunded to the customer. We recognize revenue during the term of the
contract by assessing our actual performance compared to targets and then determining the amount
the customer would be legally obligated to pay if the contract terminated at that point. These
assessments include estimates of medical claims and other data, which could require future
adjustment because 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, 2009 and 2008, we had
deferred $82 million and $81 million related to these contracts, which was included in deferred
revenue in the consolidated balance sheets. We generally have been successful in achieving
performance goals under these contracts.
Supplier Incentives: We generally account for fees for service and other incentives received
from our suppliers, relating to the purchase or distribution of inventory, 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 our 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 our 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 to us. We
evaluate the amounts due from our 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, 2009 and 2008, supplier
reserves were $113 million and $82 million.
72
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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 2009, 2008 or 2007.
Derivative Financial Instruments: Derivative financial instruments are used principally in
the management of our foreign currency and interest rate exposures and are recorded on the
consolidated balance sheets at fair value. If the 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 results included in earnings.
Accounts Receivable Sales: At March 31, 2009, we had a $1.0 billion revolving receivables
sales facility. Through this facility, McKesson Corporation 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 corporations administered by financial institutions.
Sales of undivided interests in the receivables by the SPE to the Conduits are accounted for
as a sale in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, 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 our
accounts receivable and terms of the facility, approximates fair value. McKesson receives cash in
the amount of the face value for 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 in 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.
73
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 Payment: We account for all share-based payment 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. 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.
Recently Adopted Accounting Pronouncements: On April 1, 2007, we adopted Financial Accounting
Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. Among
other things, FIN No. 48 requires application of a more likely than not threshold for the
recognition and derecognition of tax positions. It further requires that a change in judgment
related to prior years tax positions be recognized in the quarter of such change. The April 1,
2007 adoption of FIN No. 48 resulted in a reduction of our retained earnings by $46 million.
Effective March 31, 2007, we adopted SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans. SFAS No. 158 requires the recognition of an asset or a
liability in the consolidated balance sheets reflecting the funded status of pension and other
postretirement benefits, with current year changes in the funded status recognized in stockholders
equity. SFAS No. 158 did not change the existing criteria for measurement of periodic benefit
costs, plan assets or benefit obligations. Additionally, SFAS No. 158 requires that the
measurement of defined benefit plan assets and obligations be performed as of the Companys fiscal
year-end. The measurement date provision of SFAS No. 158 was adopted in the fourth quarter of 2009
and did not have a material impact on our consolidated financial statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements, which provides a consistent definition of fair value that focuses on
exit price and prioritizes the use of market-based inputs over entity-specific inputs for measuring
fair value. SFAS No. 157 requires expanded disclosures about fair value measurements and
establishes a three-level hierarchy for fair value measurements. In February 2008, the FASB issued
FASB Staff Position (FSP) Financial Accounting Standard (FAS) No. 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which
removes leasing from the scope of SFAS No. 157. In February 2008, the FASB also issued FSP FAS No.
157-2, Effective Date of FASB Statement No. 157, which permits companies to partially defer the
effective date of SFAS No. 157 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 SFAS No. 157 for financial assets and financial liabilities and
for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. We
have elected to defer adoption of SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements
on a nonrecurring basis. Accordingly, we have not applied the provisions of SFAS No. 157 for the
fair value measurement of the nonfinancial assets and nonfinancial liabilities that we recorded in
connection with our business acquisitions during the year. The provisions of SFAS No. 157 are
applied prospectively. The adoption of SFAS No. 157 on April 1, 2008 did not have a material
impact on our consolidated financial statements and no adjustment to retained earnings was
required. We will adopt the provision of SFAS No. 157 regarding nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements
on a nonrecurring basis on April 1, 2009. We do not expect the adoption will have a material
impact on our consolidated financial statements.
74
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On October 10, 2008, we adopted FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active, which applies to financial assets within the
scope of accounting pronouncements that require or permit fair value measurements in accordance
with SFAS No. 157. This FSP clarifies the application of SFAS No. 157 and defines additional key
criteria in determining the fair value of a financial asset when the market for that financial
asset is not active. The adoption of this FSP did not have a material impact on our consolidated
financial statements.
On April 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No. 159 permits us
to elect fair value as the initial and subsequent measurement attribute for certain financial
assets and liabilities that are not otherwise required to be measured at fair value on an
instrument-by-instrument basis. If we elect the fair value option, we would be required to
recognize subsequent changes in fair value in our earnings. This standard also establishes
presentation and disclosure requirements designed to improve comparisons between entities that
choose different measurement attributes for similar types of assets and liabilities. While SFAS
No. 159 became effective for us in 2009, we did not elect the fair value measurement option for any
of our existing assets and liabilities and accordingly, SFAS No. 159 did not have any impact on our
consolidated financial statements. We could elect this option for new or substantially modified
assets and liabilities in the future.
On April 1, 2008, we adopted SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133. This statement requires enhanced
disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and its related interpretations and (3) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. The adoption of this standard did not have a material impact on our
consolidated financial statements.
On October 1, 2008, we adopted FSP No. FAS 133-1 and FIN No. 45-4, Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FAS No. 133 and FIN No. 45; and Clarification
of the Effective Date of FAS No. 161. The adoption of this standard did not have an impact on our
consolidated financial statements.
On November 15, 2008, we adopted SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. This statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP. While this statement formalizes the sources
and hierarchy of GAAP within the authoritative accounting literature, it did not change the
accounting principles that were already in place. The adoption of this standard did not have a
material impact on our consolidated financial statements.
On December 31, 2008, we adopted FSP No. FAS 140-4 and FIN No. 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities. This FSP amends SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and FIN No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, to require enhanced disclosures by public entities in understanding
the extent of a transferors continuing involvement with transferred financial assets and an
enterprises involvement with VIEs. The adoption of this standard did not have a material impact
on our consolidated financial statements.
75
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Newly Issued Accounting Pronouncements: In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations. SFAS No. 141(R) amends SFAS No. 141, Business
Combinations and provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed and any noncontrolling interest in the acquiree.
Additionally, this SFAS provides disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS No.
141(R) is effective for all business combinations for which the acquisition date is on or after
April 1, 2009 with the exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109, Accounting for Income Taxes,
such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies
related to acquisitions prior to the effective date of SFAS No. 141(R) are also required to apply
the provisions of this standard. Early adoption of this SFAS was not permitted. This SFAS will
not have a material impact on our consolidated financial statements upon adoption; however, the
SFAS will have an impact on any future acquisitions.
In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP No. FAS 141(R)-1
amends and clarifies SFAS No. 141(R) to address application issues raised on the initial
recognition and measurement, subsequent measurement and accounting and disclosure of assets and
liabilities arising from contingencies in a business combination. This FSP applies to all assets
acquired and liabilities assumed in a business combination that arise from contingencies that would
be within the scope of SFAS No. 5, Accounting for Contingencies, if not acquired or assumed in a
business combination, except for assets or liabilities arising from contingencies that are subject
to specific guidance in SFAS No. 141(R). For us, FSP No. FAS 141(R)-1 will be effective for assets
and liabilities arising from contingencies in business combinations for which the acquisition date
is on or after April 1, 2009. This FSP will not have a material impact on our consolidated
financial statements upon adoption; however, the FSP will have an impact on any future
acquisitions.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. This statement requires reporting entities to
present noncontrolling interests as equity (as opposed to a liability or mezzanine equity) and
provides guidance on the accounting for transactions between an entity and noncontrolling
interests. This SFAS becomes effective for us on April 1, 2009. This SFAS will not have a
material impact on our consolidated financial statements upon adoption; however, the SFAS may have
an impact on any future investments or divestitures of our investments.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP No. FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill and Other Intangible Assets. This FSP becomes effective for us on
April 1, 2009. We do not currently anticipate that this FSP will have a material impact on our
consolidated financial statements upon adoption.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. FSP No. EITF 03-6-1 concluded that
unvested share-based payment 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 FSP becomes
effective for us on April 1, 2009. Early adoption of the FSP was not permitted; however, it will
apply retrospectively to our earnings per share as previously reported. We do not currently
anticipate that this FSP will have a material impact on our consolidated financial statements upon
adoption.
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. FSP No. FAS 132(R)-1 amends FAS No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on
an employers disclosures about plan assets of a defined benefit pension or other postretirement
plan. This FSP will become effective for us in 2010. We do not currently anticipate that this
SFAS will have a material impact on our consolidated financial statements upon adoption.
76
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP No. FAS
107-1 and APB Opinion No. 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial instruments for
interim reporting periods as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in interim financial
statements. FSP No. FAS 107-1 and APB Opinion No. 28-1 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. This FSP becomes effective for us
on June 30, 2009. We do not currently anticipate that this FSP will have a material impact on our
consolidated financial statements upon adoption.
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. FSP No. FAS 157-4 provides additional guidance for estimating
fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or
liability have significantly decreased. Additionally, this FSP provides guidance on identifying
circumstances that indicate a transaction is not orderly. Retrospective application of this FSP to
a prior interim or annual reporting period was not permitted. This FSP becomes effective for us on
June 30, 2009. We do not currently anticipate that this FSP will have a material impact on our
consolidated financial statements upon adoption.
2. Acquisitions and Investment
|
|
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 estimated 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 |
|
|
|
|
|
|
|
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. |
77
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
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. 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 of OTN 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 |
|
$ |
308 |
|
Inventory |
|
|
87 |
|
Goodwill |
|
|
240 |
|
Intangible assets |
|
|
128 |
|
Deferred tax assets |
|
|
62 |
|
Other assets |
|
|
36 |
|
Accounts payable |
|
|
(311 |
) |
Other liabilities |
|
|
(31 |
) |
|
|
|
|
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. |
|
|
|
In 2007, we made the following acquisitions and investment: |
|
|
|
On January 26, 2007, we acquired all of the outstanding shares of
Per-Se Technologies, Inc. (Per-Se) of Alpharetta, Georgia for
$28.00 per share in cash plus the assumption of Per-Ses debt, or
approximately $1.8 billion in aggregate, including cash acquired
of $76 million. Per-Se is a leading provider of financial and
administrative healthcare solutions for hospitals, physicians and
retail pharmacies. The acquisition of Per-Se is consistent with
the Companys strategy of providing products that help solve
clinical, financial and business processes within the healthcare
industry. The acquisition was initially funded with cash on hand
and through the use of an interim credit facility. In March 2007,
we issued $1 billion of long-term debt, with such net proceeds
after offering expenses from the issuance, together with cash on
hand, being used to fully repay borrowings outstanding under the
interim credit facility (refer to Financial Note 12, Long-Term
Debt and Other Financing). Financial results for Per-Se are
primarily included within our Technology Solutions segment. |
78
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 |
|
$ |
107 |
|
Property and equipment |
|
|
41 |
|
Other current and noncurrent assets |
|
|
115 |
|
Goodwill |
|
|
1,258 |
|
Intangible assets |
|
|
471 |
|
Accounts payable |
|
|
(8 |
) |
Other current liabilities |
|
|
(126 |
) |
Deferred revenue |
|
|
(30 |
) |
Long-term liabilities |
|
|
(96 |
) |
|
|
|
|
Net assets acquired, less cash and cash equivalents |
|
$ |
1,732 |
|
|
|
|
|
|
|
Approximately $1,258 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
$402 million representing customer relationships with a weighted-average life of 10 years,
developed technology of $56 million with a weighted-average life of 5 years, and trademark and
trade names of $13 million with a weighted-average life of 5 years. |
|
|
|
In connection with the purchase price allocation, we have estimated the fair value of the
support obligations assumed from Per-Se in connection with the acquisition. The estimated fair
value of these obligations was determined utilizing a cost build-up approach. The cost build-up
approach determines fair value by estimating the costs relating to fulfilling the obligations
plus a normal profit margin. The sum of the costs and operating profit approximates, in theory,
the amount that we would be required to pay a third party to assume these obligations. As a
result, in allocating the purchase price, we recorded an adjustment to reduce the carrying value
of Per-Ses deferred revenue by $17 million to $30 million, which represents our estimate of the
fair value of the obligation assumed. |
|
|
|
Our Technology Solutions segment acquired RelayHealth Corporation
(RelayHealth) based in Emeryville, California. RelayHealth is a
provider of secure online healthcare communication services
linking patients, healthcare professionals, payors and pharmacies.
This segment also acquired two other entities, one specializing
in patient billing solutions designed to simplify and enhance
healthcare providers financial interactions with their patients
as well as a provider of integrated software for electronic health
records, medical billing and appointment scheduling for
independent physician practices. The total cost of these three
entities was $90 million, which was paid in cash. Goodwill
recognized in these transactions amounted to $63 million. |
|
|
|
Our Distribution Solutions segment acquired Sterling Medical
Services, LLC (Sterling) which is based in Moorestown, New
Jersey. Sterling is a national provider and distributor of
disposable medical supplies, health management services and
quality management programs to the home care market. This segment
also acquired a medical supply sourcing agent. The total cost of
these two entities was $95 million, which was paid in cash.
Goodwill recognized in these transactions amounted to $47 million. |
|
|
|
We contributed $36 million in cash and $45 million in net assets
primarily from our Pharmacy Systems and Automation business to
Parata Systems, LLC (Parata,) in exchange for a significant
minority interest in Parata. Parata is a manufacturer of pharmacy
robotic equipment. In connection with the investment, we
abandoned certain assets which resulted in a $15 million charge to
cost of sales and we incurred $6 million of other expenses related
to the transaction which were recorded within operating expenses.
We did not recognize any additional gains or losses as a result of
this transaction as we believed the fair value of our investment
in Parata approximated the carrying value of consideration
contributed to Parata. |
79
McKESSON CORPORATION
FINANCIAL NOTES (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.
3. Share-Based Payment
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.) On April 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment. Accordingly, we
began to recognize compensation expense for the fair value of share-based awards granted, modified,
repurchased or cancelled from April 1, 2006 forward. Compensation expense is recognized for the
portion of the awards that is ultimately expected to vest. For the unvested portion of awards
issued prior to and outstanding as of April 1, 2006, the expense is recognized at the grant-date
fair value as the remaining requisite service is rendered.
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 will be
adjusted to reflect actual forfeitures when an award vests. The actual forfeitures in future
reporting periods could be higher or lower than our current estimates. The weighted-average
forfeiture rate is approximately 4% at March 31, 2009. As a result, the future share-based
compensation expense may differ from the Companys historical amounts.
The compensation expense recognized under SFAS No. 123(R) 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 2009, 2008 and 2007.
We utilize the short-cut method for calculating the tax effects of share-based compensation.
Under this method, a simplified calculation is applied in establishing the beginning additional
paid-in capital (APIC) pool balance as well as determining the future impact on the APIC pool and
our consolidated statements of cash flows relating to the tax effects of share-based compensation.
80
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, except per share amounts) |
|
2009 |
|
2008 |
|
2007 |
|
RSUs and RS (1) |
|
$ |
60 |
|
|
$ |
50 |
|
|
$ |
22 |
|
PeRSUs (2) |
|
|
13 |
|
|
|
22 |
|
|
|
24 |
|
Stock options |
|
|
18 |
|
|
|
11 |
|
|
|
7 |
|
Employee stock purchase plan |
|
|
8 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
Share-based compensation expense |
|
|
99 |
|
|
|
91 |
|
|
|
60 |
|
Tax benefit for share-based compensation expense (3) |
|
|
(34 |
) |
|
|
(31 |
) |
|
|
(20 |
) |
|
|
|
Share-based compensation expense, net of tax (4) |
|
$ |
65 |
|
|
$ |
60 |
|
|
$ |
40 |
|
|
|
|
Impact of share-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
Basic |
|
|
0.24 |
|
|
|
0.21 |
|
|
|
0.13 |
|
|
|
|
(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 based on applicable tax jurisdictions. Additionally, a
portion of pre-tax compensation expense is not tax-deductible. |
|
(4) |
|
No material share-based compensation expense was included in Discontinued Operations. |
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 28 million shares in the
form of stock options, RS, RSUs, PeRSUs and other share-based awards. As of March 31, 2009, 12
million shares remain available for future grant. As a result of
acquisitions, we currently have 2
other option plans under which no further awards have been made since their respective acquisition
dates.
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 vested over a four-year period and had a
contractual term of ten years. We expect option grants in 2010 and future years will have the same
general contractual life and vesting schedule as those options granted under the 2005 Stock Plan.
81
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 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 option 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 also reflects the impact of changes in contractual life of current option grants compared to our historical grants. |
Weighted-average assumptions used to estimate the fair value of employee stock options were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Expected stock price volatility |
|
|
27 |
% |
|
|
24 |
% |
|
|
27 |
% |
Expected dividend yield |
|
|
0.6 |
% |
|
|
0.4 |
% |
|
|
0.5 |
% |
Risk-free interest rate |
|
|
3 |
% |
|
|
5 |
% |
|
|
5 |
% |
Expected life (in years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
The following is a summary of options outstanding at March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$13.67 $27.35
|
|
|
1 |
|
|
|
1 |
|
|
$ |
21.27 |
|
|
|
1 |
|
|
$ |
21.27 |
|
$27.36 $41.02
|
|
|
12 |
|
|
|
3 |
|
|
|
34.06 |
|
|
|
12 |
|
|
|
34.06 |
|
$41.03 $54.70
|
|
|
4 |
|
|
|
3 |
|
|
|
45.94 |
|
|
|
3 |
|
|
|
45.58 |
|
$54.71 $68.37
|
|
|
2 |
|
|
|
6 |
|
|
|
59.61 |
|
|
|
|
|
|
|
62.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
3 |
|
|
|
39.28 |
|
|
|
16 |
|
|
|
36.22 |
|
|
82
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes stock option activity during 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2006 |
|
|
46 |
|
|
$ |
43.38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1 |
|
|
|
48.13 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(11 |
) |
|
|
33.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest (1) |
|
|
19 |
|
|
|
38.67 |
|
|
|
3 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2009 |
|
|
16 |
|
|
|
36.22 |
|
|
|
3 |
|
|
|
33 |
|
|
|
|
(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. |
The following table provides data related to all stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share data and years) |
|
2009 |
|
2008 |
|
2007 |
|
Weighted-average grant date fair value per stock option |
|
$ |
16.16 |
|
|
$ |
17.90 |
|
|
$ |
15.43 |
|
Aggregate intrinsic value on exercise |
|
$ |
30 |
|
|
$ |
220 |
|
|
$ |
204 |
|
Cash received upon exercise |
|
$ |
49 |
|
|
$ |
309 |
|
|
$ |
354 |
|
Tax benefits realized related to exercise |
|
$ |
14 |
|
|
$ |
83 |
|
|
$ |
74 |
|
Total fair value of shares vested |
|
$ |
13 |
|
|
$ |
8 |
|
|
$ |
4 |
|
Total compensation cost, net of estimated forfeitures,
related to unvested stock options not yet recognized,
pre-tax |
|
$ |
30 |
|
|
$ |
25 |
|
|
|
18 |
|
Weighted-average period in years over which stock
option compensation cost is expected to be recognized |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
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 have elected to expense the 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.
83
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately and
are expensed upon grant. However, payment of any shares granted prior to the July 2008 Annual
Meeting of Stockholders is delayed until the director is no longer performing services for the
Company. For those RSUs granted subsequent to July 2008, the director may receive payment
immediately or defer receipt of shares if they meet director stock ownership guidelines. At March
31, 2009, 78,000 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 of these awards on a graded vesting basis over the requisite service
period of four years. 2009 PeRSUs and the related RSUs (when they will be granted in 2010) have
a single vest date and accordingly, we recognize expense on a straight-line basis over the
requisite service period of four years.
The following table summarizes RS and RSU activity during 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date Fair |
(In millions, except per share data) |
|
Shares |
|
Value Per Share |
|
Nonvested, March 31, 2006 |
|
|
1 |
|
|
$ |
38.01 |
|
Granted |
|
|
1 |
|
|
|
49.56 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
The following table provides data related to RS and RSU activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
2007 |
|
Total fair value of shares vested |
|
$ |
101 |
|
|
$ |
20 |
|
|
$ |
5 |
|
Total compensation cost, net of
estimated forfeitures, related to
nonvested RSU awards not yet recognized,
pre-tax |
|
$ |
52 |
|
|
$ |
49 |
|
|
$ |
32 |
|
Weighted-average period in years over
which RSU cost is expected to be
recognized |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
In May 2008, the Compensation Committee approved 1 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 2010 (the 2009 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, 2009, the
total compensation cost, net of estimated forfeitures, related to nonvested 2009 PeRSUs not yet
recognized was approximately $46 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.
84
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In accordance with the provisions of SFAS No. 128, Earnings per Share, the 2009 PeRSUs are
included in the calculation of diluted weighted average shares for the year ended March 31, 2009 as
the performance goals have been achieved.
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 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 2009, 2008 and
2007, 1 million shares were issued under the ESPP and 4 million shares remain available for
issuance at March 31, 2009.
4. Restructuring Activities and Other Workforce Reduction Charges
The following table summarizes the activity related to our restructuring liabilities for the
three years ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
Technology Solutions |
|
Corporate |
|
|
(In millions) |
|
Severance |
|
Exit-Related |
|
Severance |
|
Exit-Related |
|
Severance |
|
Total |
|
Balance, March 31,
2006 |
|
$ |
6 |
|
|
$ |
29 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
36 |
|
Expenses |
|
|
3 |
|
|
|
(1 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Liabilities related
to acquisitions |
|
|
|
|
|
|
(14 |
) |
|
|
8 |
|
|
|
4 |
|
|
|
|
|
|
|
(2 |
) |
Cash expenditures |
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
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 expenditures |
|
|
(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 expenditures |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(19 |
) |
Non-cash items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
Balance, March 31,
2009 |
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
13 |
|
|
|
|
Our restructuring activities are primarily due to the consolidation of business functions and
facilities from newly acquired businesses.
85
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Restructuring Activities and Asset Impairment Expenses
During 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. |
During 2007, we recorded $15 million of restructuring expenses, of which $8 million pertained
to employee severance costs associated with the reallocation of product development and marketing
resources and the realignment of an international business within our Technology Solutions segment.
Restructuring Activities Liabilities Related to Acquisitions
In connection with our OTN acquisition within our Distribution Solutions segment, to date we
recorded a total of $7 million of employee severance costs and $4 million of facility exit costs.
In connection with our Per-Se acquisition within our Technology Solutions segment, we recorded a
total of $19 million of employee severance costs and $3 million of facility exit and contract
termination costs. In 2007, in connection with the Companys investment in Parata, $13 million of
contract termination costs that were initially estimated as part of a prior year acquisition were
extinguished and as a result, the Company decreased goodwill and its restructuring liability.
As of March 31, 2009, the majority of the restructuring accruals of $13 million, which
primarily consist of employee severance costs and facility exit and contract termination costs, are
anticipated to be disbursed through 2010. Accrued restructuring liabilities are included in other
accrued and other noncurrent liabilities in the consolidated balance sheets.
Based on our current existing initiatives, we expect to complete the majority of these
activities by the end of 2010. Expenses associated with these existing initiatives are not
anticipated to be material. We are however, continuing to evaluate other restructuring initiatives
primarily pertaining to our newly acquired businesses, which may have an impact on future net
income. Approximately 935 employees, consisting primarily of distribution, general and
administrative staffs were planned to be terminated as part of our restructuring plans, of which
661 employees had been terminated as of March 31, 2009. Restructuring expenses are included in
cost of sales and operating expenses in our consolidated statements of operations.
Other Workforce Reduction Charges
In 2009 and 2008, we recorded $32 million ($7 million for our Distribution Solutions Segment
and $25 million for our Technology Solutions segment) and $8 million of charges (for our Technology
Solutions segment) associated with various reductions in workforce. Although these actions do not
constitute a restructuring plan (as defined under GAAP), they do represent independent actions
taken from time to time, as appropriate. These charges were recorded within our consolidated
statements of operations as follows: $5 million and $7 million in cost of sales in 2009 and 2008 and
$28 million and $20 million within operating expenses.
86
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
5. Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
Interest income |
|
$ |
31 |
|
|
$ |
89 |
|
|
$ |
103 |
|
Equity in earnings, net |
|
|
7 |
|
|
|
21 |
|
|
|
23 |
|
Gain on sale of investment |
|
|
24 |
|
|
|
|
|
|
|
|
|
Impairment of investments |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
13 |
|
|
|
11 |
|
|
|
6 |
|
|
|
|
Total |
|
$ |
12 |
|
|
$ |
121 |
|
|
$ |
132 |
|
|
|
|
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 a 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.
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 approximately $24 million or
$14 million after-tax.
6. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Income from continuing operations before
income taxes
U.S. |
|
$ |
623 |
|
|
$ |
1,059 |
|
|
$ |
987 |
|
Foreign |
|
|
441 |
|
|
|
398 |
|
|
|
310 |
|
|
|
|
Total income from continuing operations
before income taxes |
|
$ |
1,064 |
|
|
$ |
1,457 |
|
|
$ |
1,297 |
|
|
|
|
87
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The provision for income taxes related to continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
177 |
|
|
$ |
189 |
|
|
$ |
71 |
|
State and local |
|
|
(111 |
) |
|
|
59 |
|
|
|
69 |
|
Foreign |
|
|
35 |
|
|
|
22 |
|
|
|
22 |
|
|
|
|
Total current |
|
|
101 |
|
|
|
270 |
|
|
|
162 |
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
69 |
|
|
|
178 |
|
|
|
204 |
|
State and local |
|
|
62 |
|
|
|
16 |
|
|
|
(18 |
) |
Foreign |
|
|
9 |
|
|
|
4 |
|
|
|
(19 |
) |
|
|
|
Total deferred |
|
|
140 |
|
|
|
198 |
|
|
|
167 |
|
|
|
|
Income tax provision |
|
$ |
241 |
|
|
$ |
468 |
|
|
$ |
329 |
|
|
|
|
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, which 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. Of the $111 million of net current tax benefits, $87
million represents a non-cash benefit to McKesson. In accordance with SFAS No. 109, Accounting
for Income Taxes, the net tax benefit is included in our income tax expense from continuing
operations.
In June 2008, the U.S. Internal Revenue Service (IRS) began its examination of fiscal years
2003 through 2006. On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(Stabilization Act), which included a retroactive reinstatement of the federal research and
development credit, was signed into law. The Stabilization Act extends the federal research and
development credit to December 31, 2009. In 2009, we recorded a benefit to our income tax
provision as a result of these research and development credits. In Canada, we received an
assessment from the Canada Revenue Agency (CRA) for a total of $19 million related to transfer
pricing for 2004. We plan to appeal the assessment. We believe we have adequately provided for
any potential adverse results for 2004 and future years. 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 approved by the Joint Committee
on Taxation during the third quarter of 2008. The IRS and the Company have 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 Canada, we received an assessment from the CRA for a total of $9 million related to transfer
pricing for 2003. We have filed an appeal with the Tax Court of Canada. We believe we have
adequately provided for any potential adverse results for 2003. During 2008, we also favorably
concluded various foreign examinations, which resulted in the recognition of approximately $4
million of income tax benefits. Income tax expense for 2008 was also impacted by a non-tax
deductible $13 million increase in a legal reserve.
88
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2007, we recorded a credit to current income tax expense of $83 million which primarily
pertained to our receipt of a private letter ruling from the IRS holding that our payment of
approximately $960 million to settle our Consolidated Securities Litigation Action (refer to
Financial Note 18, Other Commitments and Contingent Liabilities, for further discussion) is fully
tax-deductible. We previously established tax reserves to reflect the lack of certainty regarding
the tax deductibility of settlement amounts paid in the Consolidated Securities Litigation Action
and related litigation. In 2007, we also recorded $24 million in income tax benefits arising
primarily from settlements and adjustments with various taxing authorities and research and
development investment tax credits from our Canadian operations.
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 the Companys effective tax rate on income from continuing
operations and the statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
Income tax provision at federal statutory rate |
|
$ |
372 |
|
|
$ |
510 |
|
|
$ |
454 |
|
State and local income taxes net of federal tax benefit |
|
|
18 |
|
|
|
43 |
|
|
|
34 |
|
Foreign tax rate differential |
|
|
(120 |
) |
|
|
(120 |
) |
|
|
(104 |
) |
Consolidated Securities Litigation Action reserve |
|
|
|
|
|
|
|
|
|
|
(83 |
) |
Unrecognized tax benefits and settlements |
|
|
(21 |
) |
|
|
31 |
|
|
|
44 |
|
Tax credits |
|
|
(20 |
) |
|
|
(16 |
) |
|
|
(5 |
) |
Other, net |
|
|
12 |
|
|
|
20 |
|
|
|
(11 |
) |
|
|
|
Income tax provision |
|
$ |
241 |
|
|
$ |
468 |
|
|
$ |
329 |
|
|
|
|
At March 31, 2009, undistributed earnings of our foreign operations totaling $1,836 million
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.
89
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred tax balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Receivable allowances |
|
$ |
70 |
|
|
$ |
57 |
|
Deferred revenue |
|
|
170 |
|
|
|
124 |
|
Compensation and benefit-related accruals |
|
|
274 |
|
|
|
286 |
|
AWP Litigation accrual |
|
|
172 |
|
|
|
|
|
Loss and credit carryforwards |
|
|
529 |
|
|
|
566 |
|
Other |
|
|
357 |
|
|
|
257 |
|
|
|
|
Subtotal |
|
|
1,572 |
|
|
|
1,290 |
|
Less: valuation allowance |
|
|
(125 |
) |
|
|
(27 |
) |
|
|
|
Total assets |
|
$ |
1,447 |
|
|
$ |
1,263 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Basis difference for inventory valuation and other assets |
|
$ |
(1,286 |
) |
|
$ |
(1,097 |
) |
Basis difference for fixed assets and systems development costs |
|
|
(207 |
) |
|
|
(163 |
) |
Intangibles |
|
|
(238 |
) |
|
|
(154 |
) |
Other |
|
|
(158 |
) |
|
|
(141 |
) |
|
|
|
Total liabilities |
|
|
(1,889 |
) |
|
|
(1,555 |
) |
|
|
|
Net deferred tax liability |
|
$ |
(442 |
) |
|
$ |
(292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Current net deferred tax liability |
|
$ |
(695 |
) |
|
$ |
(767 |
) |
Long term net deferred tax asset |
|
|
253 |
|
|
|
475 |
|
|
|
|
Net deferred tax liability |
|
$ |
(442 |
) |
|
$ |
(292 |
) |
|
|
|
We have federal, state and foreign income tax net operating loss carryforwards of $267
million, $2,731 million and $185 million. The federal and state net operating losses will expire
at various dates from 2010 through 2029. The 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 $5 million, $36 million and $39 million on the deferred tax assets
relating to these federal, state and foreign net operating loss carryforwards. We also have
federal and state capital loss carryforwards of $43 million and $37 million. The federal and state
net operating losses will expire at various dates from 2011 through 2029. 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 $15 million and $3 million.
We also have domestic income tax credit carryforwards of $202 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 $4 million may
not be realized. In recognition of this risk, we have provided a valuation allowance of $4
million. In addition, we have federal and Canadian research and development credit carryforwards
of $61 million and $11 million. The federal and Canadian research and development credits will
expire at various dates from 2017 to 2028.
We adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes, as of
April 1, 2007, which resulted in a reduction of our retained earnings by $46 million. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. This standard also provides that a
tax benefit from an uncertain tax position may be 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. This interpretation also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
At April 1, 2007, our unrecognized tax benefits defined as the aggregate tax effect of
differences between tax return positions and the benefits recognized in our financial statements,
amounted to $465 million.
90
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to our gross unrecognized tax benefits for
the two years ended March 31, 2009
|
|
|
|
|
|
|
Unrecognized |
|
(In millions) |
|
Tax Benefits |
|
|
Balance at March 31, 2007 |
|
$ |
465 |
|
Additions based on tax positions related to current year |
|
|
58 |
|
Reductions based on settlements |
|
|
(27 |
) |
|
|
|
|
Balance at March 31, 2008 |
|
|
496 |
|
Additions based on tax positions related to prior years |
|
|
77 |
|
Additions based on tax positions related to current year |
|
|
61 |
|
Reductions based on settlements |
|
|
(41 |
) |
Reductions based on the lapse of the applicable statutes of limitations |
|
|
(67 |
) |
|
|
|
|
Balance at March 31, 2009 |
|
$ |
526 |
|
|
|
|
|
Of the total $526 million in unrecognized tax benefits at March 31, 2009, $325 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 $27 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, 2009, before any tax benefits, our accrued interest on unrecognized tax benefits amounted
to $101 million. We recognized an income tax benefit of $29 million, before any tax effect,
related to interest in our consolidated statements of operations during 2009. We have no material
amounts accrued for penalties.
7. Discontinued Operations
Results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,(1) |
(In millions) |
|
2008 |
|
2007 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(9 |
) |
Other |
|
|
1 |
|
|
|
|
|
Income taxes |
|
|
(1 |
) |
|
|
4 |
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sales of discontinued operations |
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
|
|
|
$ |
(49 |
) |
Other |
|
|
|
|
|
|
10 |
|
Income taxes |
|
|
|
|
|
|
(11 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(66 |
) |
Other |
|
|
|
|
|
|
11 |
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(55 |
) |
|
|
|
|
|
|
(1) |
|
No charges for discontinued operations were incurred during 2009. |
In 2007, we sold our Distribution Solutions segments Medical-Surgical Acute Care business to
Owens & Minor, Inc. (OMI) for net cash proceeds of approximately $160 million. Revenues
associated with the Acute Care business prior to its disposition were $597 million for 2007.
91
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial results for 2007 for this discontinued operation include an after-tax loss of $66
million, which primarily consists of an after-tax loss of $61 million for the business disposition
and $5 million of after-tax losses associated with operations, other asset impairment charges and
employee severance costs. The after-tax loss of $61 million for the business disposition includes
a $79 million non-tax deductible write-off of goodwill, as further described below.
In connection with this divestiture, we allocated a portion of our Distribution Solutions
segments Medical-Surgical Distribution business goodwill to the Acute Care business as required
by SFAS No. 142, Goodwill and Other Intangible Assets. The allocation was based on the relative
fair values of the Acute Care business and the continuing businesses that are being retained by the
Company. The fair value of the Acute Care business was determined based on the net cash proceeds
resulting from the divestiture. As a result, we allocated $79 million of the segments goodwill to
the Acute Care business.
Additionally, as part of the divestiture, we entered into a transition services agreement
(TSA) with OMI under which we provided certain services to the Acute Care business during a
transition period of approximately six months. Financial results from the TSA, as well as employee
severance charges over the transition period, were recorded as part of discontinued operations.
The continuing cash flows generated from the TSA were not material to our consolidated financial
statements and the TSA was completed as of March 31, 2007.
In the second quarter of 2007, we also sold a wholly-owned subsidiary, Pharmaceutical Buyers
Inc., for net cash proceeds of $10 million. The divestiture resulted in an after-tax gain of $5
million resulting from the tax basis of the subsidiary exceeding its carrying value. Financial
results for this business, which were previously included in our Distribution Solutions segment,
were not material to our consolidated financial statements.
The results for discontinued operations for 2007 also include an after-tax gain of $6 million
associated with the collection of a note receivable from a business sold in 2003 and the sale of a
small business.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, financial results for these businesses have been classified as discontinued operations for
all periods presented.
8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of
common shares outstanding during the reporting period. Diluted earnings per share is computed
similar to basic earnings per 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.
92
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The computations for basic and diluted earnings per share from continuing and discontinued
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share amounts) |
|
2009 |
|
2008 |
|
2007 |
|
Income from continuing operations |
|
$ |
823 |
|
|
$ |
989 |
|
|
$ |
968 |
|
Discontinued operations, net |
|
|
|
|
|
|
1 |
|
|
|
(5 |
) |
Discontinued operations loss on sales, net |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
Net income |
|
$ |
823 |
|
|
$ |
990 |
|
|
$ |
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
275 |
|
|
|
291 |
|
|
|
298 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
3 |
|
|
|
5 |
|
|
|
6 |
|
Restricted stock |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
Diluted |
|
|
279 |
|
|
|
298 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.99 |
|
|
$ |
3.40 |
|
|
$ |
3.25 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
Discontinued operations loss on sales, net |
|
|
|
|
|
|
|
|
|
|
(0.17 |
) |
|
|
|
Total |
|
$ |
2.99 |
|
|
$ |
3.40 |
|
|
$ |
3.06 |
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
3.17 |
|
Discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
Discontinued operations loss on sales, net |
|
|
|
|
|
|
|
|
|
|
(0.16 |
) |
|
|
|
Total |
|
$ |
2.95 |
|
|
$ |
3.32 |
|
|
$ |
2.99 |
|
|
|
|
|
|
|
(1) |
|
Certain computations may reflect rounding adjustments. |
Approximately 5 million, 8 million and 11 million stock options were excluded from the
computations of diluted net earnings per share in 2009, 2008 and 2007 as their exercise price was
higher than the Companys average stock price.
9. Receivables, net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
Customer accounts |
|
$ |
6,902 |
|
|
$ |
6,390 |
|
Other |
|
|
1,033 |
|
|
|
984 |
|
|
|
|
Total |
|
|
7,935 |
|
|
|
7,374 |
|
Allowances |
|
|
(161 |
) |
|
|
(161 |
) |
|
|
|
Net |
|
$ |
7,774 |
|
|
$ |
7,213 |
|
|
|
|
The allowances are primarily for uncollectible accounts and sales returns.
93
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
10. Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
Land |
|
$ |
50 |
|
|
$ |
50 |
|
Building, machinery, equipment and other |
|
|
1,673 |
|
|
|
1,652 |
|
|
|
|
Total property, plant and equipment |
|
|
1,723 |
|
|
|
1,702 |
|
Accumulated depreciation |
|
|
(927 |
) |
|
|
(927 |
) |
|
|
|
Property, plant and equipment, net |
|
$ |
796 |
|
|
$ |
775 |
|
|
|
|
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, 2007 |
|
$ |
1,386 |
|
|
$ |
1,589 |
|
|
$ |
2,975 |
|
Goodwill acquired, net of purchase price adjustments |
|
|
282 |
|
|
|
59 |
|
|
|
341 |
|
Foreign currency translation adjustments |
|
|
4 |
|
|
|
25 |
|
|
|
29 |
|
|
|
|
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 |
|
|
|
|
Information regarding intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
Customer lists |
|
$ |
824 |
|
|
$ |
725 |
|
Technology |
|
|
187 |
|
|
|
176 |
|
Trademarks and other |
|
|
70 |
|
|
|
61 |
|
|
|
|
Gross intangibles |
|
|
1,081 |
|
|
|
962 |
|
Accumulated amortization |
|
|
(420 |
) |
|
|
(301 |
) |
|
|
|
Intangible assets, net |
|
$ |
661 |
|
|
$ |
661 |
|
|
|
|
94
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amortization expense of intangible assets was $128 million, $107 million and $53 million for
2009, 2008 and 2007. The weighted average remaining amortization periods for customer lists,
technology, trademarks and other intangible assets at March 31, 2009 were: 7 years, 3 years and 7
years. Estimated annual amortization expense of these assets is as follows: $119 million, $111
million, $105 million, $86 million and $74 million for 2010 through 2014, and $166 million
thereafter. At March 31, 2008, there was an immaterial amount of intangible assets not subject to
amortization. All intangible assets were subject to amortization as of March 31, 2009.
12. Long-Term Debt and Other Financing
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
9.13% Series C Senior Notes due February, 2010 |
|
$ |
215 |
|
|
$ |
215 |
|
7.75% Notes due February, 2012 |
|
|
399 |
|
|
|
399 |
|
5.25% Notes due March, 2013 |
|
|
499 |
|
|
|
498 |
|
6.50% Notes due February, 2014 |
|
|
350 |
|
|
|
|
|
5.70% Notes due March, 2017 |
|
|
499 |
|
|
|
499 |
|
7.50% Notes due February, 2019 |
|
|
349 |
|
|
|
|
|
7.65% Debentures due March, 2027 |
|
|
175 |
|
|
|
175 |
|
ESOP related debt (see Financial Note 13) |
|
|
1 |
|
|
|
4 |
|
Other |
|
|
22 |
|
|
|
7 |
|
|
|
|
Total debt |
|
|
2,509 |
|
|
|
1,797 |
|
Less current portion |
|
|
(219 |
) |
|
|
(2 |
) |
|
|
|
Total long-term debt |
|
$ |
2,290 |
|
|
$ |
1,795 |
|
|
|
|
Long-Term Debt
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 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 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.
95
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
Accounts Receivable Sales Facility
In June 2008, we renewed our accounts receivable sales facility under substantially similar
terms to those previously in place, except that we increased the committed balance from $700
million to $1.0 billion. The renewed facility expires in June 2009. We anticipate renewing this
facility before its expiration.
Information regarding our outstanding balances related to our interests in accounts receivable
sold or qualifying receivables retained is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
March 31, |
(In millions) |
|
2009 |
|
2008 |
|
|
|
Receivables sold outstanding (1) |
|
$ |
|
|
|
$ |
|
|
Receivables retained, net of allowance for doubtful accounts |
|
|
4,814 |
|
|
|
4,251 |
|
|
|
|
|
|
|
(1) |
|
Deducted from receivables, net in the consolidated balance sheets. |
The following table summarizes the activity related to our interests in accounts receivable
sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Proceeds from accounts receivable sales |
|
$ |
5,780 |
|
|
$ |
1,075 |
|
|
$ |
|
|
Fees and charges (1) (2) |
|
|
10 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Recorded in operating expenses in the consolidated statements of operations. |
|
(2) |
|
Fee charges related to the sale of receivables to the Conduits for 2007 were not material. |
The delinquency ratio for the qualifying receivables represented less than 1% of the total
qualifying receivables as of March 31, 2009 and March 31, 2008.
Revolving Credit Facility
We have a $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. Total borrowings under this facility were $279 million for
2009. There were no borrowings for 2008. As of March 31, 2009 and 2008, there were no amounts
outstanding under this facility.
96
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In January 2007, we entered into a $1.8 billion interim credit facility. The interim credit
facility was a single-draw 364-day unsecured facility with terms substantially similar to those
contained in the Companys existing revolving credit facility. We utilized $1.0 billion of this
facility to fund a portion of our purchase of Per-Se.
Commercial Paper
We issued and repaid approximately $3.3 billion and $260 million in commercial paper during
2009 and 2008. There were no commercial paper issuances outstanding at March 31, 2009 and 2008.
Employee Stock Ownership Program
The employee stock ownership program (ESOP) debt bears interest at an 8.6% fixed rate and is
due in semi-annual installments through June 2010.
Debt Covenants
Our various borrowing facilities and certain long-term debt instruments are subject to
covenants. Our principal debt covenant is our debt to capital ratio, which cannot exceed 56.5%.
If we exceed this ratio, repayment of debt outstanding under the revolving credit facility and $215
million of term debt could be accelerated. At March 31, 2009, this ratio was 28.9% and we were in
compliance with all other covenants.
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 a nonqualified supplemental defined benefit plan for certain U.S. executives, which is
non-funded. We also assumed a frozen qualified defined benefit plan through our acquisition of
Per-Se in 2007. The Per-Se plan was merged into our retirement plan in 2008. We adopted the
measurement provisions of SFAS No. 158 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) |
|
2009 |
|
2008 |
|
2007 |
|
Service costbenefits earned during the year |
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
7 |
|
Interest cost on projected benefit obligation |
|
|
33 |
|
|
|
31 |
|
|
|
27 |
|
Expected return on assets |
|
|
(39 |
) |
|
|
(39 |
) |
|
|
(33 |
) |
Amortization of unrecognized actuarial loss,
prior service costs and net transitional
obligation |
|
|
10 |
|
|
|
11 |
|
|
|
12 |
|
Settlement charges and other |
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
Net periodic pension expense |
|
$ |
11 |
|
|
$ |
14 |
|
|
$ |
17 |
|
|
|
|
97
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The projected unit credit method is utilized for 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 and the market value of assets are amortized
straight-line over the average remaining future service periods.
Information regarding the changes in benefit obligations and plan assets for our pension plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
15 Month |
|
12 Month |
|
|
Period Ending |
|
Period Ending |
|
|
March |
|
December |
(In millions) |
|
31, 2009 |
|
31, 2007 |
|
Change in benefit obligations |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
543 |
|
|
$ |
552 |
|
SFAS No. 158 measurement date adjustment |
|
|
(3 |
) |
|
|
|
|
Service cost |
|
|
6 |
|
|
|
7 |
|
Interest cost |
|
|
33 |
|
|
|
31 |
|
Actuarial gains |
|
|
(65 |
) |
|
|
(8 |
) |
Benefit payments |
|
|
(32 |
) |
|
|
(47 |
) |
Foreign exchange impact and other |
|
|
(26 |
) |
|
|
8 |
|
|
|
|
Benefit obligation at end of period |
|
$ |
456 |
|
|
$ |
543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period |
|
$ |
501 |
|
|
$ |
484 |
|
SFAS No. 158 measurement date adjustment |
|
|
(9 |
) |
|
|
|
|
Actual return on plan assets |
|
|
(138 |
) |
|
|
29 |
|
Employer and participant contributions |
|
|
15 |
|
|
|
33 |
|
Benefits paid |
|
|
(32 |
) |
|
|
(47 |
) |
Foreign exchange impact and other |
|
|
(28 |
) |
|
|
2 |
|
|
|
|
Fair value of plan assets at end of period |
|
$ |
309 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period (1) |
|
$ |
(147 |
) |
|
$ |
(39 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized on the balance sheet |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
5 |
|
|
$ |
78 |
|
Current liabilities |
|
|
(10 |
) |
|
|
(9 |
) |
Noncurrent liabilities |
|
|
(142 |
) |
|
|
(108 |
) |
|
|
|
Total |
|
$ |
(147 |
) |
|
$ |
(39 |
) |
|
|
|
|
|
|
(1) |
|
Includes $3 million of employer contributions subsequent to our December 31, 2007 measurement
date for 2008. |
The unfavorable change in the funded status of our plans from March 31, 2008 to March 31, 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 accumulated benefit obligations for our pension plans were $441 million at March 31, 2009
and $522 million at March 31, 2008. The components of the amount recognized in accumulated other
comprehensive income at March 31, 2009 and 2008 are as follows: net actuarial loss, $215 million
and $111 million; net prior service cost, $8 million and $10 million; and net transitional
obligations, $1 million and $2 million.
98
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We estimate that we will amortize $2 million of prior service cost and $22 million of
actuarial loss for the pension plans from shareholders equity to pension expense in 2010.
Comparable 2009 amounts were $2 million and $8 million.
Projected benefit obligations relating to our unfunded U.S. plans were $110 million and $112
million at March 31, 2009 and 2008. Pension costs are funded based on the recommendations of
independent actuaries.
Expected benefit payments for our pension plans are as follows: $38 million, $35 million, $38
million, $31 million and $31 million for 2010 to 2014, and $262 million for 2015 through 2019.
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 $17 million for 2010.
Should the financial markets continue to deteriorate, the decline in fair value of the plan
assets may result in increased total pension costs in the future and may also result in additional
future cash contributions in accordance with the U.S. Pension Protection Act of 2006 or other
international retirement plan funding requirements. We currently do not expect additional cash
contributions to be material.
Weighted average asset allocations of the investment portfolio for our pension plans at March
31 and target allocations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Fair Value of Total |
|
|
Target |
|
Plan Assets |
|
|
Allocation |
|
2009 |
|
2008 |
|
Assets Category |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
59 |
% |
|
|
52 |
% |
|
|
56 |
% |
Fixed income |
|
|
33 |
% |
|
|
36 |
% |
|
|
35 |
% |
Other |
|
|
8 |
% |
|
|
12 |
% |
|
|
9 |
% |
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
We develop our expected long-term rate of return assumption based on the historical experience
of our portfolio and the review of projected returns by asset class on broad, publicly traded
equity and fixed-income indices. Our target asset allocation was determined based on the risk
tolerance characteristics of the plan and, at times, may be adjusted to achieve our overall
investment objective.
Weighted-average assumptions used to estimate the net periodic pension expense and the
actuarial present value of benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
Net periodic pension expense |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
5.34 |
% |
|
|
5.33 |
% |
|
|
5.35 |
% |
Rate of increase in compensation |
|
|
3.93 |
|
|
|
3.85 |
|
|
|
3.83 |
|
Expected long-term rate of return on plan assets |
|
|
7.75 |
|
|
|
7.53 |
|
|
|
7.47 |
|
Benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
7.74 |
% |
|
|
6.18 |
% |
|
|
5.70 |
% |
Rate of increase in compensation |
|
|
3.93 |
|
|
|
4.01 |
|
|
|
3.97 |
|
Expected long-term rate of return on plan assets |
|
|
7.90 |
|
|
|
8.04 |
|
|
|
8.09 |
|
|
|
|
99
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
McKessons U.S. defined benefit pension plans use a discount rate based on a yield curve
approach. We use a portfolio of high quality corporate bonds rated AA or better whose maturity is
timed with the expected payments of our plans. For March 31, 2009, we used a discount rate of
7.95% which represents an increase of 162 basis points from our 2008 discount rate of 6.33%.
Sensitivity to changes in the weighted-average discount rate for our U. S. pension plans is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Projected |
|
|
|
|
Percentage |
|
Benefit |
|
|
(In millions) |
|
Point Change |
|
Obligation |
|
Expense |
|
|
+/- 1.0 pt
|
|
(27)/31
|
|
(2)/2 |
|
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 liabilities 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, 2009, 2008 and 2007.
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 ESOP.
The ESOP has 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 is reported as short-term debt of the Company and
the related receivables from the ESOP are shown as a reduction of stockholders equity. The loans
are 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 are identical to the
terms of related Company borrowings. Stock is 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 $53 million, $13 million and $13 million in 2009, 2008 and 2007. ESOP
expense for 2008 and 2007 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 and 2007. In 2009, the Company
made contributions primarily in cash or with the issuance of treasury shares. At March 31, 2009,
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.
As previously reported on the PSIPs Annual
Report on Form 11-K for the year ended March 31, 2008, the PSIP is a member of the settlement class in the Consolidated Securities
Litigation Action (refer to Financial Note 18, Other Commitments and Contingent Liabilities, to the consolidated financial
statements appearing in this Annual Report on Form 10-K). On April 27, 2009, the court issued an order approving the distribution of the
settlement funds. At this time, we do not know the date on which the distribution of settlement funds to the PSIP will occur.
100
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 SFAS
No. 158 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 for our postretirement welfare benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
2007 |
|
Service costbenefits earned during the year |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost on projected benefit obligation |
|
|
10 |
|
|
|
10 |
|
|
|
11 |
|
Amortization of unrecognized actuarial loss
(gain) and prior service costs |
|
|
(14 |
) |
|
|
4 |
|
|
|
16 |
|
|
|
|
Net periodic postretirement expense |
|
$ |
(3 |
) |
|
$ |
16 |
|
|
$ |
29 |
|
|
|
|
Information regarding the changes in benefit obligations for our postretirement welfare plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
15 Month |
|
12 Month |
|
|
Period Ending |
|
Period Ending |
|
|
March |
|
December |
(In millions) |
|
31, 2009 |
|
31, 2007 |
|
Change in benefit obligations |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
157 |
|
|
$ |
183 |
|
SFAS No. 158 measurement date adjustment |
|
|
3 |
|
|
|
|
|
Service cost |
|
|
1 |
|
|
|
2 |
|
Interest cost |
|
|
10 |
|
|
|
10 |
|
Plan amendments and other |
|
|
6 |
|
|
|
5 |
|
Actuarial gain |
|
|
(30 |
) |
|
|
(27 |
) |
Benefit payments |
|
|
(14 |
) |
|
|
(16 |
) |
|
|
|
Benefit obligation at end of period |
|
$ |
133 |
|
|
$ |
157 |
|
|
|
|
We estimate that we will amortize $24 million of actuarial gain for the other postretirement
plans from shareholders equity to other postretirement expense in 2010. The comparable 2009
amount was $13 million of actuarial gain. The increase in this benefit is primarily due to
favorable healthcare cost trends.
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 $16 million,
are as follows: $15 million annually for 2010 to 2014, and $67 million cumulatively for 2015
through 2019. 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 2010.
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were
6.19%, 5.78% and 5.55% for 2009, 2008 and 2007. Weighted-average discount rates for the actuarial
present value of benefit obligations were 7.86%, 6.19% and 5.78% for 2009, 2008 and 2007.
101
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Actuarial gain or loss for the postretirement welfare benefit plan is amortized to income over
a three-year period. The assumed healthcare cost trends used in measuring the accumulated
postretirement benefit obligation were 9% and 10% for prescription drugs, 7% and 9% for medical and
6% and 7% for dental in 2009 and 2008. The healthcare cost trend rate assumption has a significant
effect on the amounts reported. For 2009, 2008 and 2007, a one-percentage-point increase or a
one-percentage-point 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 $12 million to $15 million.
15. |
|
Financial Instruments and Hedging Activities |
At March 31, 2009 and 2008, 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. The carrying amounts and estimated fair values of our long-term debt were
$2,509 million and $2,545 million at March 31, 2009 and $1,797 million and $1,861 million at March
31, 2008. The estimated fair value of our long-term debt was determined based on quoted market
prices 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 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 2009, 2008 and 2007.
We lease facilities and equipment primarily under operating leases. At March 31, 2009, future
minimum lease payments required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year for years ending March 31 are:
|
|
|
|
|
|
|
Noncancelable |
|
|
|
Operating |
|
(In millions) |
|
Leases |
|
|
2010 |
|
$ |
105 |
|
2011 |
|
|
90 |
|
2012 |
|
|
72 |
|
2013 |
|
|
48 |
|
2014 |
|
|
33 |
|
Thereafter |
|
|
79 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
427 |
|
|
|
|
102
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Rental expense under operating leases was $146 million, $149 million and $117 million in 2009,
2008 and 2007. 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. Most real property leases contain renewal
options 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.
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 these guarantees cannot reasonably be estimated. At March 31, 2009, the maximum
amounts of inventory repurchase guarantees and other customer guarantees were $102 million and $10
million, none of which had been accrued.
At March 31, 2009, we had commitments of $2 million of cash contributions to our equity-held
investments, for which no amounts had been accrued.
The expirations of the above noted financial guarantees and commitments are as follows: $51
million, $23 million, $1 million, $1 million and nil from 2010 through 2014 and $38 million
thereafter.
In addition, our banks and insurance companies have issued $115 million of standby letters of
credit and surety bonds on our behalf mostly 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.
103
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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. Revenue
from these maintenance agreements is 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. In accordance with SFAS No. 5, Accounting for Contingencies, 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 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 assessments often involve a series of complex assessments by
management about future events and can rely heavily on estimates and assumptions.
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 the unresolved legal proceedings described below. Should any one of these proceedings
against us, or a combination of more than one, be successful or should we determine to settle any
or a combination of these matters on unfavorable terms, 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 (HBOC) and now known as McKesson Information Solutions LLC, were improperly
recorded as revenue and reversed, numerous lawsuits were filed against McKesson, HBOC, certain of
McKessons or HBOCs current or 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).
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FINANCIAL NOTES (Continued)
The two remaining matters 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 allege fraud and deceit; additionally, plaintiff Green seeks indemnification 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 McKesson Corporation and Green,
among others, and for other unspecified losses. Plaintiffs seek actual and punitive damages,
attorneys fees and costs of suit in amounts unspecified in the complaint. The Company and HBOC
have answered the complaints in each of these actions, generally denying the allegations and any
liability to plaintiffs. In April 2007, we filed motions to disqualify the Green and Hall Family
Investments, L.P. damages experts, who had opined that plaintiffs incurred approximately $150
million in actual damages, and for summary judgment. On December 13, 2007, the trial judge denied
those motions. On January 3, 2008, following certification by the trial court of an appeal from
her rulings on the disqualification and summary judgment motions, we applied to the Georgia Court
of Appeals, seeking acceptance of an interlocutory appeal from the trial court rulings and on
January 29, 2008, the Court of Appeals granted that application. Our appeal has been fully briefed
and was argued to a three judge panel of the Court of Appeals on February 12, 2009, but no decision
has yet been rendered.
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.
Private Payor RICO and Antitrust 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 AWP of 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.
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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 denied McKessons motion to dismiss and for judgment on
the pleadings with respect to the RICO claims asserted in the TAC. On May 1, 2008, McKesson
answered the TAC, denying the core factual allegations and asserting numerous affirmative defenses.
Also 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. This order supplanted an earlier order of the court which denied, without prejudice,
plaintiffs motion to certify a damages class for the third party payor class.
On April 2, 2008, McKesson petitioned the First Circuit Court of Appeals to allow immediate
appeal of the district courts March 19 class certification order. On May 16, 2008, the First
Circuit denied the petition for leave to appeal.
On December 10, 2007, the same plaintiffs named in the TAC in the Private Payor RICO Action
filed a separate civil class action complaint under federal and state antitrust laws against the
Company in the United States District Court, District of Massachusetts, New England Carpenters
Health Benefits Fund, et al. v. McKesson Corporation, (Civil Action No. 1:07-CV-12277-PBS) (the
Antitrust Action). The Antitrust Action purports to be brought on behalf of the same classes and
is based on the same set of operative facts as the Private Payor RICO Action.
The complaint purports to state claims against the Company for violation of the Sherman Act,
15 U.S.C. § 1, California Business & Professions Code § 16700 et seq., and antitrust laws for
indirect purchasers for the States of Arizona, Hawaii, Iowa, Kansas, Maine, Michigan, Minnesota,
Mississippi, Nebraska, Nevada, New Mexico, New York, North Carolina, North Dakota, South Dakota,
Tennessee, Vermont, West Virginia and Wisconsin and the District of Columbia. The complaint seeks
declaratory relief, as well as compensatory and treble damages, attorneys fees and costs.
McKesson moved to dismiss the complaint in the Antitrust Action on January 31, 2008. On
August 26, 2008, the court granted McKessons motion to dismiss the complaint, without leave to
amend, and terminated the action. No appeal was filed.
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 the 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. To
date, approximately $55 million has been paid by the Company into the settlement escrow and the
balance of the $350 million will be due and owing 45 days following final approval of the
settlement by the trial court. Accordingly, $350 million is
recorded in current liabilities on our consolidated balance sheet at
March 31, 2009. The settlement also provides that the certified settlement classes
will release all claims against the Company relating to FDBs published AWPs, whenever such claims
were incurred. On March 5, 2009, the court gave preliminary approval to the amended settlement and
scheduled a fairness hearing for July 23, 2009, at which time final approval will be considered.
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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Public Payor AWP Cases
Commencing in May of 2008, a series of complaints alleging claims nearly identical to the
Private Payor RICO and Antitrust Actions were filed by various public payors governmental
entities who 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:
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 (