e10vk
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, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 whether 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 whether the registrant is not required to file reports pursuant to
Section 13 or 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 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 Exchange 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 2007, was approximately $16.3
billion.
Number of shares of common stock outstanding on
April 30, 2008: 277,279,250
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2008 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 18 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 (the Exchange Act), as amended, 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) the leading pharmaceutical distributor 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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2008 |
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2007 |
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2006 |
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Distribution Solutions |
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$ |
98.7 |
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97 |
% |
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$ |
90.7 |
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98 |
% |
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$ |
85.1 |
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98 |
% |
Technology Solutions |
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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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1.9 |
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2 |
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Total |
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$ |
101.7 |
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100 |
% |
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$ |
93.0 |
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100 |
% |
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$ |
87.0 |
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100 |
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Distribution Solutions
McKesson Distribution Solutions consists of the following businesses: McKesson U.S.
Pharmaceutical, McKesson Canada, McKesson Medical-Surgical, McKesson Retail Automation and McKesson
Specialty Distribution. We also own an approximate 49% interest in Nadro and an approximate 39%
interest in Parata.
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 other acute-care
facilities and long-term care providers).
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McKESSON CORPORATION
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 the best product availability for our customers. For example, in all of
our distribution centers we use Acumax® Plus, a Smithsonian award-winning technology, which
integrates and tracks all internal 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 our customers with real-time product availability and industry-leading order quality and
fulfillment in excess of 99.9% 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 Supply Management OnlineSM, an Internet-based tool
that provides item look-up and real-time inventory availability as well as ordering, purchasing,
third-party reconciliation and account management functionality. Together, these features help
ensure that our 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.
Furthermore, we continue to implement information systems to help achieve greater consistency and
accuracy both internally and for our customers.
Our U.S. pharmaceutical distribution business major value-added offerings, by customer group,
include the following:
Retail National Accounts Business solutions that help national accounts increase revenues
and profitability:
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Central Fill Prescription refill service that enables pharmacies to refill prescriptions
remotely, faster, 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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RxPakSM Bulk repackaging service that leverages our purchasing power 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. |
Independent Retail Pharmacies Solutions for managed care contracting, branding and
advertising, merchandising and purchasing that help independent pharmacists focus on patient care
while improving profitability:
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Health Mart® Franchise program that provides independent pharmacies 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. |
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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 OneStop Generics® Generic pharmaceutical purchasing program that helps
pharmacies maximize their cost savings with a broad selection of generic drugs, lower up-front
pricing and one-stop shopping. |
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Prefer Rx Discount program that offers aggressive prices on more than 100 branded drugs,
helping retail independent pharmacies increase margins and eliminate rebate paperwork. |
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Sunmark® Complete line of more than 1,000 products that provide retail independent
pharmacies with value-priced alternatives to national brands. |
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FrontEdge Strategic planning, merchandising and price maintenance program that helps
independent pharmacies maximize store profitability. |
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McKesson Home Health Care Comprehensive line of more than 1,800 home health care
products, including durable medical equipment, diabetes supplies, self-care supplies and
disposables from national brands and the Sunmark® line. |
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McKESSON CORPORATION
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. Enables acute care, long-term care and
institutional pharmacies to provide cost-effective, uniform packaging. |
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McKesson 340B Manager Software solution that manages, tracks, and reports on the
medication replenishment associated with the federal 340B Drug Pricing Program, helping
institutional providers maximize their 340B return. |
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AccessHealth® Expert service for third-party contracting and payment consolidation that
helps institutional providers save time and accelerate reimbursement. |
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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 Tool and the High Performance Pharmacy Benchmarking Service enable
hospital pharmacies to measure against comparable institutions and chart a step-by-step path
to high performance. |
International Pharmaceutical Distribution: McKesson Canada, a wholly-owned subsidiary, is the
largest pharmaceutical distributor 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.
We also own an approximate 49% interest in Nadro, the leading pharmaceutical distributor in
Mexico.
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 the 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 the industrys most extensive product offering,
including our own private label line. This business also includes ZEE® Medical, North Americas
leading provider 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 Retail Automation: This business supplies integrated pharmacy management systems and
services to retail and institutional outpatient pharmacies as well as payors. We also own an
approximate 39% interest in Parata which sells automated pharmacy and supply management systems and
services to retail and institutional outpatient pharmacies.
McKesson Specialty Distribution: This business product-specific solutions are directed
towards manufacturers, payors and physicians to enable delivery and administration of high-cost,
often injectable, bio-pharmaceutical drugs used to treat patients with chronic disease. The
business facilitates patient and provider access to specialty pharmaceuticals across multiple
delivery channels (direct-to-physician wholesale, patient-direct specialty pharmacy dispensing and
access to retail pharmacy), provides clinical support and treatment compliance programs that help
patients stay on complex therapies and offers reimbursement, data collection and analysis services.
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McKESSON CORPORATION
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 markets its products and services to integrated delivery networks, hospitals, physician
practices, home healthcare providers, retail pharmacies and payors. This segment also includes our
Payor group of businesses, which includes our InterQual® and clinical auditing and compliance
software businesses and our disease and medical management programs. 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.
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.
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McKESSON CORPORATION
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.
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.
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.
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.
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
workflow; |
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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 payment. |
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
3 to the consolidated financial statements, Acquisitions and Investments and Discontinued
Operations, appearing in this Annual Report on Form 10-K.
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McKESSON CORPORATION
Competition
In every area of healthcare distribution operations, our Distribution Solutions segment faces
strong competition, both in price and service, from national, regional and local full-line,
short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers
engaged in direct distribution and large payor organizations. In addition, this segment faces
competition from various other service providers and from pharmaceutical and other healthcare
manufacturers (as well as other potential customers of the segment) which may from time to time
decide to develop, for their own internal needs, supply management capabilities 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.
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, Fulfill-Rx, Health Mart®, High
Performance PharmacySM, LoyaltyScriptSM, 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®,
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®, CarePoint-RN, Connect-RN, Connect-Rx®, CRMS®, DataStat®,
ePremis®, Episode Profiler®, E-Script, Fulfill-RxSM, HealthQuest®, Horizon Admin-Rx,
Horizon Clinicals®, HorizonWP®, InterQual®, Lytec®, MedCarousel®, Medisoft, One-Call®, One-Staff®,
ORSOS, PACMED, Pak Plus-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.
8
McKESSON CORPORATION
Other Information About the Business
Customers: In recent years, a significant portion of our revenue growth has been with a
limited number of large customers. During 2008, sales to our ten largest customers accounted for
approximately 53% 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 13%
of our total consolidated revenues. At March 31, 2008, accounts receivable from our ten largest
customers were approximately 43% of total accounts receivable. Accounts receivable from Caremark
and Rite Aid were approximately 12% and 11% 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 2008. 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 2008
accounted for approximately 48% 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. In 2008 and 2007, we benefited from certain branded manufacturers
price increases on selected drugs.
Research and Development: Our development expenditures primarily consist of our investment in
software development held for sale. We expended $420 million, $359 million and $285 million for
development activities in 2008, 2007 and 2006, and of these amounts, we capitalized 17%, 21% and
22%. 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 to the consolidated financial statements, Significant
Accounting Policies, 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 17 to the consolidated financial
statements, Other Commitments and Contingent Liabilities, 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 2008 and is not expected to be
material in the next year.
Employees: On March 31, 2008, we employed approximately 32,900 persons compared to 31,800 in
2007 and 26,400 in 2006.
Financial Information About Foreign and Domestic Operations: Information as to foreign and
domestic operations is included in Financial Notes 1 and 21 to the consolidated financial
statements, Significant Accounting Policies and Segments of Business, appearing in this Annual
Report on Form 10-K.
9
McKESSON CORPORATION
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 49 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. 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 12 to the consolidated financial statements, Lease Obligations, 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 17 to our
consolidated financial statements, Other Commitments and Contingent Liabilities, appearing in
this Annual Report on Form 10-K.
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, 2008.
10
McKESSON CORPORATION
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of the Company,
including their principal occupations during the past five years. The number of years of service
with the Company includes service with predecessor companies.
There are no family relationships between any of the executive officers or directors of the
Company. The executive officers are 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
|
|
|
49 |
|
|
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 12 years. |
|
|
|
|
|
|
|
Jeffrey C. Campbell
|
|
|
47 |
|
|
Executive Vice President and Chief Financial
Officer since April 2004; Senior Vice President
and Chief Financial Officer from December 2003
to April 2004. Senior Vice President and Chief
Financial Officer, AMR Corporation (2002-2003).
Service with the Company 4 years. |
|
|
|
|
|
|
|
Paul C. Julian
|
|
|
52 |
|
|
Executive Vice President, Group President since
April 2004; Senior Vice President from August
1999 to April 2004; President of the
Distribution Solutions business since March
2000. Service with the Company 12 years. |
|
|
|
|
|
|
|
Paul E. Kirincic
|
|
|
57 |
|
|
Executive Vice President, Human Resources since
April 2004; Senior Vice President, Human
Resources from January 2001 to April 2004.
Service with the Company 7 years. |
|
|
|
|
|
|
|
Marc E. Owen
|
|
|
48 |
|
|
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 7 years. |
|
|
|
|
|
|
|
Pamela J. Pure
|
|
|
47 |
|
|
Executive Vice President, President, McKesson
Technology Solutions (formerly, McKesson
Provider Technologies) since April 2004; Chief
Operating Officer of McKesson Information
Solutions from January 2002 to April 2004. Service with the
Company 7 years. |
|
|
|
|
|
|
|
Laureen E. Seeger
|
|
|
46 |
|
|
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 8 years. |
|
|
|
|
|
|
|
Randall N. Spratt
|
|
|
56 |
|
|
Executive Vice President, Chief Information
Officer since July 2005; 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 22
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 22 to the consolidated financial statements, Quarterly Financial
Information (Unaudited), appearing in this Annual Report on Form 10-K. |
|
(b) |
|
Holders: The number of record holders of the Companys common stock at March 31, 2008 was
approximately 9,500. |
|
(c) |
|
Dividends: Dividend information is included in Financial Note 22 to the consolidated
financial statements, Quarterly Financial Information (Unaudited), 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, which will apply to ensuing quarterly dividend declarations until
further action by the Board. |
|
(d) |
|
Share Repurchase Plans: The following table provides information on the Companys share
repurchases during the fourth quarter of 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Shares that May |
|
|
|
|
|
|
|
|
|
|
As Part of Publicly |
|
Yet Be Purchased |
|
|
Total Number of |
|
Average Price Paid |
|
Announced |
|
Under the |
(In millions, except price per share) |
|
Shares Purchased |
|
Per Share |
|
Program |
|
Programs |
|
January 1, 2008 January 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,086 |
|
February 1, 2008 February 29, 2008 |
|
|
8 |
|
|
|
58.64 |
|
|
|
8 |
|
|
|
630 |
|
March 1, 2008 March 31, 2008 |
|
|
5 |
|
|
|
57.42 |
|
|
|
5 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13 |
|
|
|
58.14 |
|
|
|
13 |
|
|
|
314 |
|
|
(1) |
|
This table does not include shares tendered to satisfy the exercise price in connection with
cashless exercises of employee stock options or shares tendered to satisfy tax withholding
obligations in connection with employee equity awards. |
In April and September 2007, the Board approved two new plans to repurchase up to $2.0 billion
of the Companys common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28
million shares for $1,686 million, fully utilizing the April 2007 plan, leaving $314 million
remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase
an additional $1.0 billion of the Companys common stock. Stock repurchases may be made from
time-to-time in open market or private transactions.
12
McKESSON CORPORATION
(e) |
|
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, |
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
McKesson Corporation |
|
$ |
100.00 |
|
|
$ |
121.66 |
|
|
$ |
153.74 |
|
|
$ |
213.39 |
|
|
$ |
240.76 |
|
|
$ |
216.23 |
|
S&P 500 Index |
|
$ |
100.00 |
|
|
$ |
135.12 |
|
|
$ |
144.16 |
|
|
$ |
161.07 |
|
|
$ |
180.13 |
|
|
$ |
170.98 |
|
Value Line
Healthcare Sector
Index |
|
$ |
100.00 |
|
|
$ |
117.09 |
|
|
$ |
122.89 |
|
|
$ |
138.67 |
|
|
$ |
146.74 |
|
|
$ |
137.80 |
|
|
|
|
|
* |
|
Assumes $100 invested in the Companys common stock and in each index on March 31, 2003 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 Results of Operations and Financial Condition
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 defined in the 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 Rules 13a-15(f) and 15d-15(f) in the Exchange Act), and the related report of our
independent registered public accounting firm, are included on page 58 and page 59 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 2008 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 20, 2007, 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 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 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, 2008 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 |
|
the first column ) |
|
Equity compensation plans approved by
security holders(1) |
|
|
16.5 |
|
|
$ |
55.25 |
|
|
|
21.4 |
(2) |
Equity compensation plans not approved
by security holders(3),(4) |
|
|
9.5 |
|
|
|
36.11 |
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares available for purchase under the 2000 Employee Stock Purchase Plan (ESPP).
Also includes options outstanding under the 1994 Stock Option and Restricted Stock Plan, which
expired October 2004, the 2005 Stock Plan, and the 1997 Non-Employee Directors Equity
Compensation and Deferral Plan, which was replaced by the 2005 Stock Plan, following its
approval by the stockholders on July 27, 2005. |
|
(2) |
|
Includes 5,565,419 shares available for purchase under the ESPP and 15,857,925 shares
available for grant under the 2005 Stock Plan as of March 31, 2008. |
|
(3) |
|
Includes options that remain outstanding under the terminated broad-based 1999 Stock Option
and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan, and two stock option plans,
all of which were replaced by the 2005 Stock Plan following its approval by the stockholders
on July 27, 2005. |
|
(4) |
|
As a result of acquisitions, the Company currently has five assumed option plans under which
options are exercisable for 360,242 shares of Company 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 initially
provided for the grant of up to 13 million shares in the form of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit
awards, performance shares and other share-based awards. The 2005 Stock Plan was subsequently
amended by the Board of Directors on May 23, 2007 to increase the common stock reserved for
issuance by 15 million shares, which was approved by stockholders on July 25, 2007. For any one
share of common stock issued in connection with a stock-settled stock appreciation right,
restricted stock award, restricted stock unit award, performance share 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 appreciation right or 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.
Options are granted at not less than fair market value and have a term of seven 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 award or vesting of restricted stock,
restricted stock units (RSUs) or performance based RSUs may be conditioned upon the attainment of
one or more performance objectives. Vesting of such awards is generally a three year cliff.
Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately;
however, payment of any shares is delayed until the director is no longer performing services for
the Company. The 2005 Stock Plan replaced the 1997 Non-Employee Directors Equity Compensation and
Deferral Plan.
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 so qualify under Section
423 of the Internal Revenue Code. Currently, 16.1 million shares have been approved by
stockholders for issuance under the ESPP.
16
McKESSON CORPORATION
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, the Stock Option Plans adopted in January 1999 and August 1999, 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, restricted stock and RSUs. Stock options
under the terminated plans generally have a ten-year life and vest over four years. Restricted
stock 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 related party 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 2009 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 |
|
Consolidated Financial Statements and Report of Independent
Registered Public Accounting Firm
See Index to Consolidated
Financial Information |
|
|
25 |
|
|
|
|
|
|
Supplementary Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts |
|
|
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. |
|
|
|
|
|
|
|
|
|
Exhibits submitted with this Annual Report on Form 10-K as filed with
the SEC and those incorporated by reference to other filings are
listed on the Exhibit Index |
|
|
21 |
|
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 7, 2008 |
/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 7, 2008 |
|
|
19
McKESSON CORPORATION
SCHEDULE II
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2008, 2007 and 2006
(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, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March
31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for
doubtful accounts |
|
$ |
113 |
|
|
$ |
26 |
(5) |
|
$ |
23 |
|
|
$ |
(38 |
) (5) |
|
$ |
124 |
|
Other allowances |
|
|
3 |
|
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
116 |
|
|
$ |
29 |
|
|
$ |
24 |
|
|
$ |
(38 |
) |
|
$ |
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
(1) Deductions: |
|
|
|
|
|
|
|
|
|
Written off |
|
$ |
32 |
|
|
$ |
24 |
|
|
$ |
23 |
|
Credited to other accounts |
|
|
2 |
|
|
|
|
|
|
|
15 |
(5) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34 |
|
|
$ |
24 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
(2) Amounts shown as deductions from receivables |
|
$ |
172 |
|
|
$ |
150 |
|
|
$ |
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
Primarily represents additions relating to acquisitions. |
|
(4) |
Includes a $10 million allowance for non-current receivables. |
|
(5) |
Includes a $15 million recovery of a previously reserved doubtful account. |
20
McKESSON CORPORATION
EXHIBIT INDEX
Exhibits
identified under Incorporated by Reference in the table below are on file with the Commission and are incorporated
by reference as exhibits hereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
|
|
File |
|
|
|
|
Number |
|
Description |
|
Form |
|
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 January 4, 2007. |
|
8-K |
|
1-13252 |
|
|
3.1 |
|
|
January 8, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Amended and Restated Declaration of Trust of McKesson Financing Trust,
dated as of February 20, 1997, among the Company, The First National Bank
of Chicago, as Institutional Trustee, First Chicago, Inc., as Delaware
Trustee, and the Regular Trustees. |
|
S-3 |
|
333-26443 |
|
|
4.2 |
|
|
June 18, 1997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
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 |
|
|
Letter Agreement, dated January 11,
2005, and Annex A (Stipulation and Agreement of Settlement between Lead
Plaintiff and Defendants McKesson HBOC, Inc. and HBO & Company) thereto
in connection with the consolidated securities class action. |
|
8-K |
|
1-13252 |
|
|
99.1 |
|
|
January 18, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2* |
|
|
McKesson Corporation 1999 Stock Option
and Restricted Stock Plan, as amended through May 26, 2004. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3* |
|
|
Statement of Terms and Conditions
Applicable to certain Stock Options
granted on August 16, 1999. |
|
10-K |
|
1-13252 |
|
|
10.38 |
|
|
June 13, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4* |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5* |
|
|
McKesson Corporation Supplemental
Profit Sharing Investment Plan, as amended and restated as of January 29,
2003. |
|
10-K |
|
1-13252 |
|
|
10.6 |
|
|
June 6, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
|
|
|
|
|
|
|
|
|
|
21
McKESSON CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
|
|
File |
|
|
|
|
Number |
|
Description |
|
Form |
|
Number |
|
Exhibit |
|
Filing Date |
|
10.8* |
|
|
McKesson Corporation Deferred
Compensation Administration Plan III,
effective January 1, 2005, including
Amendment No. 1 thereto effective July
25, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9* |
|
|
McKesson Corporation 1994 Option Gain
Deferral Plan, as amended and restated
effective October 28, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.8 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10* |
|
|
McKesson Corporation Management
Deferred Compensation Plan, as amended
and restated as of October 28, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.9 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.11* |
|
|
McKesson Corporation Executive Benefit
Retirement Plan, as amended and
restated as of May 22, 2007.
|
|
10-Q
|
|
1-13252
|
|
|
10.2 |
|
|
July 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12* |
|
|
McKesson Corporation Executive
Survivor Benefits Plan, as amended and
restated as of October 28, 2004.
|
|
10-K
|
|
1-13252
|
|
|
10.11 |
|
|
May 13, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13* |
|
|
McKesson Corporation Severance Policy
for Executive Employees, as amended
and restated January 1, 2005.
|
|
10-Q
|
|
1-13252
|
|
|
10.13 |
|
|
November 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14* |
|
|
McKesson Corporation 2005 Management
Incentive Plan, as amended and
restated effective as of October 27,
2006.
|
|
10-Q
|
|
1-13252
|
|
|
10.14 |
|
|
November 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15* |
|
|
McKesson Corporation Long-Term
Incentive Plan, as amended and
restated as of January 1, 2005.
|
|
10-Q
|
|
1-13252
|
|
|
10.15 |
|
|
November 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16* |
|
|
McKesson Corporation Stock Purchase
Plan, as amended through July 31,
2002.
|
|
10-K
|
|
1-13252
|
|
|
10.19 |
|
|
June 6, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17* |
|
|
Statement of Terms and Conditions
Applicable to Certain Stock Options
Granted on January 27, 1999.
|
|
10-K
|
|
1-13252
|
|
|
10.28 |
|
|
July 16, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18* |
|
|
Form of Restricted Stock Unit
Agreement under the 2005 Stock Plan.
|
|
10-K
|
|
1-13252
|
|
|
10.19 |
|
|
May 16, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19* |
|
|
Statement of Terms and Conditions
Applicable to Restricted Stock Units
Granted to Outside Directors Pursuant
to the 2005 Stock Plan, effective July
27, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20* |
|
|
Form of Stock Option Grant Notice
under the 2005 Stock Plan.
|
|
10-K
|
|
1-13252
|
|
|
10.20 |
|
|
May 16, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21* |
|
|
McKesson Corporation 2005 Stock Plan,
as amended and restated on July 25,
2007.
|
|
10-Q
|
|
1-13252
|
|
|
10.1 |
|
|
October 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22* |
|
|
Statement of Terms and Conditions
Applicable to Options, Restricted
Stock, Restricted Stock Units and
Performance Shares Granted to
Employees Pursuant to the 2005 Stock
Plan, effective April 25, 2006.
|
|
10-K
|
|
1-13252
|
|
|
10.23 |
|
|
May 16, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23* |
|
|
Statement of Terms and Conditions
Applicable to Officers Pursuant to the
2005 Stock Plan.
|
|
8-K
|
|
1-13252
|
|
|
10.1 |
|
|
May 26, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24* |
|
|
Statement of Terms and Conditions
Applicable to the Chief Executive
Officer Pursuant to the 2005 Stock
Plan.
|
|
8-K
|
|
1-13252
|
|
|
10.2 |
|
|
May 26, 2006 |
22
McKESSON CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
|
|
File |
|
|
|
|
Number |
|
Description |
|
Form |
|
Number |
|
Exhibit |
|
Filing Date |
|
10.25 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.27 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.28 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.29 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.30 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.31* |
|
|
Amended and Restated Employment
Agreement, dated as of November 1,
2006, by and between the Company and
its Chairman, President and Chief
Executive Officer.
|
|
10-Q
|
|
1-13252
|
|
|
10.30 |
|
|
November 11, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.32* |
|
|
Amended and Restated Employment
Agreement, dated as of November 1,
2006, by and between the Company and
its Executive Vice President and
President, McKesson Technology
Solutions.
|
|
10-Q
|
|
1-13252
|
|
|
10.31 |
|
|
January 30, 2007 |
23
McKESSON CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
|
|
File |
|
|
|
|
Number |
|
Description |
|
Form |
|
Number |
|
Exhibit |
|
Filing Date |
|
|
10.33* |
|
|
Amended and Restated Employment
Agreement, dated as of November 1,
2006, by and between the Company and
its Executive Vice President and Group
President.
|
|
10-Q
|
|
1-13252
|
|
|
10.32 |
|
|
January 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.34* |
|
|
McKesson Corporation Change in Control
Policy for Selected Executive
Employees, effective as of November 1,
2006.
|
|
10-Q
|
|
1-13252
|
|
|
10.33 |
|
|
November 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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24 |
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Power of Attorney.
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31.1 |
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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.
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31.2 |
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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.
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32 |
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Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
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* |
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Management contract or compensation plan or arrangement in which directors and/or executive
officers are eligible to participate. |
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Filed herewith. |
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Furnished herewith. |
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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
|
|
|
|
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|
Page |
|
|
|
26 |
|
|
|
|
27 |
|
|
|
|
58 |
|
|
|
|
59 |
|
Consolidated Financial Statements: |
|
|
|
|
|
|
|
60 |
|
|
|
|
61 |
|
|
|
|
62 |
|
|
|
|
63 |
|
|
|
|
64 |
|
25
McKESSON CORPORATION
FIVE-YEAR HIGHLIGHTS
|
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|
|
|
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|
|
|
|
|
|
|
|
As of and for the Years Ended March 31, |
(In millions, except per share amounts and ratios) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
Operating Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
|
$ |
79,096 |
|
|
$ |
67,993 |
|
Percent change |
|
|
9.4 |
% |
|
|
6.9 |
% |
|
|
10.0 |
% |
|
|
16.3 |
% |
|
|
22.0 |
% |
Gross profit |
|
|
5,009 |
|
|
|
4,332 |
|
|
|
3,777 |
|
|
|
3,342 |
|
|
|
3,107 |
|
Income (loss) from continuing operations before income
taxes |
|
|
1,457 |
|
|
|
1,297 |
|
|
|
1,171 |
|
|
|
(266 |
) |
|
|
869 |
|
Income (loss) after income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
989 |
|
|
|
968 |
|
|
|
745 |
|
|
|
(173 |
) |
|
|
621 |
|
Discontinued operations |
|
|
1 |
|
|
|
(55 |
) |
|
|
6 |
|
|
|
16 |
|
|
|
26 |
|
Net income (loss) |
|
|
990 |
|
|
|
913 |
|
|
|
751 |
|
|
|
(157 |
) |
|
|
647 |
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
2,438 |
|
|
|
2,730 |
|
|
|
3,527 |
|
|
|
3,658 |
|
|
|
3,706 |
|
Days sales outstanding for: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer receivables |
|
|
22 |
|
|
|
21 |
|
|
|
22 |
|
|
|
23 |
|
|
|
25 |
|
Inventories |
|
|
33 |
|
|
|
32 |
|
|
|
29 |
|
|
|
34 |
|
|
|
36 |
|
Drafts and accounts payable |
|
|
44 |
|
|
|
43 |
|
|
|
41 |
|
|
|
40 |
|
|
|
40 |
|
Total assets |
|
|
24,603 |
|
|
|
23,943 |
|
|
|
20,961 |
|
|
|
18,775 |
|
|
|
16,240 |
|
Total debt, including capital lease obligations |
|
|
1,797 |
|
|
|
1,958 |
|
|
|
991 |
|
|
|
1,211 |
|
|
|
1,485 |
|
Stockholders equity |
|
|
6,121 |
|
|
|
6,273 |
|
|
|
5,907 |
|
|
|
5,275 |
|
|
|
5,165 |
|
Property acquisitions |
|
|
195 |
|
|
|
126 |
|
|
|
166 |
|
|
|
135 |
|
|
|
110 |
|
Acquisitions of businesses, net |
|
|
610 |
|
|
|
1,938 |
|
|
|
589 |
|
|
|
76 |
|
|
|
49 |
|
|
Common Share Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at year-end |
|
|
277 |
|
|
|
295 |
|
|
|
304 |
|
|
|
299 |
|
|
|
290 |
|
Shares on which earnings (loss) per common share were
based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
298 |
|
|
|
305 |
|
|
|
316 |
|
|
|
294 |
|
|
|
299 |
|
Basic |
|
|
291 |
|
|
|
298 |
|
|
|
306 |
|
|
|
294 |
|
|
|
290 |
|
Diluted earnings (loss) per common share (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
3.32 |
|
|
$ |
3.17 |
|
|
$ |
2.36 |
|
|
$ |
(0.59 |
) |
|
$ |
2.10 |
|
Discontinued operations |
|
|
|
|
|
|
(0.18 |
) |
|
|
0.02 |
|
|
|
0.06 |
|
|
|
0.09 |
|
Total |
|
|
3.32 |
|
|
|
2.99 |
|
|
|
2.38 |
|
|
|
(0.53 |
) |
|
|
2.19 |
|
Cash dividends declared |
|
|
70 |
|
|
|
72 |
|
|
|
74 |
|
|
|
71 |
|
|
|
70 |
|
Cash dividends declared per common share |
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.24 |
|
Book value per common share (3) |
|
|
22.10 |
|
|
|
21.26 |
|
|
|
19.43 |
|
|
|
17.64 |
|
|
|
17.81 |
|
Market value per common share year end |
|
|
52.37 |
|
|
|
58.54 |
|
|
|
52.13 |
|
|
|
37.75 |
|
|
|
30.09 |
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital employed (4) |
|
|
7,918 |
|
|
|
8,231 |
|
|
|
6,898 |
|
|
|
6,486 |
|
|
|
6,650 |
|
Debt to capital ratio (5) |
|
|
22.7 |
% |
|
|
23.8 |
% |
|
|
14.4 |
% |
|
|
18.7 |
% |
|
|
22.3 |
% |
Net debt to net capital employed (6) |
|
|
6.6 |
% |
|
|
0.1 |
% |
|
|
(24.1 |
)% |
|
|
(12.6 |
)% |
|
|
13.1 |
% |
Average stockholders equity (7) |
|
|
6,344 |
|
|
|
6,022 |
|
|
|
5,736 |
|
|
|
5,264 |
|
|
|
4,835 |
|
Return on stockholders equity (8) |
|
|
15.6 |
% |
|
|
15.2 |
% |
|
|
13.1 |
% |
|
|
(3.0 |
)% |
|
|
13.4 |
% |
|
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 Results of Operations and Financial Condition
GENERAL
Managements discussion and analysis of results of operations and financial condition,
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.
In April 2007, we reconfigured our operating segments to better align product development and
selling efforts with the evolving needs of the healthcare market, resulting in the following
operating segments: Distribution Solutions and Technology Solutions. See Financial Note 21 to the
accompanying consolidated financial statements, Segments of Business, for a description of these
segments. All periods presented have been reclassified to conform to the April 2007 changes in our
organization.
RESULTS OF OPERATIONS
Overview:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share data) |
|
2008 |
|
2007 |
|
2006 |
|
Revenues |
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
Securities Litigation pre-tax credits (charge), net |
|
|
5 |
|
|
|
6 |
|
|
|
(45 |
) |
Income from Continuing Operations Before Income
Taxes |
|
$ |
1,457 |
|
|
$ |
1,297 |
|
|
$ |
1,171 |
|
Income Tax Provision |
|
|
(468 |
) |
|
|
(329 |
) |
|
|
(426 |
) |
|
|
|
Income from Continuing Operations |
|
|
989 |
|
|
|
968 |
|
|
|
745 |
|
Discontinued Operations, net |
|
|
1 |
|
|
|
(55 |
) |
|
|
6 |
|
|
|
|
Net Income |
|
$ |
990 |
|
|
$ |
913 |
|
|
$ |
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
3.32 |
|
|
$ |
3.17 |
|
|
$ |
2.36 |
|
Discontinued Operations |
|
|
|
|
|
|
(0.18 |
) |
|
|
0.02 |
|
|
|
|
Total |
|
$ |
3.32 |
|
|
$ |
2.99 |
|
|
$ |
2.38 |
|
|
Revenues increased 9% to $101.7 billion and 7% to $93.0 billion in 2008 and 2007. The
increase in revenues primarily reflects market growth rates in our Distribution Solutions segment,
which accounted for 97% of our consolidated revenues. Revenues for 2008 also benefited from our
acquisitions of Oncology Therapeutics Network (OTN) in October 2007 and Per-Se Technologies, Inc.
(Per-Se) in January 2007. Revenues for 2007 also benefited from our acquisition of D&K
Healthcare Resources, Inc. (D&K) in August 2005.
Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a
percentage of revenues, gross profit increased 27 basis points (bp) to 4.93% in 2008 and 32 bp to
4.66% in 2007. The increase in our 2008 gross profit margin primarily reflects a greater
proportion of higher margin Technology Solutions products and an improvement in our Distribution
Solutions segment margin. The increase in our 2007 gross profit margin primarily reflects
improvement in our U.S. pharmaceutical distribution business, including a decrease in our receipt
of antitrust class action lawsuits settlements. Our 2008, 2007 and 2006 gross profit includes the
receipt of $14 million, $10 million and $95 million of cash proceeds representing our share of
settlements of antitrust class action lawsuits.
27
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
Operating expenses were $3.5 billion, $3.1 billion and $2.7 billion in 2008, 2007 and 2006.
Operating expenses increased 15% in 2008 and 16% in 2007 primarily reflecting additional operating
expenses incurred to support our sales growth, expenses associated with our business acquisitions
and higher employee compensation expenses including expenses for share-based compensation.
Additionally, operating expenses for 2007 were impacted by a decrease in charges associated with
our Securities Litigation. Operating expenses for 2008, 2007 and 2006 include pre-tax credits of
$5 million and $6 million and pre-tax charges of $45 million for our Securities Litigation.
Other income, net decreased in 2008 primarily reflecting a decrease in interest income due to
lower cash balances and lower interest rates. Other income, net in 2007 approximated that of 2006.
Interest expense increased 43% to $142 million in 2008 primarily reflecting the issuance of
$1.0 billion of long-term debt as part of our $1.8 billion acquisition of Per-Se. Interest expense
increased 5% to $99 million in 2007.
Income from continuing operations before income taxes was $1,457 million, $1,297 million and
$1,171 million in 2008, 2007 and 2006, reflecting the above noted factors.
Our reported income tax rates were 32.1%, 25.4% and 36.4% in 2008, 2007 and 2006.
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. Additionally, 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. The tax reserves were initially
established in 2005 and were favorably resolved in 2007.
In 2007, 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. Financial results for the Acute Care business have been
reclassified as a discontinued operation for all periods presented. Results from discontinued
operations for 2008 and 2006 were $1 million and $6 million after-tax, or nil and $0.02 per diluted
share.
Net income was $990 million, $913 million and $751 million in 2008, 2007 and 2006 and diluted
earnings per share was $3.32, $2.99 and $2.38. Excluding the Securities Litigation charges or
credit, net income would have been $987 million, $826 million and $781 million in 2008, 2007 and
2006 and diluted earnings per share would have been $3.31, $2.71 and $2.48 (see reconciliation on
page 37).
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Distribution Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pharmaceutical direct distribution & services |
|
$ |
60,436 |
|
|
$ |
54,127 |
|
|
$ |
51,730 |
|
U.S. pharmaceutical sales to customers warehouses |
|
|
27,668 |
|
|
|
27,555 |
|
|
|
25,462 |
|
|
|
|
Subtotal |
|
|
88,104 |
|
|
|
81,682 |
|
|
|
77,192 |
|
Canada pharmaceutical distribution & services |
|
|
8,106 |
|
|
|
6,692 |
|
|
|
5,910 |
|
Medical-Surgical
distribution & services |
|
|
2,509 |
|
|
|
2,364 |
|
|
|
2,037 |
|
|
|
|
Total Distribution Solutions |
|
|
98,719 |
|
|
|
90,738 |
|
|
|
85,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
2,240 |
|
|
|
1,537 |
|
|
|
1,217 |
|
Software and software systems |
|
|
591 |
|
|
|
536 |
|
|
|
476 |
|
Hardware |
|
|
153 |
|
|
|
166 |
|
|
|
151 |
|
|
|
|
Total Technology Solutions |
|
|
2,984 |
|
|
|
2,239 |
|
|
|
1,844 |
|
|
|
|
Total Revenues |
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
|
28
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
Revenues increased 9% to $101.7 billion in 2008 and 7% to $93.0 billion in 2007. The growth
in revenues was primarily driven by our Distribution Solutions segment, which accounted for 97% of
revenues.
U.S. pharmaceutical direct distribution and service revenues increased in 2008 primarily
reflecting market growth rates, new and expanded business and to a lesser extent, due to our
acquisition of OTN. During the third quarter of 2008, we acquired OTN, a U.S. distributor of
specialty pharmaceuticals. In 2007, revenues increased primarily reflecting market growth rates,
expanded business and to a lesser extent, due to our acquisition of D&K. These increases were
partially offset by the loss of OTN as a customer. During the second quarter of 2006, we acquired
D&K, a wholesale distributor of branded and generic pharmaceuticals and over-the-counter health and
beauty products to independent and regional pharmacies, primarily in the Midwest. Market growth
rates reflect growing drug utilization and price increases, which are offset in part by the
increased use of lower priced generics.
U.S. pharmaceutical sales to customers warehouses increased over the last two years primarily
as a result of new and expanded agreements with customers. In 2008, these increases were partially
offset by a customers loss of a customer 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 have significantly lower gross profit margin 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Direct Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Independents |
|
|
13 |
% |
|
|
13 |
% |
|
|
12 |
% |
Institutions |
|
|
30 |
|
|
|
29 |
|
|
|
32 |
|
Retail Chains |
|
|
24 |
|
|
|
23 |
|
|
|
22 |
|
|
|
|
Subtotal |
|
|
67 |
|
|
|
65 |
|
|
|
66 |
|
Sales to retail customers warehouses |
|
|
33 |
|
|
|
35 |
|
|
|
34 |
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
From
2006 to 2007, the percentage of total revenue direct and warehouse attributed to the Companys retail chain
customers has grown faster than our other customer groups. This growth has resulted in a negative
impact on the Companys gross profit margin as the retail chain customer group typically has lower
gross profit margins as compared to our other customer groups. From 2007 to 2008, the percentage
of total direct and warehouse revenue attributed to the Companys retail chain customers grew slower than 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 has
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 revenues increased over the last two years primarily
reflecting market growth rates and favorable foreign exchange rates.
Additionally in 2008, these
revenues benefited from new and expanded business, partially offset by six fewer days of sales
compared to 2007. Canadian revenues benefited from a 12%, 5% and 7% foreign currency impact in
2008, 2007 and 2006.
Medical-Surgical distribution and services revenues increased in 2008 primarily reflecting
market growth rates and an acquisition, partially offset by the discontinuance of the distribution
of a product line. Revenues associated with this product line are now recorded by our U.S.
pharmaceutical distribution business. In 2008, these revenues were partially offset by one less
week of sales compared to 2007. In 2007, revenues increased primarily reflecting stronger than
average market growth rates and due to the acquisition of Sterling Medical Services LLC
(Sterling) during the first quarter of 2007. Sterling is a national provider and distributor of
disposable medical supplies, health management services and quality management programs to the home
care market.
Technology Solutions revenues increased in 2008 primarily due to the acquisition of Per-Se and
increased services revenues, primarily reflecting the segments expanded customer bases and
clinical software implementations. During the fourth quarter of 2007, we acquired Per-Se, a
leading provider of financial and administrative healthcare solutions for hospitals, physicians and
retail pharmacies. In 2007, revenues for this segment benefited from increased clinical software
implementations and to a lesser extent, our acquisition of Per-Se.
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2008 |
|
2007 |
|
2006 |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
3,586 |
|
|
$ |
3,252 |
|
|
$ |
2,883 |
|
Technology Solutions |
|
|
1,423 |
|
|
|
1,080 |
|
|
|
894 |
|
|
|
|
Total |
|
$ |
5,009 |
|
|
$ |
4,332 |
|
|
$ |
3,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
3.63 |
% |
|
|
3.58 |
% |
|
|
3.39 |
% |
Technology Solutions |
|
|
47.69 |
|
|
|
48.24 |
|
|
|
48.48 |
|
Total |
|
|
4.93 |
|
|
|
4.66 |
|
|
|
4.34 |
|
|
Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a
percentage of revenues, gross profit increased 27 bp in 2008 and 32 bp in 2007. Gross profit
margin increased in 2008 primarily reflecting a greater proportion of higher margin Technology
Solutions products and an improvement in our Distribution Solutions segments margin. Gross profit
margin increased in 2007 primarily due to an increase in our Distribution Solutions segments gross
profit margin.
In 2008, our Distribution Solutions segments gross profit margin increased slightly from that
of the prior year. 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 retail automation group and an increase
associated with a smaller proportion of revenues within the segment attributed to sales to
customers warehouses. These increases were partially offset by a decline in sell margin and
last-in, first-out (LIFO) inventory credits ($14 million in 2008 compared with $64 million in
2007).
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 2006 to 2007 the percentage of total
direct and warehouse revenue attributed to our retail
chain customers, grew faster than our other customer
groups. This change resulted in a negative impact on the Companys gross profit margin as this
customer group typically has lower margins as compared to our other customer groups. From 2007 to
2008, the percentage of total direct and warehouse revenue attributed to our retail chain customers grew slower than our other
customer groups. This decline resulted in a positive impact on the Companys gross profit margin.
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 do
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 included in this Financial Review.
In 2007, our Distribution Solutions segments gross profit margin increased compared to the
prior year. Gross profit margin was impacted by higher buy side margins, the benefit of increased
sales of generic drugs with higher margins and an increase in LIFO inventory credits ($64 million
in 2007 compared with $32 million in 2006). In addition, gross profit margin benefited from a
relatively stable sell side margin. Partially offsetting these increases was a decrease associated
with antitrust settlements ($10 million in 2007 compared with $95 million in 2006), $15 million of
impairment charges associated with the write-down of certain abandoned assets within our retail
automation group and a decrease associated with a larger proportion of revenues within the segment
attributed to sales to customers warehouses.
During the first quarter of 2007, we contributed $36 million in cash and $45 million in net
assets primarily from our Automated Prescription Systems 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 believe the fair value of our
investment in Parata approximates the carrying value of consideration contributed to Parata. Our
investment in Parata is accounted for under the equity method of accounting within our Distribution
Solutions segment.
Technology Solutions segments gross profit margin decreased primarily reflecting a change in
product mix. In 2008, this segments product mix included a higher proportion of lower margin
Per-Se service revenues. Partially offsetting this decrease, 2008 gross profit margin was
positively impacted by the recognition of $21 million of disease
management deferred revenues for a contract for
which expenses associated with these revenues were previously recognized as incurred.
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2008 |
|
2007 |
|
2006 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
2,138 |
|
|
$ |
1,896 |
|
|
$ |
1,673 |
|
Technology Solutions |
|
|
1,115 |
|
|
|
884 |
|
|
|
720 |
|
Corporate |
|
|
283 |
|
|
|
294 |
|
|
|
213 |
|
|
|
|
Subtotal |
|
|
3,536 |
|
|
|
3,074 |
|
|
|
2,606 |
|
Securities Litigation (credits) charge, net |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
45 |
|
|
|
|
Total |
|
$ |
3,531 |
|
|
$ |
3,068 |
|
|
$ |
2,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses as a Percentage of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
2.17 |
% |
|
|
2.09 |
% |
|
|
1.97 |
% |
Technology Solutions |
|
|
37.37 |
|
|
|
39.48 |
|
|
|
39.05 |
|
Total |
|
|
3.47 |
|
|
|
3.30 |
|
|
|
3.05 |
|
|
31
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
Operating expenses increased 15% to $3.5 billion in 2008 and 16% to $3.1 billion in 2007.
Operating expenses for 2008, 2007 and 2006 include pre-tax credits of $5 million and $6 million and
a pre-tax charge of $45 million for our Securities Litigation. Excluding the impact of our
Securities Litigation, operating expenses increased 15% and 18% in 2008 and 2007. Operating
expenses as a percentage of revenues increased 17 bp to 3.47% in 2008 and 25 bp to 3.30% in 2007
(or 17 bp and 31 bp in 2008 and 2007, excluding the impact of our Securities Litigation).
Excluding the Securities Litigation credits, increases in operating expenses primarily reflect
additional operating expenses incurred to support our sales growth, expenses associated with our
business acquisitions, and higher employee compensation expenses including expenses for share-based
compensation, research and development expenses, foreign currency exchange rates and higher bad
debt expense.
Operating expenses included the following significant items:
2008
|
|
$91 million of share-based compensation expense or $31 million
more than the previous year. On April 1, 2006, 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.
The incremental compensation expense was recorded as follows: $9
million and $16 million in our Distribution Solutions and
Technology Solutions segments, and $6 million in Corporate
expenses, |
|
|
|
Due to the accelerated vesting of share-based awards prior to 2007, we anticipate the impact of
SFAS No. 123(R) to increase in significance as future awards of share-based compensation are
granted and amortized over the requisite service period. 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, level and types
of our grants of annual share-based awards, the attainment of performance goals and actual
forfeiture rates. As a result, the actual future share-based compensation expense may differ
from historical levels of expense. Information regarding our share based payments is included
in Financial Note 19 to the consolidated financial statements, Share-Based Payment, appearing
in this Annual Report on Form 10-K, |
|
|
|
$14 million of restructuring charges primarily associated with the
abandonment of a Technology Solutions software project, the
closure of two Distribution Solutions segment distribution
centers and the integration of OTN. An additional $5 million of
these expenses were recorded to cost of sales. Information
regarding our restructuring activities is included in Financial
Note 4 to the consolidated financial statements, Restructuring
Activities, appearing in this Annual Report on Form 10-K, |
|
|
|
$13 million increase in a legal reserve. During the third quarter
of 2008, we engaged in discussions with a governmental agency to
settle claims arising out of an inquiry. As a result of these
settlement discussions, we recorded an increase in a legal reserve
of $13 million within our Distributions Solutions segment. These
claims were settled in May 2008 consistent with this reserve. This
reserve is not tax deductible, and |
|
|
|
$8 million of severance expense associated with the realignment of
our Technology Solutions workforce. An additional $2 million of
severance expense was recorded to cost of sales. Although such
actions do not constitute a restructuring plan, they represent
independent actions taken from time to time, as appropriate. |
32
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
2007
|
|
$60 million of share-based compensation expense, or $44 million
more than the previous year. The incremental compensation expense
was recorded as follows: $13 million and $18 million in our
Distribution Solutions and Technology Solutions segments, and $13
million in Corporate expenses, |
|
|
|
$15 million of severance restructuring expense primarily to
reallocate product development and marketing resources and to
realign one of the international businesses within our
Technology Solutions segment, and |
|
|
|
an $11 million credit to our Distribution Solutions operating
expenses due to a favorable adjustment to a legal reserve. |
2006
|
|
a $45 million net charge for our Securities Litigation and a
decrease in legal expenses associated with the litigation which
were both recorded in Corporate expenses, and |
|
|
|
a $15 million credit to our Distribution Solutions bad debt
expense due to a recovery of a previously reserved customer
account. |
Other Income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
By Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
35 |
|
|
$ |
39 |
|
|
$ |
40 |
|
Technology Solutions |
|
|
11 |
|
|
|
10 |
|
|
|
13 |
|
Corporate |
|
|
75 |
|
|
|
83 |
|
|
|
86 |
|
|
|
|
Total |
|
$ |
121 |
|
|
$ |
132 |
|
|
$ |
139 |
|
|
Other income, net decreased in 2008 primarily reflecting a decrease in interest income due to
lower cash balances and lower interest rates. Other income, net in 2007 approximated that of 2006.
Interest income, which is primarily recorded in Corporate expenses, was $89 million, $103 million
and $105 million in 2008, 2007 and 2006.
Segment Operating Profit and Corporate Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(Dollars in millions) |
|
2008 |
|
2007 |
|
2006 |
|
Segment Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
1,483 |
|
|
$ |
1,395 |
|
|
$ |
1,250 |
|
Technology Solutions |
|
|
319 |
|
|
|
206 |
|
|
|
187 |
|
|
|
|
Subtotal |
|
|
1,802 |
|
|
|
1,601 |
|
|
|
1,437 |
|
Corporate Expenses, net |
|
|
(208 |
) |
|
|
(211 |
) |
|
|
(127 |
) |
Securities Litigation credit (charge), net |
|
|
5 |
|
|
|
6 |
|
|
|
(45 |
) |
Interest Expense |
|
|
(142 |
) |
|
|
(99 |
) |
|
|
(94 |
) |
|
|
|
Income from Continuing Operations Before
Income Taxes |
|
$ |
1,457 |
|
|
$ |
1,297 |
|
|
$ |
1,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
1.50 |
% |
|
|
1.54 |
% |
|
|
1.47 |
% |
Technology Solutions |
|
|
10.69 |
|
|
|
9.20 |
|
|
|
10.14 |
|
|
Segment operating profit includes gross margin, net of operating expenses, and other income
for our two operating segments. Operating profit increased in 2008 primarily reflecting revenue
growth and improved operating profit in both of our segments and for 2007, primarily reflecting
revenue growth and improved operating profit in our Distribution Solutions segment.
33
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
Operating profit as a percentage of revenues in our Distribution Solutions segment decreased
slightly in 2008 primarily reflecting higher operating expenses as a percentage of revenues,
partially offset by improved gross profit margin. Operating expenses increased in both dollars and
as a percentage of revenues primarily due to a $13 million increase in a legal reserve, our
acquisition of OTN, which has a higher ratio of operating expenses as a percentage of revenues and,
to a lesser extent, an increase in share-based compensation. Increases in operating expenses were
also due to additional costs incurred to support our sales volume growth. Share-based compensation
expense for this segment was $26 million and $17 million for 2008 and 2007.
Operating profit as a percentage of revenues in our Distribution Solutions segment increased
in 2007 primarily reflecting an increase in gross profit margin, offset in part by an increase in
operating expenses as a percentage of revenues. Operating expenses increased in both dollars and
as a percentage of revenues primarily due to additional compensation expense, our acquisition of
D&K which had a higher ratio of operating expenses as a percentage of revenues, an increase in bad
debt expense and, to a lesser extent, due to an increase in share-based compensation. These
increases were partially offset by an $11 million credit to operating expense due to an adjustment
to a legal reserve. Increases in operating expenses were also due to additional costs incurred to
support our sales volume growth. In 2006, operating profit benefited from a $15 million credit to
bad debt expense due to a recovery on a previously reserved customer account. Share-based
compensation expense for this segment was $17 million and $4 million for 2007 and 2006.
Operating profit as a percentage of revenues in our Technology Solutions segment increased
during 2008 primarily due to a decrease in operating expenses as a percentage of revenues partially
offset by a decrease in gross profit margin. Operating expenses as a percentage of revenues were
favorably impacted by the acquisition of Per-Se which has a lower ratio of operating expenses as a
percentage of revenues. This decrease was partially offset by an increase in share-based
compensation and bad debt expense. Operating expenses increased primarily due to business
acquisitions, including Per-Se, investments in research and development activities and additional
share-based compensation. Share-based compensation expense for this segment was $35 million and
$19 million for 2008 and 2007.
Operating profit as a percentage of revenues in our Technology Solutions segment decreased
during 2007 primarily due to a decrease in gross profit margin as well as an increase in operating
expenses as a percentage of revenues. Operating expenses increased in both dollars and as a
percentage of revenues primarily reflecting additional compensation expense, including share-based
compensation, severance charges incurred to reallocate product development and marketing resources
and to realign one of the segments international businesses and investments in research and
development activities. Share-based compensation expense for this segment was $19 million and $1
million for 2007 and 2006.
Corporate expenses, net of other income, decreased in 2008 and increased in 2007. Corporate
expenses, net of other income, reflect additional costs incurred to support various initiatives and
our revenue growth, an increase in share-based compensation and a decrease in interest income. For
2008, these increases were fully offset by a decrease in legal expenses associated with our
Securities Litigation, a decrease in charitable contributions and a decrease in other long-term
compensation. Legal expenses associated with our Securities Litigation declined in 2007; however,
other legal costs offset this benefit. Legal expenses associated with our Securities Litigation
were $4 million, $19 million and $27 million in 2008, 2007 and 2006. Share-based compensation
expense for Corporate was $30 million, $24 million and $11 million in 2008, 2007 and 2006.
Securities
Litigation Credit/(Charge), Net: We recorded net credits of $5 million and $6
million in 2008 and 2007 and net charges of $45 million in 2006 relating to various settlements for
our Securities Litigation. Recent developments pertaining to our Securities Litigation are described in Financial Note 17,
Other Commitments and Contingent Liabilities, to the accompanying consolidated financial
statements.
34
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
Interest Expense: Interest expense increased in the last two years primarily due to $1.0
billion of long-term debt issued in the fourth quarter of 2007 to fund our acquisition of Per-Se.
Refer to our discussion under the caption Credit Resources within this Financial Review for
additional information regarding our financing for the Per-Se acquisition.
Income Taxes: Our reported tax rates were 32.1%, 25.4% and 36.4% in 2008, 2007 and 2006. 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 2008, the U.S. Internal Revenue Service (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. 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. We are in the process of amending state income tax returns for 2000 to 2002
to reflect the IRS settlement. We recorded the anticipated state tax impact of the IRS
examination in our 2008 income tax provision and do not anticipate any material impact when the
final amended state tax returns have been completed. In Canada, we received an assessment from the
Canada Revenue Agency for a total of $9 million related to transfer pricing for 2003. We plan to
further pursue this issue and will appeal the assessment. We believe we have adequately provided
for any potential adverse results for 2003 and future years. During 2008, we have also favorably
concluded various foreign examinations, which resulted in the recognition of approximately $4
million of income tax benefits. In nearly all jurisdictions, the tax years prior to 1999 are no
longer subject to examination. We believe that we have made adequate provision for all remaining
income tax uncertainties. 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 (refer to
Financial Note 17, Other Commitments and Contingent Liabilities of the accompanying consolidated
financial statements) 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.
In 2006, we made a $960 million payment into an escrow account relating to the Consolidated
Securities Litigation Action. This payment was deducted in our 2006 income tax returns and as a
result, our current tax expense decreased and our deferred tax expense increased in 2006 primarily
reflecting the utilization of the deferred tax assets associated with the Consolidated Securities
Litigation Action. In 2006, we also recorded a $14 million income tax expense, which primarily
related to a basis adjustment in an investment and adjustments with various taxing authorities.
35
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
Discontinued Operations:
Results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(9 |
) |
|
$ |
(13 |
) |
BioServices |
|
|
|
|
|
|
|
|
|
|
2 |
|
Other |
|
|
1 |
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(1 |
) |
|
|
4 |
|
|
|
4 |
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(5 |
) |
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sales of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
|
|
|
$ |
(49 |
) |
|
$ |
|
|
BioServices |
|
|
|
|
|
|
|
|
|
|
22 |
|
Other |
|
|
|
|
|
|
10 |
|
|
|
|
|
Income taxes |
|
|
|
|
|
|
(11 |
) |
|
|
(9 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(50 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(66 |
) |
|
$ |
(8 |
) |
BioServices |
|
|
|
|
|
|
|
|
|
|
14 |
|
Other |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(55 |
) |
|
$ |
6 |
|
|
In the second quarter of 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. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the financial results of this business are classified as a discontinued operation for all
periods presented in the accompanying consolidated financial statements. Revenues associated with
the Acute Care business prior to its disposition were $1,062 million for 2006 and $597 million for
the first half of 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
Medical-Surgical business goodwill to the Acute Care supply 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 and the fair value of the continuing businesses. 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.
36
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
In 2005, our Acute Care business entered into an agreement with a third party vendor to sell
the vendors proprietary software and services. The terms of the contract required us to prepay
certain royalties. During the third quarter of 2006, we ended marketing and sale of the software
under the contract. As a result of this decision, we recorded a $15 million pre-tax charge in the
third quarter of 2006 to write-off the remaining balance of the prepaid royalties.
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. The gain on
disposition was also recorded in the second quarter of 2007. 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 the second quarter of 2006, we sold our wholly-owned subsidiary, McKesson BioServices
Corporation (BioServices), for net cash proceeds of $63 million. The divestiture resulted in an
after-tax gain of $13 million. Financial results for this business, which were previously included
in our Distribution Solutions segment, were not material to our consolidated financial statements.
In accordance with SFAS No. 144, financial results for these businesses have been classified
as discontinued operations for all periods presented.
Net Income: Net income was $990 million, $913 million and $751 million in 2008, 2007 and 2006
and diluted earnings per share was $3.32, $2.99 and $2.38. Excluding the Securities Litigation
credits or charges, 2008 net income and net income per diluted share would have been $987 million
and $3.31, for 2007, $826 million and $2.71, and for 2006, $781 million and $2.48.
A reconciliation between our net income per share reported under accounting standards
generally accepted in the United States (GAAP) and our earnings per diluted share, excluding
charges for the Securities Litigation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions except per share amounts) |
|
2008 |
|
2007 |
|
2006 |
|
Net income, as reported |
|
$ |
990 |
|
|
$ |
913 |
|
|
$ |
751 |
|
Exclude: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities Litigation charge (credit), net |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
45 |
|
Estimated income tax expense (benefit) |
|
|
2 |
|
|
|
2 |
|
|
|
(15 |
) |
Income tax reserve reversal |
|
|
|
|
|
|
(83 |
) |
|
|
|
|
|
|
|
Securities Litigation charge (credit), net of tax |
|
|
(3 |
) |
|
|
(87 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, excluding Securities Litigation charge |
|
$ |
987 |
|
|
$ |
826 |
|
|
$ |
781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share, excluding
Securities Litigation charge (1) |
|
$ |
3.31 |
|
|
$ |
2.71 |
|
|
$ |
2.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares on which diluted earnings per common share,
excluding the Securities Litigation charge, were
based |
|
|
298 |
|
|
|
305 |
|
|
|
316 |
|
|
|
|
|
|
(1) |
|
For 2006, interest expense, net of related income taxes, of $1 million has been added to net
income, excluding the Securities Litigation charges, for purpose of calculating diluted
earnings per share. This calculation also includes the impact of dilutive securities (stock options, convertible junior subordinated debentures and restricted
stock). |
37
McKESSON CORPORATION
FINANCIAL
REVIEW (Continued)
These pro forma amounts are non-GAAP financial measures. We use these measures internally and
consider these results to be useful to investors as they provide relevant benchmarks of core
operating performance.
Weighted Average Diluted Shares Outstanding: Diluted earnings per share was calculated based
on a weighted average number of shares outstanding of 298 million, 305 million and 316 million for
2008, 2007 and 2006. The decrease in the number of weighted average diluted shares outstanding
over the past two years primarily reflects stock repurchased, partially offset by exercised stock
options.
International Operations
International operations accounted for 8.2%, 7.5% and 7.0% of 2008, 2007 and 2006 consolidated
revenues. International operations are subject to certain risks, including currency fluctuations.
We monitor our operations and adopt strategies responsive to changes in the economic and political
environment in each of the countries in which we operate. Additional information regarding our
international operations is also included in Financial Note 21, Segments of Business to the
accompanying consolidated financial statements.
Acquisitions and Investments
In April 2008, we entered into an agreement to acquire McQueary Brothers Drug Company, Inc.
(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 will expand our existing U.S.
pharmaceutical distribution business. The acquisition is expected to close in the first quarter of
2009, subject to customary closing conditions including regulatory review and will be funded with
cash on hand. When completed, financial results for McQueary Brothers will be included within our
Distribution Solutions segment.
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 $531 million,
including the assumption of debt and net of $31 million of cash
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. Approximately
$257 million of the preliminary purchase price allocation has been
assigned to goodwill. Included in the purchase price allocation
are acquired identifiable intangibles of $119 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 $7 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 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 10, 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. |
38
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
|
|
Approximately $1,258 million of the purchase price allocation has been assigned to goodwill.
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, 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 Automated Prescription Systems business to
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
believe the fair value of our investment in Parata approximates
the carrying value of consideration contributed to Parata. Our
investment in Parata is accounted for under the equity method of
accounting within our Distribution Solutions segment.
In 2006, we made the following acquisitions: |
|
|
|
We acquired substantially all of the issued and outstanding stock
of D&K of St. Louis, Missouri for an aggregate cash purchase price
of $479 million, including the assumption of D&Ks debt. D&K is
primarily a wholesale distributor of branded and generic
pharmaceuticals and over-the-counter health and beauty products to
independent and regional pharmacies, primarily in the Midwest.
The acquisition of D&K expanded our existing U.S. pharmaceutical
distribution business. Approximately $158 million of the purchase
price was assigned to goodwill. Included in the purchase price
were acquired identifiable intangibles of $43 million primarily
representing customer lists and not-to-compete covenants which
have an estimated weighted-average useful life of nine years.
Financial results for D&K are included within our Distribution
Solutions segment. |
39
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
|
|
We acquired all of the issued and outstanding shares of Medcon Ltd., (Medcon), an Israeli
company, for an aggregate purchase price of $82 million. Medcon provides web-based cardiac
image and information management services to healthcare providers. Approximately $60 million
of the purchase price was assigned to goodwill and $20 million was assigned to intangibles
which represent technology assets and customer lists which have an estimated weighted-average
useful life of four years. Financial results for Medcon are included within our Technology
Solutions segment. |
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 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 Investments, to the accompanying consolidated
financial statements for further discussions regarding our acquisitions and investing activities.
2009 Outlook
Information regarding the Companys 2009 outlook is contained in our Form 8-K dated May 5,
2008. 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 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, 2008, revenues and accounts receivable from our ten largest customers
accounted for approximately 53% of consolidated revenues and approximately 43% of accounts
receivable. At March 31, 2008, revenues and accounts receivable from our two largest customers,
CVS Caremark Corporation (Caremark) and Rite Aid Corporation (Rite Aid), represented approximately 14% and 13% of total consolidated revenues and 12% and
11% 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
2008 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, 2008, trade and notes receivables were $6,536 million, and other customer
financing was $120 million, prior to allowances of $163 million. In 2008, 2007 and 2006 our
provision for bad debts was $41 million, $24 million and $26 million. At March 31, 2008 and 2007,
the allowance as a percentage of trade and notes receivables was 2.5% and 2.6%. An increase or
decrease of 0.1% in the 2008 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
this Annual Report on Form 10-K.
Inventories: 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 was determined on the LIFO method and international inventories are stated using the
first-in, first-out (FIFO) method. Technology Solutions inventories consist of computer
hardware with cost determined by the standard cost method. Total inventories were $9.0 billion and
$8.2 billion at March 31, 2008 and 2007.
The LIFO method was used to value approximately 88% of our inventories at March 31, 2008 and
2007. At March 31, 2008 and 2007, our LIFO reserves were $34 million and $92 million. LIFO
reserves include both pharmaceutical and non-pharmaceutical products. In 2008, 2007 and 2006, we
recognized $14 million, $64 million and $32 million of LIFO credits within our statements of
operations. LIFO adjustments generally represent the net effect of the amount of price increases
on branded pharmaceutical products held in inventory offset by price declines on generic
pharmaceutical products, including the price decrease effect of branded pharmaceutical products
that have lost patent protection. A LIFO benefit implies that the price declines on generic
pharmaceutical products, including the effect of branded pharmaceuticals that have lost patent
protection, exceeded the effect of price increases on branded pharmaceutical products held in
inventory.
Our policy is to record inventories at the lower of cost or market (LCM). 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 $43 million higher than FIFO as of March 31,
2008. As a result, we recorded a $43 million LCM reserve in 2008 to adjust our LIFO inventories to
market. As deflation in generic pharmaceuticals continues, we anticipate that LIFO benefits on our
pharmaceutical products will be fully offset by a LCM reserve.
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.
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 Investments to the accompanying
consolidated financial statements for additional information regarding our acquisitions.
Goodwill: As a result of acquiring businesses, we have $3,345 million and $2,975 million of
goodwill at March 31, 2008 and 2007. We maintain goodwill assets on our books unless the assets
are deemed to be impaired. We perform an impairment test on goodwill balances annually or when
indicators of impairment exist. Such impairment tests require that we first compare the carrying
value of net assets to the estimated fair value of net assets for the operations in which goodwill
is assigned. If carrying value exceeds fair value, a second step would be performed to calculate
the amount of impairment. 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 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.
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 unanticipated events and circumstances, may affect the accuracy or validity
of such estimates and could potentially result in an impairment charge.
In September 2006, we sold our Distribution Solutions Medical-Surgical Acute Care 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.
42
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Goodwill at March 31, 2008 and 2007 was $3,345 million and $2,975 million and we concluded
that there was no impairment of our goodwill. Decreasing the multiple of earnings or multiple of
revenues of competitors used for impairment testing by one point or increasing the discount rate in
the discounted cash flow analysis used for impairment testing by 1% would not have indicated
impairment for any of the Companys reporting units for 2008 or 2007. Refer to Financial Note 9,
Goodwill and Intangible Assets, net in the accompanying
consolidated financial statements for additional
information regarding goodwill.
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.
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, 2008 and 2007,
supplier reserves were $82 million and $100 million. All of the supplier reserves at March 31,
2008 and 2007 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 2008. 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 future taxes to be paid. We are subject to income taxes
in both 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 $1,290 million and
$1,269 million at March 31, 2008 and 2007 and deferred tax
liabilities of $1,555 million and $1,524 million. We
established valuation allowances of $27 million and $25 million, against certain deferred tax
assets, which primarily relates to federal and state loss carry forwards 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. Management is not aware of any such
changes that could have a material effect on the Companys results of operations, cash flows or
financial position.
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 $15 million, or $0.05 per diluted share, for 2008.
Share-Based Payment: Our compensation programs include share-based payments. Beginning in
2007, we account for all share-based payment transactions using a fair-value based measurement
method required by SFAS No. 123(R). We adopted SFAS No. 123(R) using the modified prospective
method of transition. 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 the awards with
performance conditions, we recognize the expense on a straight-line basis, on an accelerated basis.
Upon adoption of SFAS No. 123(R) in 2007, we elected the short-cut method
for calculating the beginning balance of the additional paid-in capital pool related to the tax
effects of share-based compensation.
43
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 term of the option, the
expected stock price volatility factor and the expected dividend yield. We continue to use
historical exercise patterns as our best estimate of future exercise patterns in determining our
expected term of the option. We use a combination of historical and quoted implied 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 emerging
employee stock option valuation considerations. Through 2008, our expected stock price volatility
assumption reflected a constant dividend yield during the expected term of the option. 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 required 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 the 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 behaviors, timing, level and types of our grants 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 2008, 2007 and 2006,
share-based compensation expense was $0.20, $0.13 and $0.03 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.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Net cash flow from operating activities was $869 million in 2008, compared with $1,539 million
in 2007 and $2,738 million in 2006. Operating activities for 2008 were impacted by a use of cash
of $962 million due to the release of restricted cash for our Consolidated Securities Litigation
Action. Excluding this $962 million use of cash, cash flow provided from operations was $1,831
million. In addition, operating activities in 2008 reflect changes in our working capital accounts
due to revenue growth. 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 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.
44
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Operating activities for 2006 benefited from improved working capital balances for our U.S.
pharmaceutical distribution business as purchases from certain of our suppliers became better
aligned with customer demand and as a result, net financial inventory (inventory, net of accounts
payable) decreased. Operating activities for 2006 also benefited from better inventory management.
Operating activities for 2006 include a $143 million cash receipt in connection with an amended
agreement entered into with a customer and cash settlement payments of $243 million for the
Securities Litigation cases. Additionally, cash flows from operations for 2006 include a reduction
in current income taxes payable and a reduction in our deferred tax assets which largely pertain to
our Securities Litigation cash settlement payments (including the $962 million placed in escrow),
which was deducted in our 2006 income tax return.
Net cash used in investing activities was $5 million in 2008, compared with $2,108 million in
2007 and $1,813 million in 2006. 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 $531 million for
OTN. Investing activities for 2007 reflect $1,938 million of cash paid for our business
acquisitions (including $1.8 billion for Per-Se) and $36 million for our investment in Parata.
Investing activities for 2007 also reflect $179 million of cash proceeds from the sale of our
businesses, including $164 million for the sale of our Acute Care business. Investing activities
for 2006 reflect $589 million of cash paid for our business acquisitions, including $479 million
for D&K, and a use of cash of $962 million due to a transfer of cash to an escrow account for
future payment of our Consolidated Securities Litigation Action. Partially offsetting these
increases were cash proceeds of $63 million pertaining to the sale of BioServices.
Financing activities utilized cash of $1,470 million in 2008, provided cash of $379 million in
2007 and utilized cash of $583 million in 2006. Financing activities for 2008 include $1.7 billion
of cash paid for stock repurchases, partially offset by $354 million of cash receipts from common
stock issuances. Cash received from common stock issuances primarily represent employees
exercises of stock options.
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 from the issuance after offering
expenses of the notes of $990 million 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, partially offset by $399 million of cash receipts from common stock
issuances.
Financing activities for 2006 include $958 million of cash paid for stock repurchases and $102
million of cash paid for the repayment of life insurance policy loans, partially offset by $568
million of cash receipts from common stock issuances.
The Companys Board of Directors (the Board) approved share repurchase plans in October
2003, August 2005, December 2005 and January 2006 which permitted the Company to repurchase up to a
total of $1.0 billion ($250 million per plan) of the Companys common stock. Under these plans, we
repurchased 19 million shares for $958 million during 2006. As of March 31, 2006, less than $1
million remained available for future repurchases under the January 2006 plan and all of these
other plans were completed.
In April and July 2006, the Board approved two new share repurchase plans which permitted the
Company to repurchase up to an additional $1.0 billion ($500 million per plan) of the Companys
common stock. During 2007, we repurchased a total of 20 million shares for $1.0 billion. As a
result of these repurchases, we effectively completed all of the pre-2007 and 2007 share repurchase
plans.
In April and September 2007, the Board approved two new plans to repurchase up to $2.0 billion
of the Companys common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28
million shares for $1,686 million, fully utilizing the April 2007 plan, leaving $314 million
remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase
an additional $1.0 billion of the Companys common stock. Stock repurchases may be made from time-to-time in open market or private transactions.
45
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Historically,
we have provided contributions for our profit sharing investment plan (PSIP)
for U.S. employees primarily through a leveraged employee stock ownership plan (ESOP). At March
31, 2008, almost all of the 24 million common shares in the ESOP had been allocated to plan
participants. In 2008, 2007 and 2006, we granted 1 million shares per year to plan participants.
As a result, we will need to fund most of our future PSIP contributions with cash or treasury
shares. In 2008, had we paid cash for our PSIP contributions, such contributions would have
amounted to $53 million.
Selected Measures of Liquidity and Capital Resources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
(Dollars in millions) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Cash and cash equivalents |
|
$ |
1,362 |
|
|
$ |
1,954 |
|
|
$ |
2,139 |
|
Working capital |
|
|
2,438 |
|
|
|
2,730 |
|
|
|
3,527 |
|
Debt, net of cash and cash equivalents |
|
|
435 |
|
|
|
4 |
|
|
|
(1,148 |
) |
Debt to capital ratio (1) |
|
|
22.7 |
% |
|
|
23.8 |
% |
|
|
14.4 |
% |
Net debt to net capital employed (2) |
|
|
6.6 |
% |
|
|
0.1 |
% |
|
|
(24.1 |
)% |
Return on stockholders equity (3) |
|
|
15.6 |
% |
|
|
15.2 |
% |
|
|
13.1 |
% |
|
|
|
|
|
(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. |
As
of March 31, 2008, a significant portion of our cash and cash equivalents are on deposit
with foreign financial institutions and are used to fund operations.
Working capital primarily includes cash, receivables and inventories, net of drafts and
accounts payable and other 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 at March 31,
2008 decreased compared with that of the prior year end. Working capital was negatively impacted
by decreases in cash and cash equivalents and net financial inventory (inventory, net of drafts and
accounts payable) as well as 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. In 2007, our working capital
decreased primarily as a result of increases in other liabilities and deferred revenue. Net
financial inventory resulted in a small increase to working capital in 2007.
Our ratio of net debt to net capital employed increased in 2008 primarily reflecting an
increase in net debt (i.e., a decrease in cash and cash equivalents as well as long-term debt).
Our ratio of net debt to net capital employed increased in 2007 primarily due to our issuance of
$1.0 billion of long-term debt in relation to the Per-Se acquisition.
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 2008, we paid total cash dividends of $70 million. The Company anticipates
that it will continue to pay quarterly cash dividends in the future. 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, which
will apply to ensuing
quarterly dividend declarations until further action by the Board. 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.
46
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Financial Obligations and Commitments:
The table below presents our significant financial obligations and commitments at March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years |
|
(In millions) |
|
Total |
|
|
Within 1 |
|
|
Over 1 to 3 |
|
|
Over 3 to 5 |
|
|
After 5 |
|
|
On balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
1,797 |
|
|
$ |
2 |
|
|
$ |
217 |
|
|
$ |
903 |
|
|
$ |
675 |
|
Other (1) |
|
|
349 |
|
|
|
29 |
|
|
|
51 |
|
|
|
54 |
|
|
|
215 |
|
Off balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
3,607 |
|
|
|
3,288 |
|
|
|
144 |
|
|
|
90 |
|
|
|
85 |
|
Interest on borrowings |
|
|
799 |
|
|
|
118 |
|
|
|
216 |
|
|
|
164 |
|
|
|
301 |
|
Customer guarantees |
|
|
122 |
|
|
|
46 |
|
|
|
21 |
|
|
|
1 |
|
|
|
54 |
|
Operating lease obligations |
|
|
488 |
|
|
|
114 |
|
|
|
171 |
|
|
|
104 |
|
|
|
99 |
|
|
|
|
Total |
|
$ |
7,162 |
|
|
$ |
3,597 |
|
|
$ |
820 |
|
|
$ |
1,316 |
|
|
$ |
1,429 |
|
|
|
|
|
|
(1) |
|
Primarily includes estimated payments for pension and postretirement plans. |
We define a purchase obligation 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. At March 31, 2008, the liability recorded
for uncertain tax positions, excluding associated interest and penalties, was approximately $496
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.
We have 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. Customer guarantees
range from one to seven years and were primarily provided to facilitate financing for certain
strategic customers. At March 31, 2008, the maximum amounts of inventory repurchase guarantees and
other customer guarantees were $115 million and $5 million. We consider it unlikely that we would
make significant payments under these guarantees, and accordingly, amounts accrued for these
guarantees were nominal.
In addition, our banks and insurance companies have issued $101 million of standby letters of
credit and surety bonds on our behalf 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, short-term borrowings and our
receivables sales facility. In June 2007, we renewed our existing $1.3 billion five-year, senior
unsecured revolving credit facility, which was scheduled to expire in September 2009. The new
credit facility has terms and conditions substantially similar to those previously in place and
expires in June 2012. Borrowings under this new credit facility bear interest based upon either a
Prime rate or the London Interbank Offering Rate. At March 31, 2008 and March 31, 2007, no amounts
were outstanding under this facility.
In June 2007, we renewed our $700 million committed accounts receivable sales facility. The
facility was renewed under substantially similar terms to those previously in place. We intend to
renew this facility prior to its expiration in June 2008. At March 31, 2008 and March 31, 2007, no
amounts were outstanding under this facility.
47
McKESSON CORPORATION
FINANCIAL REVIEW (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 which had 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. On March 5, 2007, we issued $500
million of 5.25% notes due 2013 and $500 million of 5.70% notes due 2017. The notes are unsecured
and interest is paid semi-annually on March 1 and September 1. The notes are redeemable at any
time, in whole or in part, at our option. In addition, upon occurrence of both a change of control
and a ratings downgrade of the notes to non-investment-grade levels, we are required to make an
offer to redeem the notes at a price equal to 101% of the principal amount plus accrued interest.
We utilized net proceeds, after offering expenses, of $990 million from the issuance of the notes,
together with cash on hand, to repay all amounts outstanding under the interim credit facility plus
accrued interest.
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, 2008,
this ratio was 22.7% 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 2008, 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 2008, interest
income would have increased or decreased by approximately $9 million.
As of March 31, 2008 and 2007, the net fair value liability of financial instruments with
exposure to interest rate risk was approximately $1,958 million and $2,036 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, 2008, 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.
48
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
In addition to historical information, managements discussion and analysis includes 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 the
forward-looking statements can be identified by use of forward-looking words such as believes,
expects, anticipates, may, 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 potential risks and uncertainties.
These and other risks and uncertainties are described herein or in our other public documents.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. 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. 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 potential 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 matters 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 17 Other Commitments and Contingent
Liabilities contained in 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 which caused average wholesale prices to rise for certain prescription drugs during
specified periods.
49
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 17, Other Commitments and
Contingent Liabilities, contained in 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 any of our individual or collective group of
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 revenues and gross profit margins have increased 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 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.
International Sourcing. We may experience difficulties and delays inherent in sourcing
products and contract manufacturing from foreign countries, including, but not limited to, (i)
difficulties in complying with the requirements of applicable federal, state and local governmental
authorities in the United States and of foreign regulatory authorities, (ii) inability to increase
production capacity commensurate with demand or the failure to predict market demand, and (iii)
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.
50
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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. 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 Federal District Court for the Eastern District of New
York that temporarily enjoined implementation of this regulation. 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 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 (i) 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 and (ii)
impose a number of restrictions upon referring physicians and providers of designated health
services under Medicare and Medicaid programs. 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.
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 payers may file claims against us, and we may be excluded from Medicare, Medicaid
or other government-funded healthcare programs. Any such proceeding or investigation could have 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 and benefits inquiries and 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.
51
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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. 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.
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.
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 and other competing service providers. Price, quality of
service, and in some cases, convenience to the customer are generally the principal competitive
elements in these segments.
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 rate of generic price decreases could also have an adverse impact on our results
of operations.
52
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Substantial defaults in payment or a material reduction in purchases of our products by large
customers could have a significant negative impact on our financial condition and 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, 2008, sales to our ten largest customers
accounted for approximately 53% of our total consolidated revenues. Sales to our two largest
customers, Caremark and Rite Aid, represented approximately 14% and 13% of our 2008 total
consolidated revenues. At March 31, 2008, accounts receivable from our ten largest customers were
approximately 43% of total accounts receivable. Accounts receivable from Caremark and Rite Aid
were approximately 12% and 11% 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. Any defaults in payment or a material reduction in purchases from a
large customer could have an adverse impact on our results of operations.
Any adverse change in general economic conditions can adversely reduce sales to our customers
or affect consumer buying practices which would reduce our revenue growth and cause a decrease in
our profitability. 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: (i) facilitate the purchase and distribution of thousands of inventory
items from numerous distribution centers; (ii) receive, process and ship orders on a timely basis;
(iii) manage the accurate billing and collections for thousands of customers; and (iv) 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 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.
53
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The failure of our Technology Solutions business 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 Technology Solutions business delivers 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 Technology Solutions software products could impair our ability to attract and retain
customers and could have an adverse impact on our results of operations.
Future advances in the healthcare information systems industry could lead to new technologies,
products or services that are competitive with the products and services offered by our Technology
Solutions business. Such technological advances could also lower the cost of such products and
services or otherwise result in competitive pricing pressure. The success of our Technology
Solutions business will depend, in part, on its ability to be responsive to technological
developments, pricing pressures and changing business models. To remain competitive in the
evolving healthcare information systems marketplace, our Technology Solutions business must 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 Solutions business 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 Solutions segment may adversely impact
our operating results.
We license the rights to use certain technologies from third-party vendors to incorporate in
or complement our Technology Solutions segments products and solutions. 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. 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.
54
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 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.
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: (i) power loss and telecommunications failures; (ii) fire,
flood, hurricane and other natural disasters; (iii) software and hardware errors, failures or
crashes; and (iv) 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 and 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.
55
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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.
Regulations relating to patient confidentiality 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 (HIPAA), 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.
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 over two years or more from initial
contact with the customer to completion of implementation. How and when to implement, replace, or
expand an information system, or modify or add business processes, are major decisions for
healthcare organizations. Many of the solutions we provide typically require significant capital
expenditures and time commitments by the customer. Any decision by our customers to delay
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 generally accepted accounting principles to test our goodwill for
impairment at least annually as well as 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.
56
McKESSON CORPORATION
FINANCIAL
REVIEW (Concluded)
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 and 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.
In addition to the above, changes in generally accepted accounting principles and general
economic and market conditions could affect future results.
57
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, 2008.
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, 2008. This audit report
appears on page 59 of this Annual Report on Form 10-K.
May 7, 2008
|
|
|
/s/ John H. Hammergren
John H. Hammergren
|
|
|
Chairman, President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
/s/ Jeffrey C. Campbell
Jeffrey C. Campbell
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
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|
58
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, 2008 and 2007, 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, 2008. 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, 2008, 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,
2008 and 2007, and the results of their operations and their cash flows for each of the three
fiscal years in the period ended March 31, 2008, 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, 2008, 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, Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans on March 31, 2007, and SFAS 123(R), Share-Based Payment, on April 1, 2006.
Deloitte & Touche LLP
San Francisco, California
May 7, 2008
59
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues |
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
Cost of Sales |
|
|
96,694 |
|
|
|
88,645 |
|
|
|
83,206 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
5,009 |
|
|
|
4,332 |
|
|
|
3,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
744 |
|
|
|
673 |
|
|
|
590 |
|
Distribution |
|
|
886 |
|
|
|
771 |
|
|
|
686 |
|
Research and development |
|
|
347 |
|
|
|
284 |
|
|
|
223 |
|
Administrative |
|
|
1,559 |
|
|
|
1,346 |
|
|
|
1,107 |
|
Securities Litigation charge (credit), net |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,531 |
|
|
|
3,068 |
|
|
|
2,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
1,478 |
|
|
|
1,264 |
|
|
|
1,126 |
|
Interest Expense |
|
|
(142 |
) |
|
|
(99 |
) |
|
|
(94 |
) |
Other Income, Net |
|
|
121 |
|
|
|
132 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Income Taxes |
|
|
1,457 |
|
|
|
1,297 |
|
|
|
1,171 |
|
Income Tax Provision |
|
|
(468 |
) |
|
|
(329 |
) |
|
|
(426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income After Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
989 |
|
|
|
968 |
|
|
|
745 |
|
Discontinued operations, net |
|
|
1 |
|
|
|
(5 |
) |
|
|
(7 |
) |
Discontinued operations gain (loss) on sales, net |
|
|
|
|
|
|
(50 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
990 |
|
|
$ |
913 |
|
|
$ |
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
3.32 |
|
|
$ |
3.17 |
|
|
$ |
2.36 |
|
Discontinued operations, net |
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
Discontinued operations gain (loss) on sales, net |
|
|
|
|
|
|
(0.16 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3.32 |
|
|
$ |
2.99 |
|
|
$ |
2.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
3.40 |
|
|
$ |
3.25 |
|
|
$ |
2.44 |
|
Discontinued operations, net |
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
Discontinued operations gain (loss) on sales, net |
|
|
|
|
|
|
(0.17 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3.40 |
|
|
$ |
3.06 |
|
|
$ |
2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
298 |
|
|
|
305 |
|
|
|
316 |
|
Basic |
|
|
291 |
|
|
|
298 |
|
|
|
306 |
|
See Financial Notes
60
McKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,362 |
|
|
$ |
1,954 |
|
Restricted cash for Consolidated Securities
Litigation Action |
|
|
|
|
|
|
962 |
|
Receivables, net |
|
|
7,213 |
|
|
|
6,566 |
|
Inventories, net |
|
|
9,000 |
|
|
|
8,153 |
|
Prepaid expenses and other |
|
|
211 |
|
|
|
221 |
|
|
|
|
|
|
|
|
Total |
|
|
17,786 |
|
|
|
17,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
|
775 |
|
|
|
684 |
|
Capitalized Software Held for Sale |
|
|
199 |
|
|
|
166 |
|
Goodwill |
|
|
3,345 |
|
|
|
2,975 |
|
Intangible Assets, Net |
|
|
661 |
|
|
|
613 |
|
Other Assets |
|
|
1,837 |
|
|
|
1,649 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
24,603 |
|
|
$ |
23,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Drafts and accounts payable |
|
$ |
12,032 |
|
|
$ |
10,873 |
|
Deferred revenue |
|
|
1,210 |
|
|
|
1,027 |
|
Current portion of long-term debt |
|
|
2 |
|
|
|
155 |
|
Consolidated Securities Litigation Action |
|
|
|
|
|
|
962 |
|
Other accrued |
|
|
2,104 |
|
|
|
2,109 |
|
|
|
|
|
|
|
|
Total |
|
|
15,348 |
|
|
|
15,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Liabilities |
|
|
1,339 |
|
|
|
741 |
|
Long-Term Debt |
|
|
1,795 |
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
Other Commitments and Contingent Liabilities (Note
17) |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100 shares
authorized, no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value
Shares authorized: 2008 and 2007 - 800
Shares issued: 2008 - 351, 2007 - 341 |
|
|
4 |
|
|
|
3 |
|
Additional Paid-in Capital |
|
|
4,252 |
|
|
|
3,722 |
|
Other Capital |
|
|
(10 |
) |
|
|
(19 |
) |
Retained Earnings |
|
|
5,586 |
|
|
|
4,712 |
|
Accumulated Other Comprehensive Income |
|
|
152 |
|
|
|
31 |
|
ESOP Notes and Guarantees |
|
|
(3 |
) |
|
|
(14 |
) |
Treasury Shares, at Cost, 2008 - 74 and 2007 - 46 |
|
|
(3,860 |
) |
|
|
(2,162 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
6,121 |
|
|
|
6,273 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
24,603 |
|
|
$ |
23,943 |
|
|
|
|
|
|
|
|
See Financial Notes
61
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended March 31, 2008, 2007 and 2006
(In millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
ESOP Notes |
|
|
Treasury |
|
|
|
|
|
|
Restated |
|
|
|
Stock |
|
|
Paid-in |
|
|
Other |
|
|
Retained |
|
|
Comprehensive |
|
|
and |
|
|
Common |
|
|
|
|
|
|
Stockholders |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Guarantees |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
Income (Loss) |
|
Balances, March 31, 2005 |
|
|
306 |
|
|
$ |
3 |
|
|
$ |
2,320 |
|
|
$ |
(42 |
) |
|
$ |
3,194 |
|
|
$ |
32 |
|
|
$ |
(36 |
) |
|
|
(7 |
) |
|
$ |
(196 |
) |
|
$ |
5,275 |
|
|
|
|
|
Issuance of shares under
employee plans |
|
|
18 |
|
|
|
|
|
|
|
617 |
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
570 |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
Tax benefit related to issuance
of shares under employee
plans |
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
ESOP note collections |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Note reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
$ 24 |
|
Additional minimum
pension liability, net of tax
of $2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
751 |
|
|
|
751 |
|
Unrealized gain on investments,
net of tax of $(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Conversion of Debentures |
|
|
6 |
|
|
|
|
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
(958 |
) |
|
|
(958 |
) |
|
|
|
|
Cash dividends declared,
$0.24 per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2006 |
|
|
330 |
|
|
$ |
3 |
|
|
$ |
3,238 |
|
|
$ |
(75 |
) |
|
$ |
3,871 |
|
|
$ |
55 |
|
|
$ |
(25 |
) |
|
|
(26 |
) |
|
$ |
(1,160 |
) |
|
$ |
5,907 |
|
|
$ |
774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
Note reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
33 |
|
Additional minimum
pension liability, net of tax
of $(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913 |
|
|
|
913 |
|
Unrealized loss on investments,
net of tax of $1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
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 |
) |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Financial Notes
62
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
990 |
|
|
$ |
913 |
|
|
$ |
751 |
|
Discontinued operations, net of income taxes |
|
|
(1 |
) |
|
|
55 |
|
|
|
(6 |
) |
Adjustments to reconcile to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
124 |
|
|
|
112 |
|
|
|
109 |
|
Amortization |
|
|
247 |
|
|
|
183 |
|
|
|
153 |
|
Provision for bad debts |
|
|
41 |
|
|
|
24 |
|
|
|
11 |
|
Deferred taxes |
|
|
198 |
|
|
|
167 |
|
|
|
403 |
|
Share-based compensation expense |
|
|
91 |
|
|
|
60 |
|
|
|
16 |
|
Excess tax benefit from share-based payment arrangements |
|
|
(83 |
) |
|
|
(70 |
) |
|
|
|
|
Other non-cash items |
|
|
(24 |
) |
|
|
(66 |
) |
|
|
(64 |
) |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(288 |
) |
|
|
(209 |
) |
|
|
(519 |
) |
Inventories |
|
|
(676 |
) |
|
|
(928 |
) |
|
|
601 |
|
Drafts and accounts payable |
|
|
762 |
|
|
|
872 |
|
|
|
1,104 |
|
Deferred revenue |
|
|
98 |
|
|
|
181 |
|
|
|
379 |
|
Taxes |
|
|
336 |
|
|
|
144 |
|
|
|
(53 |
) |
Securities Litigation charge (credit), net |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
45 |
|
Securities Litigation settlement payments |
|
|
(962 |
) |
|
|
(25 |
) |
|
|
(243 |
) |
Proceeds from sale of notes receivable |
|
|
16 |
|
|
|
5 |
|
|
|
60 |
|
Other |
|
|
5 |
|
|
|
127 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
869 |
|
|
|
1,539 |
|
|
|
2,738 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions |
|
|
(195 |
) |
|
|
(126 |
) |
|
|
(166 |
) |
Capitalized software expenditures |
|
|
(161 |
) |
|
|
(180 |
) |
|
|
(160 |
) |
Acquisitions of businesses, less cash and cash equivalents
acquired |
|
|
(610 |
) |
|
|
(1,938 |
) |
|
|
(589 |
) |
Proceeds from sale of businesses |
|
|
|
|
|
|
179 |
|
|
|
63 |
|
Restricted cash for Consolidated Securities Litigation Action |
|
|
962 |
|
|
|
|
|
|
|
(962 |
) |
Other |
|
|
(1 |
) |
|
|
(43 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5 |
) |
|
|
(2,108 |
) |
|
|
(1,813 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuances of debt, net |
|
|
|
|
|
|
1,997 |
|
|
|
|
|
Repayment of debt |
|
|
(162 |
) |
|
|
(1,031 |
) |
|
|
(24 |
) |
Capital stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuances |
|
|
354 |
|
|
|
399 |
|
|
|
568 |
|
Share repurchases |
|
|
(1,698 |
) |
|
|
(1,003 |
) |
|
|
(958 |
) |
Excess tax benefits from share-based arrangements |
|
|
83 |
|
|
|
70 |
|
|
|
|
|
ESOP notes and guarantees |
|
|
11 |
|
|
|
10 |
|
|
|
12 |
|
Dividends paid |
|
|
(70 |
) |
|
|
(72 |
) |
|
|
(73 |
) |
Other |
|
|
12 |
|
|
|
9 |
|
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(1,470 |
) |
|
|
379 |
|
|
|
(583 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
14 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(592 |
) |
|
|
(185 |
) |
|
|
339 |
|
Cash and cash equivalents at beginning of year |
|
|
1,954 |
|
|
|
2,139 |
|
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,362 |
|
|
$ |
1,954 |
|
|
$ |
2,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
146 |
|
|
$ |
100 |
|
|
$ |
100 |
|
Income taxes, net of refunds |
|
|
(66 |
) |
|
|
27 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Transaction: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in conjunction with redemption of
long-term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
196 |
|
See Financial Notes
63
McKESSON CORPORATION
FINANCIAL NOTES
1. Significant Accounting Policies
Nature of Operations: The consolidated financial statements of McKesson Corporation
(McKesson, the Company, or we and other similar pronouns) include the financial statements of
all majority-owned or
controlled companies. 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.
Commencing in 2008, we realigned our business segments as further described in Financial Note 21,
Segments of Business.
Reclassifications: Certain prior year amounts have been reclassified to conform to the
current year presentation. The reclassifications are primarily related to changes to our segment
reporting and had no impact on net income.
Use of Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates.
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.
Restricted Cash: Cash that is subject to legal restrictions or is unavailable for general
operating purposes is classified as restricted cash. At March 31, 2007, restricted cash included
$962 million paid into an escrow account for future distribution to class members of our Securities
Litigation settlement. The corresponding liability is in current liabilities under the caption
Consolidated Securities Litigation Action. In 2008, the Company removed its $962 million
Consolidated Securities Litigation Action liability and corresponding restricted cash balance from
its consolidated financial statements as all criteria for the extinguishment of this liability were
met. Refer to Financial Note 17, Other Commitments and Contingent Liabilities.
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, 2008 and 2007, marketable securities were not material.
Inventories: We state inventories at the lower of cost or market. 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. The LIFO method is used to value approximately 88% of our
inventories at March 31, 2008 and 2007. Total inventories before the LIFO cost adjustment, which
approximates replacement cost, were $9,077 million and $8,244 million at March 31, 2008 and 2007.
Vendor rebates, cash discounts, allowances and chargebacks received from vendors are generally
accounted for as a reduction in the cost of inventory and are recognized when the inventory is
sold.
64
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Property, Plant and Equipment: We state our property, plant and equipment at cost and
depreciate them on the straight-line method at rates designed to distribute the cost of properties
over estimated service lives ranging from one to 30 years.
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) |
|
2008 |
|
2007 |
|
2006 |
|
Amounts capitalized |
|
$ |
73 |
|
|
$ |
76 |
|
|
$ |
61 |
|
Amortization expense |
|
|
44 |
|
|
|
43 |
|
|
|
51 |
|
Third-party royalty fees paid |
|
|
52 |
|
|
|
43 |
|
|
|
33 |
|
|
Goodwill: Goodwill is tested for impairment on an annual basis and between annual tests if
indicators of potential impairment exist, using a fair-value based approach. The annual evaluation
for impairment is generally based on valuation models that incorporate internal projections of
expected future cash flows and operating plans. Other than our goodwill impairment relating to the
disposition of our Acute Care business (see Financial Note 3, Discontinued Operations,) there
have been no goodwill impairments during the years presented.
Intangible assets: Intangible assets are amortized using the straight-line method over their
estimated period of benefit, ranging from one to twenty 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. Substantially all of our
intangible assets are subject to amortization. No material impairments of intangible assets have
been identified during any of the years presented.
Capitalized Software Held for Internal Use: We amortize capitalized software held for
internal use over the assets estimated useful lives ranging from one to ten years. As of March
31, 2008 and 2007, capitalized software held for internal use was $458 million and $465 million,
net of accumulated amortization of $467 million and $391 million and was included in Other Assets
in the consolidated balance sheets.
Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic
exposures as well as those risks required to be insured by law or contract. It is our policy to
retain a significant portion of certain losses primarily related to workers compensation and
comprehensive general, product, and vehicle liability. Provisions for losses expected under these
programs are recorded based upon our estimate of the aggregate liability for claims incurred as
well as for claims incurred but not yet reported. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
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 and rebates. We accrue sales returns
based on estimates at the time of sale to the customer. Sales returns from customers were
approximately $1,093 million, $1,113 million and $933 million in 2008, 2007 and 2006. Taxes
collected from customers and remitted to governmental authorities are presented on a net basis;
that is, they are excluded from revenues.
65
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The revenues for the 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. We also record revenues for direct store
deliveries from most of these same customers. Sales to customer warehouses amounted to $27.7
billion in 2008, $27.6 billion in 2007 and $25.5 billion in 2006. 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.
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.
66
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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, 2008 and 2007, we had
deferred $81 million and $104 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, 2008 and 2007, supplier
reserves were $83 million and $100 million.
Shipping and Handling Costs: We include all costs to warehouse, pick, pack and deliver
inventory to our customers in distribution expenses.
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 tax basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Foreign Currency Translation: Assets and liabilities of 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 2008, 2007 or 2006.
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 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. 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.
67
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Concentrations of Credit Risk: Trade receivables subject us to a concentration of credit risk
with customers primarily in our Distribution Solutions segment. A significant proportion of our
revenue growth has been with a limited number of large customers and as a result, our credit
concentration has increased. Accordingly, any defaults in payment by or a reduction in purchases
from these large customers could have a significant negative impact on our financial condition,
results of operations and liquidity. At March 31, 2008, revenues and accounts receivable from our
ten largest customers accounted for approximately 53% of consolidated revenues and approximately
43% of accounts receivable. At March 31, 2008, revenues and accounts receivable from our two
largest customers, CVS Caremark Corporation and Rite Aid Corporation, represented approximately 14%
and 13% of total consolidated revenues and 12% and 11% of accounts receivable. We have also
provided financing arrangements to certain of our customers, some of which are on a revolving
basis. At March 31, 2008, these customer financing arrangements totaled approximately $120
million.
Accounts Receivable Sales: At March 31, 2008, we had a $700 million revolving receivables
sales facility, which was fully available. The program qualifies for sale treatment under
Statement of Financial Accounting Standards (SFAS) No. 140, Accounting For Transfers and
Servicing Financial Assets and Extinguishments of Liabilities. Sales are recorded at the
estimated fair values of the receivables sold, reflecting discounts for the time value of money
based on U.S. commercial paper rates and estimated loss provisions. Discounts are recorded in
administrative expenses in the consolidated statements of operations.
Share-Based Payment: Beginning in 2007, we account for all share-based payment transactions
using a fair-value based measurement method required by SFAS No. 123(R), Share-Based Payment.
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 the awards with performance conditions, we
recognize the expense on an accelerated basis.
Prior to the adoption of SFAS No. 123(R), we accounted for our employee stock-based
compensation plans using the intrinsic value method under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Under this policy, since the exercise
price of stock options we granted was generally set equal to the market price on the date of the
grant, we did not record any expense to the income statement related to the grants of stock
options, unless certain original grant-date terms were subsequently modified. See Financial Note
19, Share-Based Payment, for the pro forma effect on net income and diluted earnings per common
share required under the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition
and Disclosure, for the year ended March 31, 2006.
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. The incremental effect of the initial adoption of SFAS
No. 158 reduced our shareholders equity by $63 million at March 31, 2007. Additionally, SFAS No.
158 requires the measurement of defined benefit plan assets and obligations to be the date of the
Companys fiscal year-end. We plan on adopting this provision of SFAS No. 158 in 2009.
68
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Subsequent to the issuance of the Companys 2007 Annual Report on Form 10-K, it was determined
that we incorrectly presented the adjustment to initially apply SFAS No. 158 of $63 million, net,
as a reduction of 2007 comprehensive income within our Consolidated Statements of Stockholders
Equity for the year ended March 31, 2007. This error was corrected in 2008, increasing previously
reported comprehensive income from $889 million to $952 million for the year ended March 31, 2007.
Newly Issued Accounting Pronouncements: In September 2006, the Financial Accounting Standards
Board (FASB) issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. This standard applies under other accounting pronouncements that require or permit
fair value measurements, but does not require any new fair value measurements. In February 2008,
the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, Application
of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting
Pronouncements That Address Leasing Transactions, and FSP FAS 157-2, Effective Date of FASB
Statement No. 157. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157. FSP FAS 157-2
delays the effective date of SFAS No. 157 from 2009 to 2010 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). We are currently assessing the
impact of SFAS No. 157.
In February 2007, the FASB issued 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 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. SFAS No. 159 is effective for
us in 2009 although early adoption is permitted. We are currently assessing the impact of SFAS No.
159 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R)
amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets
and goodwill acquired, liabilities assumed and any noncontrolling interest in the acquiree. It
also provides disclosure requirements to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. We are currently evaluating the impact
on our consolidated financial statements of this standard, which will become effective for us on
April 1, 2009.
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 (minority) interests as equity (as opposed to as a liability or mezzanine
equity) and provides guidance on the accounting for transactions between an entity and
noncontrolling interests. We are currently evaluating the impact on our consolidated financial
statements of this standard, which will become effective for us on April 1, 2009.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133. This statement requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) 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 (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. SFAS No. 161 will become effective for us in 2009. As this standard
impacts disclosures only, the adoption of this standard will not have material impact on our
consolidated financial statements.
69
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
2. |
|
Acquisitions and Investments |
|
|
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 $531 million, including the assumption of debt
and net of $31 million of cash 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 are included within our Distribution
Solutions segment. |
|
|
|
The following table summarizes the preliminary estimated fair values of the assets acquired and
liabilities assumed in the acquisition as of March 31, 2008: |
|
|
|
|
|
(In millions) |
|
|
|
|
|
Accounts receivable |
|
$ |
321 |
|
Inventory |
|
|
93 |
|
Goodwill |
|
|
257 |
|
Intangible assets |
|
|
129 |
|
Deferred tax asset |
|
|
43 |
|
Accounts payable |
|
|
(318 |
) |
Other, net |
|
|
6 |
|
|
|
|
|
Net assets acquired, less cash and cash equivalents |
|
$ |
531 |
|
|
|
|
Approximately $257 million of the preliminary purchase price allocation has been assigned to
goodwill. Included in the purchase price allocation are acquired identifiable intangibles of
$119 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 $7 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 10, Long-Term
Debt and Other Financing). Financial results for Per-Se are
primarily included within our Technology Solutions segment. |
70
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed in the acquisition as of March 31, 2008:
|
|
|
|
|
(In millions) |
|
|
|
|
|
Accounts receivable |
|
$ |
107 |
|
Property and equipment |
|
|
41 |
|
Other current and non-current 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.
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 Automated Prescription Systems 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 believe the fair value of our investment in
Parata approximates the carrying value of consideration
contributed to Parata. Our investment in Parata is accounted for
under the equity method of accounting within our Distribution
Solutions segment.
|
71
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
|
|
In 2006, we made the following acquisitions: |
|
|
|
We acquired substantially all of the issued and outstanding stock
of D&K Healthcare Resources, Inc. (D&K) of St. Louis, Missouri
for an aggregate cash purchase price of $479 million, including
the assumption of D&Ks debt. D&K is primarily a wholesale
distributor of branded and generic pharmaceuticals and
over-the-counter health and beauty products to independent and
regional pharmacies, primarily in the Midwest. The acquisition of
D&K expanded our existing U.S. pharmaceutical distribution
business. Approximately $158 million of the purchase price has
been assigned to goodwill. Included in the purchase price were
acquired identifiable intangibles of $43 million primarily
representing customer lists and not-to-compete covenants which
have an estimated weighted-average useful life of nine years.
Financial results for D&K are included in our Distribution
Solutions segment. |
|
|
|
We acquired all of the issued and outstanding shares of Medcon,
Ltd. (Medcon), an Israeli company, for an aggregate purchase
price of $82 million. Medcon provides web-based cardiac image and
information management services to healthcare providers.
Approximately $60 million of the purchase price was assigned to
goodwill and $20 million was assigned to intangibles which
represent technology assets and customer lists which have an
estimated weighted-average useful life of four years. Financial
results for Medcon are included in our Technology Solutions
segment. |
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 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. Discontinued Operations
Results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(9 |
) |
|
$ |
(13 |
) |
BioServices |
|
|
|
|
|
|
|
|
|
|
2 |
|
Other |
|
|
1 |
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(1 |
) |
|
|
4 |
|
|
|
4 |
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(5 |
) |
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sales of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
|
|
|
$ |
(49 |
) |
|
$ |
|
|
BioServices |
|
|
|
|
|
|
|
|
|
|
22 |
|
Other |
|
|
|
|
|
|
10 |
|
|
|
|
|
Income taxes |
|
|
|
|
|
|
(11 |
) |
|
|
(9 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(50 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Acute Care |
|
$ |
1 |
|
|
$ |
(66 |
) |
|
$ |
(8 |
) |
BioServices |
|
|
|
|
|
|
|
|
|
|
14 |
|
Other |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
(55 |
) |
|
$ |
6 |
|
|
72
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
In the second quarter of 2007, we sold our Distribution Solutions segments Medical-Surgical
Acute Care supply business to Owens & Minor, Inc. (OMI) for net cash proceeds of approximately
$160 million. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the financial results of this business are classified as a discontinued
operation for all periods presented in the accompanying consolidated financial statements.
Revenues associated with the Acute Care business prior to its disposition were $1,062 million for
2006 and $597 million for the first half of 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 this divestiture, we allocated a portion of our Distribution Solutions
segments Medical-Surgical 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 and the fair value of the continuing businesses. 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 2005, our Acute Care business entered into an agreement with a third party vendor to sell
the vendors proprietary software and services. The terms of the contract required us to prepay
certain royalties. During the third quarter of 2006, we ended marketing and sale of the software
under the contract. As a result of this decision, we recorded a $15 million pre-tax charge in the
third quarter of 2006 to write-off the remaining balance of the prepaid royalties.
In the second quarter of 2007, we also sold a wholly-owned subsidiary, Pharmaceutical Buyers
Inc. (PBI), 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 of this business, which were previously included in our Distribution Solutions
segment, have been presented as a discontinued operation for all periods presented in the
accompanying consolidated financial statements. These results 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 the second quarter of 2006, we sold our wholly-owned subsidiary, McKesson BioServices
Corporation (BioServices), for net cash proceeds of $63 million. The divestiture resulted in an
after-tax gain of $13 million. Financial results for this business, which were previously included
in our Distribution Solutions segment, have been presented as a discontinued operation for all
periods presented in the accompanying consolidated financial statements. These results were not
material to our consolidated financial statements.
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.
73
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
4. Restructuring Activities
The following table summarizes the activity related to our restructuring liabilities for the
three years ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
|
Technology Solutions |
|
|
Corporate |
|
|
|
|
(In millions) |
|
Severance |
|
|
Exit-Related |
|
|
Severance |
|
|
Exit-Related |
|
|
Severance |
|
|
Total |
|
|
Balance, March 31, 2005 |
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
7 |
|
Expenses |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Liabilities related to
acquisition |
|
|
10 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Cash expenditures |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(11 |
) |
|
|
|
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 |
|
|
Restructuring Activities and Asset Impairment Expenses
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.
74
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
Restructuring Activities Liabilities Related to Acquisitions
In connection with our OTN acquisition within our Distribution Solutions segment, we recorded
other liabilities of $6 million relating to employee severance 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 $5 million of facility exit and contract termination costs in 2008 and
2007. In connection with our D&K acquisition within our Distribution Solutions segment, we
recorded $10 million of liabilities relating to employee severance costs and $28 million for
facility exit and contract termination costs during 2006. In 2007, in connection with the
Companys investment in Parata, $13 million of contract termination costs that were initially
estimated as part of the D&K acquisition were extinguished and, as a result, the Company decreased
goodwill and its restructuring liability.
With the exception of our OTN acquisition which we are currently evaluating certain
restructuring initiatives, as of March 31, 2008, all actions related to the above noted
restructuring activities have been substantially completed. Approximately 520 employees,
consisting primarily of distribution, general and administrative staff, were terminated as part of
our restructuring plans over the last three years. As of March 31, 2008, restructuring accruals of
$28 million, which primarily consist of employee severance costs and facility exit and contract
termination costs, are anticipated to be disbursed from 2009 through 2015. Restructuring expenses
were primarily recorded in operating expenses in our consolidated statements of operations.
Accrued restructuring liabilities are included in other accrued liabilities in the consolidated
balance sheets.
5. Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Interest income |
|
$ |
89 |
|
|
$ |
103 |
|
|
$ |
105 |
|
Equity in earnings, net |
|
|
21 |
|
|
|
23 |
|
|
|
20 |
|
Other, net |
|
|
11 |
|
|
|
6 |
|
|
|
14 |
|
|
|
|
Total |
|
$ |
121 |
|
|
$ |
132 |
|
|
$ |
139 |
|
|
6. 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.
75
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) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Income from continuing operations |
|
$ |
989 |
|
|
$ |
968 |
|
|
$ |
745 |
|
Interest expense on convertible junior subordinated
debentures, net of tax |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
Income from continuing operations diluted |
|
|
989 |
|
|
|
968 |
|
|
|
746 |
|
Discontinued operations |
|
|
1 |
|
|
|
(5 |
) |
|
|
(7 |
) |
Discontinued operations gain (loss) on sales, net |
|
|
|
|
|
|
(50 |
) |
|
|
13 |
|
|
|
|
Net income diluted |
|
$ |
990 |
|
|
$ |
913 |
|
|
$ |
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
291 |
|
|
|
298 |
|
|
|
306 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
5 |
|
|
|
6 |
|
|
|
9 |
|
Convertible junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
1 |
|
Restricted stock |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Diluted |
|
|
298 |
|
|
|
305 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
3.40 |
|
|
$ |
3.25 |
|
|
$ |
2.44 |
|
Discontinued operations |
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
Discontinued operations gain (loss) on sales, net |
|
|
|
|
|
|
(0.17 |
) |
|
|
0.04 |
|
|
|
|
Total |
|
$ |
3.40 |
|
|
$ |
3.06 |
|
|
$ |
2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
3.32 |
|
|
$ |
3.17 |
|
|
$ |
2.36 |
|
Discontinued operations |
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
Discontinued operations gain (loss) on sales, net |
|
|
|
|
|
|
(0.16 |
) |
|
|
0.04 |
|
|
|
|
Total |
|
$ |
3.32 |
|
|
$ |
2.99 |
|
|
$ |
2.38 |
|
|
|
|
|
(1) |
|
Certain computations may reflect rounding adjustments. |
Approximately 8 million, 11 million and 11 million stock options were excluded from the
computations of diluted net earnings per share in 2008, 2007 and 2006 as their exercise price was
higher than the Companys average stock price.
7. Receivables, net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
Customer accounts |
|
$ |
6,390 |
|
|
$ |
5,753 |
|
Other |
|
|
984 |
|
|
|
953 |
|
|
|
|
Total |
|
|
7,374 |
|
|
|
6,706 |
|
Allowances |
|
|
(161 |
) |
|
|
(140 |
) |
|
|
|
Net |
|
$ |
7,213 |
|
|
$ |
6,566 |
|
|
The allowances are primarily for uncollectible accounts and sales returns.
76
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
8. Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
Land |
|
$ |
50 |
|
|
$ |
43 |
|
Building, machinery and equipment |
|
|
1,652 |
|
|
|
1,463 |
|
|
|
|
Total property, plant and equipment |
|
|
1,702 |
|
|
|
1,506 |
|
Accumulated depreciation |
|
|
(927 |
) |
|
|
(822 |
) |
|
|
|
Property, plant and equipment, net |
|
$ |
775 |
|
|
$ |
684 |
|
|
9. 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, 2006 |
|
$ |
1,150 |
|
|
$ |
487 |
|
|
$ |
1,637 |
|
Goodwill acquired, net of purchase price adjustments |
|
|
234 |
|
|
|
1,088 |
|
|
|
1,322 |
|
Translation adjustments |
|
|
2 |
|
|
|
14 |
|
|
|
16 |
|
|
|
|
Balance, March 31, 2007 |
|
|
1,386 |
|
|
|
1,589 |
|
|
|
2,975 |
|
Goodwill acquired, net of purchase price adjustments |
|
|
282 |
|
|
|
59 |
|
|
|
341 |
|
Translation adjustments |
|
|
4 |
|
|
|
25 |
|
|
|
29 |
|
|
|
|
Balance, March 31, 2008 |
|
$ |
1,672 |
|
|
$ |
1,673 |
|
|
$ |
3,345 |
|
|
Information regarding intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
Customer lists |
|
$ |
725 |
|
|
$ |
593 |
|
Technology |
|
|
176 |
|
|
|
161 |
|
Trademarks and other |
|
|
61 |
|
|
|
56 |
|
|
|
|
Gross intangibles |
|
|
962 |
|
|
|
810 |
|
Accumulated amortization |
|
|
(301 |
) |
|
|
(197 |
) |
|
|
|
Intangible assets, net |
|
$ |
661 |
|
|
$ |
613 |
|
|
Amortization expense of intangible assets was $107 million, $53 million and $28 million for
2008, 2007 and 2006. The weighted average remaining amortization period for customer lists,
technology, trademarks and other intangible assets at March 31, 2008 was: 8 years, 3 years and 8
years. Estimated future annual amortization expense of these assets is as follows: $113 million,
$97 million, $90 million, $83 million and $67 million for 2009 through 2013, and $207 million
thereafter. At March 31, 2008 and 2007, there were $4 million and $17 million of intangible assets
not subject to amortization.
77
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
10. Long-Term Debt and Other Financing
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
6.40% Notes due March, 2008 |
|
$ |
|
|
|
$ |
150 |
|
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 |
|
|
498 |
|
|
|
498 |
|
5.70% Notes due March, 2017 |
|
|
499 |
|
|
|
499 |
|
7.65% Debentures due March, 2027 |
|
|
175 |
|
|
|
175 |
|
ESOP related debt (see Financial Note 13) |
|
|
4 |
|
|
|
14 |
|
Other |
|
|
7 |
|
|
|
8 |
|
|
|
|
Total debt |
|
|
1,797 |
|
|
|
1,958 |
|
Less current portion |
|
|
2 |
|
|
|
155 |
|
|
|
|
Total long-term debt |
|
$ |
1,795 |
|
|
$ |
1,803 |
|
|
In June 2007, we renewed our $700 million committed accounts receivable sales facility. The
facility was renewed under substantially similar terms to those previously in place. The renewed
facility expires in June 2008. As of March 31, 2008 and 2007, no amounts were outstanding under
the accounts receivable facility.
In June 2007, we renewed our existing $1.3 billion five-year, senior unsecured revolving
credit facility, which was scheduled to expire in September 2009. The new credit facility has
terms and conditions substantially similar to those previously in place and expires in June 2012.
Borrowings under this new credit facility bear interest based upon either a Prime rate or the
London Interbank Offering Rate (LIBOR). As of March 31, 2008 and 2007, no amounts were
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. On March 5, 2007, we issued $500 million of
5.25% notes due 2013 and $500 million of 5.70% notes due 2017. The notes are unsecured and
interest is paid semi-annually on March 1 and September 1. The notes are redeemable at any time,
in whole or in part, at our option. In addition, upon occurrence of both a change of control and a
ratings downgrade of the notes to non-investment-grade levels, we are required to make an offer to
redeem the notes at a price equal to 101% of the principal amount plus accrued interest. We
utilized net proceeds, after offering expenses, of $990 million from the issuance of the notes,
together with cash on hand, to repay all amounts outstanding under the interim credit facility plus
accrued interest.
In 2008, 2007 and 2006, we sold customer lease portfolio receivables for cash proceeds of $16
million, $5 million and $60 million. Gains on sales of these receivables were not material.
The employee stock ownership program (ESOP) debt bears interest at rates ranging from 8.6%
fixed rate to approximately 93% of the LIBOR and is due in semi-annual and annual installments
through 2010.
78
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
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, 2008, this ratio was 22.7% and we were in
compliance with all other covenants.
Convertible Junior Subordinated Debentures
In February 1997, we issued 5% Convertible Junior Subordinated Debentures (the Debentures)
in an aggregate principal amount of $206 million. The Debentures were purchased by McKesson
Financing Trust (the Trust) with proceeds from its issuance of four million shares of preferred
securities to the public and 123,720 common securities to us. The Debentures represented the sole
assets of the Trust and bore interest at an annual rate of 5%, payable quarterly. These preferred
securities of the Trust were convertible into our common stock at the holders option.
Holders of the preferred securities were entitled to cumulative cash distributions at an
annual rate of 5% of the liquidation amount of $50 per security. Each preferred security was
convertible at the rate of 1.3418 shares of our common stock, subject to adjustment in certain
circumstances. The preferred securities were to be redeemed upon repayment of the Debentures and
were callable by us on or after March 4, 2000, in whole or in part, initially at 103.5% of the
liquidation preference per share, and thereafter at prices declining at 0.5% per annum to 100% of
the liquidation preference on and after March 4, 2007 plus, in each case, accumulated, accrued and
unpaid distributions, if any, to the redemption date.
During the first quarter of 2006, we called for the redemption of the Debentures, which
resulted in the exchange of the preferred securities for 5 million shares of our newly issued
common stock.
11. Financial Instruments and Hedging Activities
At March 31, 2008 and 2007, the carrying amounts of cash and cash equivalents, restricted
cash, marketable securities, receivables, drafts and accounts payable, and other 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 $1,797
million and $1,861 million at March 31, 2008 and $1,958 million and $2,036 million at March 31,
2007. 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.
12. Lease Obligations
We lease facilities and equipment under both capital and operating leases. Net assets held
under capital leases included in property, plant and equipment were $4 million and $2 million at
March 31, 2008 and 2007. Rental expense under operating leases was $149 million, $117 million and
$106 million in 2008, 2007 and 2006. 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.
79
McKESSON CORPORATION
FINANCIAL
NOTES (Continued)
At March 31, 2008, future minimum lease payments and sublease rental income for years ending
March 31 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable |
|
|
|
|
|
|
|
|
|
Operating |
|
|
Non-cancelable |
|
|
|
|
(In millions) |
|
Leases |
|
|
Sublease Rentals |
|
|
Capital Leases |
|
|
2009 |
|
$ |
114 |
|
|
$ |
3 |
|
|
$ |
1 |
|
2010 |
|
|
93 |
|
|
|
2 |
|
|
|
1 |
|
2011 |
|
|
78 |
|
|
|
2 |
|
|
|
|
|
2012 |
|
|
64 |
|
|
|
2 |
|
|
|
|
|
2013 |
|
|
40 |
|
|
|
1 |
|
|
|
|
|
Thereafter |
|
|
99 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
488 |
|
|
$ |
11 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Less amounts representing interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
13. Pension Benefits
We maintain a number of qualified and nonqualified defined benefit pension 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. This Per-Se plan was merged into our retirement plan in 2008. The measurement
date for all of our pension plans is December 31.
The net periodic expense for our pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Service costbenefits earned during the year |
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
6 |
|
Interest cost on projected benefit obligation |
|
|
31 |
|
|
|
27 |
|
|
|
26 |
|
Expected return on assets |
|
|
(39 |
) |
|
|
(33 |
) |
|
|
(32 |
) |
Amortization of unrecognized actuarial loss,
prior service costs and net transitional
obligation |
|
|
11 |
|
|
|
12 |
|
|
|
9 |
|
Settlement charges and other |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
14 |
|
|
$ |
17 |
|
|
$ |
9 |
|
|
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.
80
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations and plan assets for our pension plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2008 |
|
2007 |
|
Change in benefit obligations |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
552 |
|
|
$ |
485 |
|
Service cost |
|
|
7 |
|
|
|
7 |
|
Interest cost |
|
|
31 |
|
|
|
27 |
|
Actuarial losses (gains) |
|
|
(8 |
) |
|
|
19 |
|
Benefit payments |
|
|
(47 |
) |
|
|
(29 |
) |
Benefit obligations assumed through acquisition |
|
|
|
|
|
|
37 |
|
Foreign exchange impact and other |
|
|
8 |
|
|
|
6 |
|
|
|
|
Benefit obligation at end of year |
|
$ |
543 |
|
|
$ |
552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
484 |
|
|
$ |
412 |
|
Actual return on plan assets |
|
|
29 |
|
|
|
48 |
|
Employer and participant contributions |
|
|
33 |
|
|
|
24 |
|
Benefits paid |
|
|
(47 |
) |
|
|
(29 |
) |
Plan assets acquired through acquisition |
|
|
|
|
|
|
28 |
|
Foreign exchange impact and other |
|
|
2 |
|
|
|
1 |
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
501 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year (1) |
|
$ |
(39 |
) |
|
$ |
(65 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized on the balance sheet |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
78 |
|
|
$ |
53 |
|
Current liabilities |
|
|
(9 |
) |
|
|
(17 |
) |
Noncurrent liabilities |
|
|
(108 |
) |
|
|
(101 |
) |
|
|
|
Total |
|
$ |
(39 |
) |
|
$ |
(65 |
) |
|
|
|
|
|
(1) |
|
Includes $3 million of employer contributions subsequent to our December 31, 2007 and 2006
measurement dates. |
The accumulated benefit obligations for our pension plans were $522 million at March 31, 2008
and $525 million at March 31, 2007. The components of the amount recognized in accumulated other
comprehensive income at March 31, 2008 and 2007 are as follows: net actuarial loss, $111 million
and $118 million; net prior service cost, $10 million and $12 million; and net transitional
obligations, $2 million and $2 million.
In 2009, we estimate that we will amortize $2 million of prior service cost and $6 million of
actuarial loss for the pension plans from shareholders equity to pension expense. Comparable 2008
amounts were $2 million and $9 million.
Projected benefit obligations relating to our unfunded U.S. plans were $112 million and $92
million at March 31, 2008 and 2007. Pension costs are funded based on the recommendations of
independent actuaries.
Expected benefit payments for our pension plans are as follows: $37 million, $32 million, $35
million, $38 million and $32 million for 2009 to 2013, and $265 million for 2014 through 2018.
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 $22 million for 2009.
81
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Weighted average asset allocations of the investment portfolio for our pension plans at
December 31 and target allocations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Fair Value of Total |
|
|
|
|
|
|
Plan Assets |
|
|
Target |
|
|
|
|
|
|
Allocation |
|
2008 |
|
2007 |
|
Assets Category |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equity securities |
|
|
44 |
% |
|
|
42 |
% |
|
|
44 |
% |
International equity securities |
|
|
15 |
% |
|
|
14 |
% |
|
|
16 |
% |
Fixed income |
|
|
33 |
% |
|
|
35 |
% |
|
|
29 |
% |
Other |
|
|
8 |
% |
|
|
9 |
% |
|
|
11 |
% |
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Net periodic expense |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
5.33 |
% |
|
|
5.35 |
% |
|
|
5.75 |
% |
Rate of increase in compensation |
|
|
3.85 |
|
|
|
3.83 |
|
|
|
4.00 |
|
Expected long-term rate of return on plan assets |
|
|
7.53 |
|
|
|
7.47 |
|
|
|
8.23 |
|
Benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
6.18 |
% |
|
|
5.70 |
% |
|
|
5.56 |
% |
Rate of increase in compensation |
|
|
4.01 |
|
|
|
3.97 |
|
|
|
3.97 |
|
Expected long-term rate of return on plan assets |
|
|
8.04 |
|
|
|
8.09 |
|
|
|
8.11 |
|
|
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 benefits 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, 2008, 2007 and 2006.
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 into the PSIP through an
individual retirement savings account up to 20% of their monthly eligible compensation for pre-tax
deferrals and up to 67% of compensation for catch-up contributions not to exceed Internal Revenue
Service (IRS) limits. The Company makes matching contributions in an
amount equal to 100% of the employees first 3% of pay deferred and 50% of the employees deferral
for the next 2% of pay deferred. 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. The Company has historically provided for the PSIP contributions
primarily with its common shares through its leveraged ESOP.
82
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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. The
ESOPs outstanding borrowings are reported as long-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. After-tax ESOP expense and other contribution expense, including interest expense on ESOP debt, was
$8 million, $8 million and $7 million in 2008, 2007 and 2006. Approximately 1 million shares of
common stock were allocated to plan participants in each of the years 2008, 2007 and 2006. At
March 31, 2008, almost all of the 24 million common shares had been allocated to plan participants.
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 retire 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. The measurement date for our postretirement
welfare plan is December 31.
The net periodic expense for our postretirement welfare benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Service costbenefits earned during the year |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost on projected benefit obligation |
|
|
10 |
|
|
|
11 |
|
|
|
11 |
|
Amortization of unrecognized actuarial loss
and prior service costs |
|
|
4 |
|
|
|
16 |
|
|
|
20 |
|
|
|
|
Net periodic postretirement expense |
|
$ |
16 |
|
|
$ |
29 |
|
|
$ |
33 |
|
|
Information regarding the changes in benefit obligations for our postretirement welfare plans
is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2008 |
|
2007 |
|
Change in benefit obligations |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
183 |
|
|
$ |
213 |
|
Service cost |
|
|
2 |
|
|
|
2 |
|
Interest cost |
|
|
10 |
|
|
|
11 |
|
Plan amendments and other |
|
|
5 |
|
|
|
|
|
Actuarial gain |
|
|
(27 |
) |
|
|
(26 |
) |
Benefit payments |
|
|
(16 |
) |
|
|
(17 |
) |
|
|
|
Benefit obligation at end of year |
|
$ |
157 |
|
|
$ |
183 |
|
|
In 2009, we estimate that we will amortize $13 million of actuarial gain for the other
postretirement plans from shareholders equity to other postretirement expense. The comparable
2008 amount was $4 million of actuarial loss.
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 $18 million,
are as follows: $15 million annually for 2009 to 2013, and $70 million cumulatively for 2014
through 2018. 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 2009.
83
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were
5.78%, 5.55% and 5.75% for 2008, 2007 and 2006. Weighted-average discount rates for the actuarial
present value of benefit obligations were 6.19%, 5.78% and 5.55% for 2008, 2007 and 2006.
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 10% and 12% for prescription drugs, 9% for medical and 7%
for dental in 2008 and 2007. The healthcare cost trend rate assumption has a significant effect on
the amounts reported. For 2008, 2007 and 2006, a one-percentage-point increase and 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. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Income from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
1,059 |
|
|
$ |
987 |
|
|
$ |
927 |
|
Foreign |
|
|
398 |
|
|
|
310 |
|
|
|
244 |
|
|
|
|
Total income from continuing operations
before income taxes |
|
$ |
1,457 |
|
|
$ |
1,297 |
|
|
$ |
1,171 |
|
|
The provision for income taxes related to continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
189 |
|
|
$ |
71 |
|
|
$ |
(14 |
) |
State and local |
|
|
59 |
|
|
|
69 |
|
|
|
19 |
|
Foreign |
|
|
22 |
|
|
|
22 |
|
|
|
16 |
|
|
|
|
Total current |
|
|
270 |
|
|
|
162 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
178 |
|
|
|
204 |
|
|
|
361 |
|
State and local |
|
|
16 |
|
|
|
(18 |
) |
|
|
38 |
|
Foreign |
|
|
4 |
|
|
|
(19 |
) |
|
|
6 |
|
|
|
|
Total deferred |
|
|
198 |
|
|
|
167 |
|
|
|
405 |
|
|
|
|
Income tax provision |
|
$ |
468 |
|
|
$ |
329 |
|
|
$ |
426 |
|
|
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. 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. We are in the process of amending
state income tax returns for 2000 to 2002 to reflect the IRS
settlement. We recorded the
anticipated state tax impact of the IRS examination in our 2008 income tax provision and do not
anticipate any material impact when the final amended state tax returns have been completed. In
Canada, we received an assessment from the Canada Revenue Agency for a total of $9 million related
to transfer pricing for 2003. We plan to further pursue this issue and will appeal the assessment.
We believe we have adequately provided for any potential adverse results for 2003 and future
years. During 2008, we have also favorably concluded various foreign examinations, which resulted
in the recognition of approximately $4 million of income tax benefits. In nearly all
jurisdictions, the tax years prior to 1999 are no longer subject to examination. We believe that
we have made adequate provision for all remaining income tax uncertainties. Income tax expense for
2008 was also impacted by a non-tax deductible $13 million increase in a legal reserve.
84
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 17, Other Commitments and Contingent Liabilities) 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.
In 2006, we made a $960 million payment into an escrow account relating to the Consolidated
Securities Litigation Action. This payment was deducted in our 2006 income tax returns and as a
result, our current tax expense decreased and our deferred tax expense increased in 2006 primarily
reflecting the utilization of the deferred tax assets associated with the Consolidated Securities
Litigation Action. In 2006, we also recorded a $14 million income tax expense, which primarily
related to a basis adjustment in an investment and adjustments with various taxing authorities.
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 1,100 returns with various state and foreign jurisdictions. Our
income tax expense, deferred tax assets and liabilities reflect managements best assessment of
estimated 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) |
|
2008 |
|
2007 |
|
2006 |
|
Income tax provision at federal statutory rate |
|
$ |
510 |
|
|
$ |
454 |
|
|
$ |
410 |
|
State and local income taxes net of federal tax benefit |
|
|
43 |
|
|
|
34 |
|
|
|
34 |
|
Foreign tax rate differential |
|
|
(126 |
) |
|
|
(109 |
) |
|
|
(74 |
) |
Securities Litigation reserve |
|
|
|
|
|
|
(83 |
) |
|
|
3 |
|
Unrecognized
tax benefits
and settlements |
|
|
31 |
|
|
|
44 |
|
|
|
30 |
|
Nondeductible/nontaxable items |
|
|
11 |
|
|
|
3 |
|
|
|
1 |
|
Othernet |
|
|
(1 |
) |
|
|
(14 |
) |
|
|
22 |
|
|
|
|
Income tax provision |
|
$ |
468 |
|
|
$ |
329 |
|
|
$ |
426 |
|
|
At March 31, 2008,
undistributed earnings of our foreign operations totaling $1,450 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.
85
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred tax balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
(In millions) |
|
2008 |
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Receivable allowances |
|
$ |
57 |
|
|
$ |
55 |
|
Deferred revenue |
|
|
124 |
|
|
|
215 |
|
Compensation and benefit-related accruals |
|
|
286 |
|
|
|
231 |
|
Securities Litigation |
|
|
|
|
|
|
15 |
|
Loss and credit carryforwards |
|
|
566 |
|
|
|
525 |
|
Other |
|
|
257 |
|
|
|
228 |
|
|
|
|
Subtotal |
|
|
1,290 |
|
|
|
1,269 |
|
Less: valuation allowance |
|
|
(27 |
) |
|
|
(25 |
) |
|
|
|
Total assets |
|
$ |
1,263 |
|
|
$ |
1,244 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Basis difference for inventory valuation and other assets |
|
$ |
(1,097 |
) |
|
$ |
(1,097 |
) |
Basis difference for fixed assets and systems development costs |
|
|
(163 |
) |
|
|
(161 |
) |
Intangibles |
|
|
(154 |
) |
|
|
(160 |
) |
Other |
|
|
(141 |
) |
|
|
(106 |
) |
|
|
|
Total liabilities |
|
|
(1,555 |
) |
|
|
(1,524 |
) |
|
|
|
Net deferred tax liability |
|
$ |
(292 |
) |
|
$ |
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Current net deferred tax liability |
|
$ |
(767 |
) |
|
$ |
(614 |
) |
Long term net deferred tax asset |
|
|
475 |
|
|
|
334 |
|
|
|
|
Net deferred tax liability |
|
$ |
(292 |
) |
|
$ |
(280 |
) |
|
We have federal and state income tax net operating loss carryforwards of $411 million and
$2,001 million which will expire at various dates from 2009 through 2028. We believe that it is
more likely than not that the benefit from certain state net operating loss carryforwards may not
be realized. In recognition of this risk, we have provided a valuation allowance of $27 million on
the deferred tax assets relating to these state net operating loss carryforwards. We have foreign
income tax net operating loss carryforwards of $86 million, which have indefinite lives.
We also have domestic income tax credit carryforwards of $266 million, which are primarily
alternative minimum tax credit carryforwards that have an indefinite life and foreign income tax
credit carryforwards of $3 million, which are Canadian research and development credit
carryforwards that expire between 2025 and 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.
86
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to our gross unrecognized tax benefits
from March 31, 2007 to March 31, 2008:
|
|
|
|
|
|
|
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 |
|
|
Of the total $496 million in unrecognized tax benefits at March 31, 2008, $318 million would
reduce income tax expense and the effective tax rate if recognized. We continue to report interest
and penalties on tax deficiencies as income tax expense. At March 31, 2008, before any tax
benefits, our accrued interest on unrecognized tax benefits amounted to $130 million and we
recognized $31 million of interest expense, before any tax benefits, in our consolidated statements
of operations during 2008. We have no amounts accrued for penalties. It is reasonably possible
that audit resolutions and expiration of statutes of limitations could potentially reduce our
unrecognized tax benefits by up to $133 million during the next twelve months.
16. 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. Customer guarantees
range from one to seven years and were primarily provided to facilitate financing for certain
strategic customers. At March 31, 2008, the amounts of inventory repurchase guarantees and other
customer guarantees were $115 million and $5 million of which a nominal amount had been accrued.
At March 31, 2008, 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: $46
million, $20 million, $1 million, $1 million and nil from 2009 through 2013 and $54 million
thereafter.
In addition, our banks and insurance companies have issued $101 million of standby letters of
credit and surety bonds on our behalf 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 on 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.
87
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.
17. 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, ninety-two lawsuits were filed against McKesson, HBOC, certain of
McKessons or HBOCs current or former officers or directors, and other defendants, including Bear
Stearns & Co. Inc. (Bear Stearns) and Arthur Andersen LLP (Andersen). Although almost all of
these cases (collectively the Securities Litigation) have now been resolved, certain matters
remain pending as more fully described below.
88
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Federal Actions
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). In general, we
agreed to pay the settlement class a total of $960 million in cash. On February 24, 2006, the
Honorable Ronald M. Whyte signed a Final Judgment and Order of Dismissal (the Judgment), in which
the Court gave its final approval to the settlement of the
Consolidated Securities Litigation Action and dismissed on the
merits and with prejudice all claims asserted against the Company, HBOC, and Defendants Released
Persons (as that term is defined in the Judgment). On March 23, 2006, Defendant Bear Stearns filed
an appeal of the Judgment to the United States Court of Appeals for the Ninth Circuit. The appeal
by Bear Stearns challenged certain provisions of the settlement that restricted Bear Stearns
ability to bring certain claims in the future against the Company, HBOC and certain other persons
released in the settlement.
On
September 28, 2007, the trial court in the Consolidated
Securities Litigation Action preliminarily approved a
settlement by Bear Stearns of all claims against it by the class. As part of that settlement with
the class, Bear Stearns agreed to dismiss its appeal from the Companys settlement, as well as
to dismiss its New York State Court action against the Company, as described below, and to fully
release the Company as to all claims related to the Securities Litigation. In consideration of
these Bear Stearns obligations, the Company agreed to pay $10 million to fund the Bear Stearns
class settlement. The Bear Stearns appeal was dismissed on October 9, 2007, making the Companys
settlement of the Consolidated Securities Litigation Action final and binding on both the Company and the class. On
January 18, 2008, Judge Whyte gave his final approval to the Bear Stearns class action settlement.
On August 11, 2005, the Company and HBOC filed a complaint against Andersen and former
Andersen partner Robert A. Putnam (Putnam) in San Francisco Superior Court captioned McKesson
Corporation et al. v Andersen et al., (No. 05-443987), which Putnam subsequently removed to the
United States District Court for the Northern District of California. Upon removal, the case was
assigned to Judge Whyte and given N.D. Cal. Case No. 05-04020 RMW. In its complaint, as amended on
March 28, 2006, McKesson asserted claims against Andersen for negligent misrepresentation, breach
of contract, indemnity and contribution, and HBOC asserted claims against Andersen for breach of
contract, professional negligence, equitable indemnity or declaratory relief, and contribution. On
March 16, 2006, Andersen filed its own action against McKesson and HBOC in federal court in San
Jose captioned Andersen v. McKesson Corporation et al., (No. C-06-02035-JW). In its complaint,
Andersen asserted claims against McKesson and HBOC for fraud, negligent misrepresentation, breach
of contract, breach of the covenant of good faith and fair dealing, equitable indemnity and
declaratory relief, in connection with Andersens prior audits and reviews of HBOCs financial
results. In the second quarter of 2008, the Company, Andersen and Putnam reached a global
settlement of all claims related to the Securities Litigation, including those involved in these
two lawsuits; and the lawsuits have been dismissed with prejudice.
The previously-reported action captioned Cater v. McKesson Corporation et al., (No.
C-00-20327-RMW) has also been settled.
Based on the above described settlements and actions, there are no longer any Securities
Litigation matters pending in federal court.
89
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
State Actions
Twenty-four actions were filed in various state courts in California, Colorado, Delaware,
Georgia, Louisiana and Pennsylvania (the State Actions).
All of these actions have been settled or
otherwise resolved, except for the following two individual actions,
originally filed in Georgia Superior Court: Holcombe T. Green and HTG Corp. v. McKesson, Inc. et
al., (Georgia Superior Court, Fulton County, Case No. 2002-CV-48407); and Hall Family Investments,
L.P. v. McKesson, Inc. et al. (Georgia Superior Court, Fulton County, Case No. 2002-CV-48612). The
Green and Hall Family Investments, L.P. actions were voluntarily dismissed by plaintiffs on April
26, 2006 in the Georgia Superior Court and were re-filed in Georgia State Court, 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). The allegations in these actions are substantially
similar to those in the Consolidated Securities Litigation Action. Plaintiffs allege claims of fraud and deceit;
additionally, plaintiff Green seeks indemnification in connection with a lawsuit, now settled,
which had been filed by the McKesson Corporation Profit Sharing Investment Plan against McKesson
Corporation 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. No briefing schedule for that
appeal has been set.
As previously reported, in December of 2005, Bear Stearns filed a complaint captioned, Bear
Stearns & Co., Inc v. McKesson Corporation, (Case No. 604304/5), against the Company in the trial
court for the State and County of New York. Bear Stearns alleged that the Companys entry into the
settlement of the Consolidated Securities Litigation Action, without providing a full release for Bear Stearns in that
settlement, was a breach of the engagement letter under which Bear Stearns advised the Company in
connection with its acquisition of HBOC. As described above, the Bear Stearns federal class
settlement required that Bear Stearns dismiss its New York state court action against the Company
upon final approval of the Bear Stearns settlement. Accordingly, Bear Stearns dismissed this
action following Judge Whytes January 18, 2008 order granting final approval to the Bear Stearns
settlement.
II. Average Wholesale Price Litigation
On June 2, 2005, a civil class action complaint was filed against the Company in the United
States District Court, District of Massachusetts captioned: New England Carpenters Health Benefits
Fund et al., v. First DataBank, Inc. and McKesson Corporation, (Civil Action No. 05-11148) (New
England Carpenters I). Named plaintiffs are health benefit plans. The Complaint alleges that in
late 2001 and early 2002 the Company and co-defendant First DataBank (FDB) conspired to
improperly raise the published Average Wholesale Price (AWP) of certain prescription drugs, and
that this alleged conduct resulted in higher drug reimbursement payments by plaintiffs and others
similarly situated. Plaintiffs purported to represent a class of third party payors who paid any
portion of the price of certain prescription drugs based upon the AWPs published by FDB during the
period January 1, 2002 to March 15, 2005.
The complaint alleges 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
sections 17200 and 17500, and common law civil conspiracy and seeks injunctive relief, as well as
actual, punitive and treble damages, attorneys fees and costs, in an unspecified amount. On
December 29, 2005, the Company filed a response to the plaintiffs complaint, denying the
allegations and asserting numerous affirmative defenses.
90
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
From July 2006 through November 2007, the plaintiffs filed three amended complaints, which
together sought to add a class of consumers that made percentage co-payments (consumer co-pay
class) for certain prescription drugs and a class of uninsured consumers who paid usual and
customary prices for the prescription drugs from August 1, 2001 through the present (U&C class),
to modify and extend the purported class period pertaining to third party payors from August 1,
2001 to March 15, 2005, and to add an alternative count under various state consumer protection
statutes. The Company has responded to all amended complaints, denying the allegations and
asserting numerous affirmative defenses. No trial date has been set with respect to the third
party payor class or consumer co-pay class. Although the district
court has not yet certified any alleged U&C class, a trial
date of January 26, 2009 is presently set with
respect to the alleged U&C class.
On March 19, 2008, the district court denied a motion filed by the Company to dismiss and for
judgment on the pleadings with respect to the RICO claims asserted in the third amended complaint.
Also on the same date, the district court entered an order certifying: (1) a consumer co-pay class
for all purposes for the period August 1, 2001 to May 15, 2005; (2) the third party payor class for
liability and equitable relief for the period from August 1, 2001 to May 15, 2005; and (3) the
third party payor class for damages for the period August 1, 2001 to December 31, 2003. Although
the complaints do not specify the amount of damages sought for either of the two certified classes,
prior to the courts March 19, 2008 ruling plaintiffs filed a damages report claiming damages of
$6.8 billion for the third party payor class and $214 million for the consumer co-pay class, which
in the case of the third party payors represented damages for a period approximately sixteen months
longer than the period certified on March 19, 2008 by the court. The plaintiffs will submit a new
damages report which we expect will conform to the courts shorter class period and other issues
addressed in the opinion.
On April 2, 2008, the Company petitioned the U.S. Court of Appeals for the First Circuit to
allow immediate appeal of the district courts March 19, 2008 class certification order.
Plaintiffs filed a response to the petition on April 14, 2008. The First Circuit has not yet
acted on the petition.
On December 10, 2007, the same plaintiffs named in the New England Carpenters I civil action
filed a civil class action complaint under federal and state antitrust laws against the Company in
the United States District Court, District of Massachusetts, captioned: New England Carpenters
Health Benefits Fund et al., v. McKesson Corporation, (Civil Action No. 1:07-CV-12277-PBS) (New
England Carpenters II). The New England Carpenters II action purports to be brought on behalf of
the same three classes and is based on the same set of operative facts as the New England
Carpenters I 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 seventeen individual states. Plaintiffs seek
declaratory relief, as well as actual and treble damages, attorneys fees and costs in unspecified
amounts. The Company moved to dismiss the complaint in New England Carpenters II on January 31,
2007. That motion was argued, but not decided, on April 17, 2008. At the conclusion of the
hearing, the court stayed further activity in the case. McKesson has not yet answered the
complaint. No trial date or pretrial schedule has been set.
In June 2007, the Company was informed that a qui tam action by an unknown relator was
previously filed in the United States District Court in the District of New Jersey, purportedly on
behalf of the United States, twelve states (California, Delaware, Florida, Hawaii, Illinois,
Louisiana, Massachusetts, Nevada, New Mexico, Tennessee, Virginia and Texas) and the District of
Columbia, against the Company and seven other defendants unaffiliated with the Company. The
Company was advised that the United States and the various states are considering whether to
intervene in the suit, but none has done so to date. The suit thus remains inactive and under
seal, and the suit has not been served on the Company. The Company was informed further that an
amended complaint filed under seal in this matter alleges multiple claims against the Company and
several other parties, including claims under the federal False Claims Act and the various states
and District of Columbias false claims statutes. The claims arise out of alleged manipulation of
AWP by defendants from 1993 through at least 2005, which the plaintiffs claim caused them to pay
more than they should have in reimbursement for prescription drugs covered by various government
programs that base reimbursement payments on AWP. The complaint seeks damages on behalf of the
United States, the twelve named states and the District of Columbia, including treble damages and
civil penalties as provided under the various False Claims Act statutes, as well as attorneys fees
and costs, all in an unspecified amount. The Company has been cooperating with the investigation.
91
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
III. Product Liability Litigation
The Company is a defendant in approximately 575 cases alleging that the plaintiffs were
injured by Vioxx, an anti-inflammatory drug manufactured by Merck & Company (Merck). The cases
typically assert causes of action for strict liability, negligence, breach of warranty and false
advertising for improper design, testing, manufacturing, and warnings relating to the manufacture
and distribution of Vioxx. None of the cases involving the Company is scheduled for trial. The
Company has tendered each of these cases to Merck and has reached an agreement with Merck to defend
and indemnify the Company.
The Company is a defendant in approximately 3 cases alleging that the plaintiffs were injured
because they took the drugs known as fen-phen, the term commonly used to describe the weight-loss
combination of fenfluramine or dexfenfluramine with phentermine. The Company has been named as a
defendant along with several other defendants in 41 cases and has accepted the tender of one of
its customers named as a defendant in one additional case. The cases are pending in state courts
in California and Mississippi and in state and federal courts in Florida and New York, and
typically assert causes of action for strict liability, negligence, breach of warranty, false
advertising and unfair business practices for improper design, testing, manufacturing and warnings
relating to the distribution and/or prescription of fen-phen. The Company has tendered each of
these cases, including the three remaining matters, to its suppliers and has reached an agreement with its major supplier to defend and
indemnify the Company and its customers.
We, through our former McKesson Chemical Company division, are named in approximately 450
cases involving the alleged distribution of asbestos. These cases typically involve either single
or multiple plaintiffs claiming personal injuries and unspecified compensatory and punitive damages
as a result of exposure to asbestos-containing materials. Pursuant to an indemnification agreement
signed at the time of the 1987 sale of McKesson Chemical Company to what is now called Univar USA
Inc. (Univar), we have tendered each of these actions to Univar. Univar has raised questions
concerning the extent of its obligations under the indemnification agreement. Univar continues to
defend the Company in some of these cases, but since February 2005 has been rejecting tenders and
accordingly, the Company is incurring defense costs in connection with the more recently served
actions. The Company believes that Univar remains obligated under the terms of the indemnification
agreement. The Company has filed an arbitration demand against Univar pursuant to the
indemnification agreement seeking a determination that the liability for these cases is Univars
responsibility. Arbitrators have been identified and agreed upon, but no date is yet set for the
arbitration. In addition to its indemnification rights against Univar, the Company believes that
portions of these claims are covered by insurance and is pursuing that coverage.
IV. Other Litigation and Claims
On May 3, 2004, judgment was entered against us and one of our employees in the action
captioned: Roby v. McKesson HBOC, Inc. et al. (Superior Court for Yolo County, California, Case No.
CV01-573). Former employee Charlene Roby (Roby) brought claims for wrongful termination,
disability discrimination and disability-based harassment against McKesson and a claim for
disability-based harassment against her former supervisor. The jury awarded Roby compensatory
damages against McKesson and against her supervisor in the total amount of $4 million, and punitive
damages in the amount of $15 million against McKesson. Following post-trial motions, the trial
court reduced the amount of compensatory damages against McKesson to $3 million; the punitive
damages awarded against both defendants and the compensatory damages awarded against the individual
employee defendant were not reduced. We filed a Notice of Appeal, seeking reduction or reversal of
the compensatory and punitive damage awards and the award of attorneys fees. On December 26,
2006, the Court of Appeal for the Third Appellate District of California issued its decision
reversing the verdict for harassment against Robys supervisor, reducing the compensatory damages
from $3 million to $1 million, and reducing punitive damages from $15 million to $2 million.
Following the rejection of Robys petition for rehearing before the Court of Appeals, plaintiff
petitioned for review by the California Supreme Court, which was granted on April 18, 2007. Roby
has filed her opening brief; the Company has filed its brief in opposition, and plaintiff is
scheduled to file her reply brief in May, 2008. A hearing will thereafter be scheduled by the
Court.
92
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On July 14, 2006, an action was filed in the United States District Court for the Eastern
District of New York against McKesson, two McKesson employees, four other drug wholesalers and
sixteen drug manufacturers, RxUSA v. Alcon Laboratories et al., (Case No. 06-CV-3447-MJT).
Plaintiff alleges that we, along with various other defendants, unlawfully engaged in
monopolization and attempted monopolization of the sale and distribution of pharmaceutical products
in violation of the federal antitrust laws, as well as in violation of New York States Donnelly
Act. We are also alleged to have violated the Sarbanes-Oxley Act of 2002; and our employees are
alleged to have violated the Donnelly Act, the Sarbanes-Oxley Act and Sections 1962 (c) and (d) of
the civil RICO statute. Plaintiff alleges generally that defendants have individually, and in
concert with one another, taken actions to create and maintain a monopoly and to exclude secondary
wholesalers, such as the plaintiff, from the wholesale pharmaceutical industry. The complaint
seeks monetary damages of approximately $1.6 billion, and also seeks treble damages, attorneys
fees and injunctive relief. All defendants have filed motions to dismiss all claims. The motions
were fully briefed and submitted to the trial court on March 13, 2007. The court has not yet
decided any of the motions and has not set a date to hear oral argument on the motions. Discovery
has been stayed subject to disposition of the motions to dismiss. No trial date has been set.
Between
1976 and 1987, our former McKesson Chemical Company division operated a facility in
Santa Fe Springs, California. We have been actively remediating the contamination at this site
since 1994. Angeles Chemical Company (Angeles) conducted similar repackaging activities at its
property adjacent to the Companys site between 1976 and 2000. In late 2001, Angeles filed an
action against McKesson Angeles Chemical Company v. McKesson Corporation, et al., (United States
District Court for the Central District of California Case No. 01-10532-TJH) claiming that
McKessons contamination had migrated to Angeles property. The causes of action in the current
complaint purport to state claims based on the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (as amended, the Superfund law or its state law
equivalent) and the Resource Conservation and Recovery Act, as well as allege various state law
claims, such as nuisance, trespass, negligence, defamation, interference with prospective
advantage, unfair business practices, and for declaratory relief, among others. Angeles seeks
injunctive relief, as well as compensatory and punitive damages, attorneys fees and costs. We
have answered the complaint, denying liability and asserting affirmative defenses. Fact discovery
is closed, expert discovery is ongoing and a pretrial conference is scheduled for June 23, 2008, at
which time a trial date is expected to be set.
V. Government Investigations and Subpoenas
The health care industry is highly regulated, and government agencies continue to increase
their scrutiny over certain practices affecting government programs. From time to time, the
Company receives subpoenas or requests for information from various government agencies. The
Company generally responds to such subpoenas and requests in a cooperative, thorough and timely
manner. These responses sometimes require considerable time and effort, and can result in
considerable costs being incurred by the Company. Such subpoenas and requests also can lead to the
assertion of claims or the commencement of legal proceedings against the Company and other members
of the health care industry, as well as to settlements. Examples of such requests and subpoenas
include the following: (1) we are in the process of responding to a subpoena from the U.S.
Attorneys Office (USAO) in Massachusetts seeking documents relating to the Companys business
relationship with a long-term care pharmacy organization; (2) we have responded to a request from
the Federal Trade Commission for certain documents as part of a non-public investigation to
determine whether the Company may have engaged in anti-competitive practices with other wholesale
pharmaceutical distributors in order to limit competition for provider customers seeking
distribution services; (3) we have received and responded to a Civil Investigative Demand from the
Attorney Generals Office of the State of Tennessee apparently in connection with an investigation
into possible violations of the Tennessee Medicaid False Claims Act in connection with repackaged
pharmaceuticals; (4) we have responded to a subpoena from the office of the Attorney General of the
State of New York requesting documents and other information concerning our participation in the
secondary or alternative source market for pharmaceutical products; (5) we have received and have
responded, or are in the process of responding to subpoenas from a number of Offices of state
Attorney Generals or other state agencies, including requests from New York, Wisconsin, and
Alabama, relating to the pricing, including First DataBank AWP, for branded and generic drugs; (6)
we are cooperating in an investigation by the USAO for the Northern District of Mississippi into
whether it will intervene in a civil qui tam action filed by an unknown private relator against the
Company and other defendants, and we are informed that the action purports to allege violations of
the anti-kickback and/or false claims statutes in connection with the provision of Medicare claims
billing services to multi-facility nursing home customers; and (7) we are responding to a subpoena,
issued by the USAO in Houston, which seeks documents relating to billing and collection
93
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
services performed by our subsidiary, Per-Se, for certain healthcare operations associated
with the University of Texas from 2004 to the present.
On May 2,
2008, we entered into two agreements which resolved previously disclosed
claims by the Drug Enforcement Administration (DEA) and six USAOs
that between 2005 and 2007, certain of our pharmaceutical
distribution centers fulfilled customer orders for select controlled
substances, which orders were not adequately reported to the DEA. The settlements were
achieved consistent with the previously disclosed $13 million reserve
established for these matters. These settlements resolve all administrative and civil claims
arising out of the investigations.
As previously
reported, on January 26, 2007, we acquired Per-Se, which became a wholly owned
subsidiary of McKesson. Prior to its acquisition, Per-Se had publicly disclosed two pending
Securities and Exchange Commission (SEC) investigations. Those investigations are the following:
(1) In March 2005, the SEC issued a subpoena to Per-Se pursuant to a formal order of investigation
which we believe relates to allegations of wrongdoing made in 2003 by a former Per-Se employee.
Those allegations were the subject of a prior investigation by the Per-Se Audit Committee and an
outside accounting firm. Per-Se has produced documents and provided testimony to the SEC. By
letter dated June 26, 2007, the SEC informed the Company that its investigation of Per-Se was
closed, and that it did not intend to recommend any enforcement action against Per-Se as a result
of that investigation. (2) In December 2004, the SEC issued a formal order of investigation
relating to accounting matters at NDCHealth Corporation (NDCHealth), a then public company which
was acquired by Per-Se in January 2006, prior to our acquisition of Per-Se. In March 2005,
NDCHealth restated its financial statements for the fiscal years ended May 28, 2004, May 30, 2003
and May 31, 2002, and for the fiscal quarters ended August 22, 2004 and August 29, 2005, to correct
errors relating to certain accounting matters. NDCHealth produced documents to the SEC and fully
cooperated with the SEC in its investigation. The SEC has taken testimony from a number of current
and former NDCHealth employees. There has been no activity in this matter for some time and the
SEC has taken no action against NDCHealth or its successor to date.
VI. Environmental Matters
Primarily
as a result of the operation of our former chemical businesses, which were fully
divested by 1987, we are involved in various matters pursuant to environmental laws and
regulations. We have received claims and demands from governmental agencies relating to
investigative and remedial actions purportedly required to address environmental conditions alleged
to exist at seven sites where we, or entities acquired by us, formerly conducted operations and we,
by administrative order or otherwise, have agreed to take certain actions at those sites, including
soil and groundwater remediation. In addition, we are one of multiple recipients of a New Jersey
Department of Environmental Protection Agency directive and a separate United States Environmental
Protection Agency directive relating to potential natural resources damages (NRD) associated with
one of these seven sites. Although the Companys potential allocation under either directive
cannot be determined at this time, we have agreed to participate with a potentially responsible
party (PRP) group in the funding of an NRD assessment, the costs of which are reflected in the
aggregate estimates set forth below.
Based on
a determination by our environmental staff, in consultation with outside
environmental specialists and counsel, the current estimate of reasonably possible remediation
costs for these seven sites is $10 million, net of approximately $2 million that third parties have
agreed to pay in settlement or we expect, based either on agreements or nonrefundable contributions
which are ongoing, to be contributed by third parties. The $10 million is expected to be paid out
between April 2008 and March 2028. Our estimated liability for these environmental matters has
been accrued in the accompanying consolidated balance sheets.
In addition,
we have been designated as a PRP under the Superfund law for environmental
assessment and cleanup costs as the result of our alleged disposal or hazardous substances at 18
sites. With respect to these sites, numerous other PRPs have similarly been designated and, while
the current state of the law potentially imposes joint and several liability upon PRPs, as a
practical matter costs of these sites are typically shared with other PRPs. Our estimated
liability at those 18 sites is approximately $1 million. The aggregate settlements and costs paid
by us in Superfund matters to date have not been significant. The accompanying consolidated
balance sheets include this environmental liability.
94
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
VII. Other Matters
We are involved in various other litigation and governmental proceedings, not described above,
that arise in the normal course of business. While it is not possible to determine with certainty
the ultimate outcome or the duration of any such litigation or governmental proceedings, we believe
based on current knowledge and the advice of our counsel that such litigation and proceedings will
not have a material impact on our financial position or results of operations.
18. Stockholders Equity
Each share of the Companys outstanding common stock is permitted one vote on proposals
presented to stockholders and is entitled to share equally in any dividends declared by the
Companys Board of Directors (the Board).
Share repurchase plans: The Board approved share repurchase plans in October 2003, August
2005, December 2005 and January 2006 which permitted the Company to repurchase up to a total of
$1.0 billion ($250 million per plan) of the Companys common stock. Under these plans, we
repurchased 19 million shares for $958 million during 2006. During 2007, we repurchased the
remaining available shares under the January 2006 plan, fully utilizing all of these repurchase
plans.
In April and July 2006, the Board approved two new share repurchase plans which permitted the
Company to repurchase up to an additional $1.0 billion ($500 million per plan) of the Companys
common stock. During 2007, we repurchased a total of 20 million shares for $1.0 billion. As a
result of these repurchases, we effectively completed all of the 2007 share repurchase plans.
In April and September 2007, the Board approved two new plans to repurchase up to $2.0 billion
of the Companys common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28
million shares for $1,686 million, fully utilizing the April 2007 plan, leaving $314 million
remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase
an additional $1.0 billion of the Companys common stock. Stock repurchases may be made from
time-to-time in open market or private transactions.
2005 Stock Plan (the 2005 Stock Plan): The 2005 Stock Plan was adopted by the Board on May
25, 2005 and approved by the Companys stockholders on July 25, 2005. The 2005 Stock Plan
initially provided for the grant of up to 13 million shares in the form of nonqualified stock
options, incentive stock options, restricted stock awards, restricted stock unit awards, stock
appreciation rights, performance shares and other share-based awards to employees, officers and
directors of the Company. The 2005 Stock Plan replaced several other plans (the Legacy Plans)
and the remaining 11 million shares available for issuance under the Legacy Plans were cancelled,
although awards under those plans remain outstanding.
In July 2007, the Companys stockholders amended the 2005 Stock Plan to increase the number of
shares of common stock reserved for issuance under the 2005 Stock Plan by 15 million shares to an
aggregate of 28 million shares. As of March 31, 2008, 16 million shares remain available for grant
under the 2005 Stock Plan. As a result of acquisitions, we currently have 5 other option plans
under which no further awards have been made since the date of acquisition.
2000 Employee Stock Purchase Plan (the ESPP): The Company also has an ESPP under which 11
million shares have been authorized for issuance. On July 25, 2007, the Companys stockholders
approved an amendment to the ESPP under which the number of shares of common stock reserved for
issuance was increased by 5 million shares to an aggregate of 16 million shares. Eligible
employees may purchase a limited number of shares of the Companys common stock at a discount of up
to 15% of the market value at certain plan-defined dates. In each year of 2008, 2007 and 2006, 1
million shares were issued under the ESPP. At March 31, 2008, 6 million shares were available for
issuance under the ESPP.
As previously discussed, during the first quarter of 2006, we called for the redemption of the
Debentures, which resulted in the exchange of the preferred securities for 5 million shares of our
newly issued common stock.
95
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
19. 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), as discussed in Financial Note 1,
Significant Accounting Policies. 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 recognize compensation expense on a straight-line basis over the requisite service
period for those awards with graded vesting and service conditions. For the awards with
performance conditions, we recognize the expense on an accelerated basis.
We adopted SFAS No. 123(R) using the modified prospective method and therefore have not
restated prior period financial statements. Prior to adopting SFAS No. 123(R), we accounted for
our employee share-based compensation plans using the intrinsic value method under APB Opinion No.
25. This standard generally did not require recognition of compensation expense for the majority
of our share-based awards except for RS and RSUs. In addition, as required under APB Opinion No.
25, we previously recognized forfeitures as they occurred.
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 the future
reporting periods could be materially higher or lower than our current estimates. The
weighted-average forfeiture rate is approximately 6% at March 31, 2008. 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
statements of operations or capitalized on the 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 balance sheets at March 31, 2008 and 2007. In addition, SFAS No. 123(R)
requires that the benefits of realized tax deductions in excess of previously recognized tax
benefits on compensation expense be reported as a financing cash flow rather than an operating cash
flow, as was done under APB Opinion No. 25.
In conjunction with the adoption of SFAS No. 123(R), in 2007, we elected the short-cut
method for calculating the beginning balance of the additional paid-in capital pool (APIC pool)
related to the tax effects of share-based compensation. Under this method, a simplified
calculation is applied in establishing the beginning 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. The election of this accounting policy did not have a
material impact on our consolidated financial statements.
96
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) |
|
2008 |
|
2007 |
|
2006 |
|
RSU and RS (1) |
|
$ |
50 |
|
|
$ |
22 |
|
|
$ |
16 |
|
PeRSUs (2) |
|
|
22 |
|
|
|
24 |
|
|
|
|
|
Stock options |
|
|
11 |
|
|
|
7 |
|
|
|
|
|
Employee stock purchase plan |
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
91 |
|
|
|
60 |
|
|
|
16 |
|
Tax benefit
for share-based compensation expense (3) |
|
|
(31 |
) |
|
|
(20 |
) |
|
|
(6 |
) |
|
|
|
Share-based
compensation expense, net of tax (4) |
|
$ |
60 |
|
|
$ |
40 |
|
|
$ |
10 |
|
|
|
|
Impact of share-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.20 |
|
|
$ |
0.13 |
|
|
$ |
0.03 |
|
Basic |
|
|
0.21 |
|
|
|
0.13 |
|
|
|
0.03 |
|
|
|
|
|
(1) |
|
Substantially all of the 2008 expense was the result of our 2007 PeRSUs that have been
converted to RSUs in 2008 due to the attainment of goals during the 2007 performance period. |
|
(2) |
|
Represents estimated compensation expense for PeRSUs that are conditional upon attaining
performance objectives during the current years performance period. These PeRSUs are
expected to be granted in May 2008. |
|
(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. |
I. SFAS No. 123 Pro Forma Information for 2006
As described in Financial Note 1, prior to April 1, 2006 we accounted for our employee
share-based compensation plans using the intrinsic value method under APB Opinion No. 25. Had
compensation expense for our employee share-based compensation been recognized based on the fair
value method, consistent with the provisions of SFAS No. 123, net income and earnings per share
would have been as follows:
|
|
|
|
|
|
|
Year Ended |
|
|
|
March 31, |
|
(In millions, except per share amounts) |
|
2006 |
|
|
Net income, as reported |
|
$ |
751 |
|
Compensation expense, net of tax: |
|
|
|
|
APB Opinion No. 25 expense included in net income |
|
|
10 |
|
SFAS No. 123 expense |
|
|
(66 |
) |
|
|
|
|
Pro forma net income |
|
$ |
695 |
|
|
|
|
|
Earnings per common share: |
|
|
|
|
Diluted as reported |
|
$ |
2.38 |
|
Diluted pro forma |
|
|
2.20 |
|
Basic as reported |
|
|
2.46 |
|
Basic pro forma |
|
|
2.27 |
|
|
In 2006 and 2005, we granted 5 million and 6 million employee stock options, substantially all
of which vested on or before March 31, 2006. The shortened vesting schedules at grant were
approved by the Compensation Committee of the Companys Board of Directors (Compensation
Committee) for employee retention purposes and in anticipation of the requirements of SFAS No.
123(R). Prior to 2005, stock options typically vested over a four year period. Accordingly, SFAS
No. 123 compensation expense for the 2006 employee stock options that were fully vested prior to
April 1, 2006 is reflected on the pro forma results above, but not recognized in our earnings after
the adoption of SFAS No. 123(R).
97
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
II. Stock Plans
The 2005 Plan provides our employees, officers and non-employee directors share-based
long-term incentives. The 2005 Plan permits the granting of stock options, RS, RSUs, PeRSUs and
other share-based awards. Under the 2005 Plan, 13 million shares were initially authorized for
issuance and 15 million additional shares were authorized on July 27, 2007. As of March 31, 2008,
16 million shares remain available for future grant. The 2005 Plan replaced the following three
plans in advance of their expirations: 1999 Stock Option and Restricted Stock Plan, the 1997
Directors Equity Compensation and Deferral Plan and the 1998 Canadian Incentive Plan
(collectively, the Legacy Plans). The aggregate remaining 11 million authorized shares under the
Legacy Plans were cancelled, although awards under those plans remain outstanding. The 2005 Plan
is now the Companys only plan for providing share-based incentive compensation to employees and
non-employee directors of the Company and its affiliates.
In anticipation of the requirements of SFAS No. 123(R), the Compensation Committee reviewed
our long-term compensation program for key employees across the Company. As a result, beginning in
2006, reliance on options was reduced with more long-term incentive value delivered by grants of
PeRSUs and performance-based cash compensation.
III. Stock Options
Stock options are granted at not less than fair market value and those options granted under
the 2005 Plan have a contractual term of seven years. Prior to 2005, stock options typically
vested over a four-year period and had a contractual term of ten years. As noted above, in 2006
and 2005, we provided shortened vesting schedules to 2006 and 2005 employee stock options upon
grant. Options granted in 2008 have a seven-year contractual life and generally follow the
four-year vesting schedule. We expect option grants in 2009 and future years will have the same
contractual life and vesting schedule as 2008 option grants. Stock options under the Legacy Plans,
which are substantially vested, generally have a ten-year contractual life.
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 value 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 emerging employee stock option valuation considerations. Through 2008, our expected
stock price volatility assumption reflected a constant dividend yield during the expected term of the option. |
|
- |
|
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. |
|
- |
|
The expected life of the options is determined based on historical option exercise behavior data, and also reflects the
impact of changes in contractual life of current option grants compared to our historical grants. |
98
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Weighted-average assumptions used to estimate the fair value of employee stock options were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
Expected stock price volatility |
|
|
24 |
% |
|
|
27 |
% |
|
|
36 |
% |
Expected dividend yield |
|
|
0.4 |
% |
|
|
0.5 |
% |
|
|
0.5 |
% |
Risk-free interest rate |
|
|
5 |
% |
|
|
5 |
% |
|
|
4 |
% |
Expected life (in years) |
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
The following is a summary of options outstanding at March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
2 |
|
|
$ |
21.46 |
|
|
|
1 |
|
|
$ |
21.35 |
|
$27.36 - $41.02 |
|
|
13 |
|
|
|
4 |
|
|
|
33.94 |
|
|
|
13 |
|
|
|
33.93 |
|
$41.03 - $54.70 |
|
|
4 |
|
|
|
4 |
|
|
|
45.92 |
|
|
|
3 |
|
|
|
45.31 |
|
$54.71 - $68.37 |
|
|
1 |
|
|
|
6 |
|
|
|
62.48 |
|
|
|
- |
|
|
|
66.27 |
|
$68.38 - $82.04 |
|
|
6 |
|
|
|
1 |
|
|
|
73.15 |
|
|
|
6 |
|
|
|
73.15 |
|
$82.05 - $95.72 |
|
|
1 |
|
|
|
|
|
|
|
90.74 |
|
|
|
1 |
|
|
|
90.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
3 |
|
|
|
48.59 |
|
|
|
24 |
|
|
|
48.10 |
|
|
The following table summarizes stock option activity during 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Average Exercise |
|
Contractual |
|
Intrinsic |
(In millions, except per share data) |
|
Shares |
|
Price |
|
Term (Years) |
|
Value (2) |
|
Outstanding, March 31, 2005 |
|
|
59 |
|
|
$ |
40.37 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
5 |
|
|
|
44.93 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(17 |
) |
|
|
31.15 |
|
|
|
|
|
|
|
|
|
Cancelled and forfeited |
|
|
(1 |
) |
|
|
69.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest (1) |
|
|
26 |
|
|
|
48.27 |
|
|
|
3 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2008 |
|
|
24 |
|
|
|
48.10 |
|
|
|
3 |
|
|
|
292 |
|
|
|
|
|
(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. |
99
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table provides data related to all stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions, except per share data) |
|
2008 |
|
2007 |
|
2006 |
|
Weighted-average grant date fair value per stock option |
|
$ |
17.90 |
|
|
$ |
15.43 |
|
|
$ |
18.26 |
|
Aggregate intrinsic value on exercise |
|
$ |
220 |
|
|
$ |
204 |
|
|
$ |
278 |
|
Cash received upon exercise |
|
$ |
309 |
|
|
$ |
354 |
|
|
$ |
538 |
|
Tax benefits realized related to exercise |
|
$ |
83 |
|
|
$ |
74 |
|
|
$ |
106 |
|
Total fair value of shares vested |
|
$ |
8 |
|
|
$ |
4 |
|
|
$ |
89 |
|
Total compensation cost, net of estimated forfeitures,
related to unvested stock options not yet recognized,
pre-tax |
|
$ |
25 |
|
|
$ |
18 |
|
|
|
NA |
|
Weighted-average period in years over which stock
option compensation cost is expected to be recognized |
|
|
1 |
|
|
|
2 |
|
|
|
NA |
|
|
|
|
|
NA |
|
Not applicable as stock option
compensation cost was not generally
recognized under APB Opinion No. 25 in 2006. |
IV. 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. The fair value of RS and RSUs with graded vesting and service
conditions is expensed on a straight-line basis over the requisite service period. RS contains
certain restrictions on transferability and may not be transferred until such restrictions lapse.
Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately,
and which are expensed upon grant. However, payment of any shares is delayed until the director is
no longer performing services for the Company. At March 31, 2008, 54,000 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. Vesting of such awards ranges from one
to three-year periods following the end of the performance period and may follow the graded or
cliff method of vesting.
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 award is
classified as a RSU and is accounted for on that basis. The fair value of PeRSUs is expensed on an
accelerated basis, over the requisite service period of four years. For RS and RSUs with service
conditions, we have elected to amortize the expense on a straight-line basis.
100
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes RS and RSU activity during 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date Fair |
(In millions, except per share data) |
|
Shares |
|
Value Per Share |
|
Nonvested, March 31, 2005 |
|
|
1 |
|
|
|
33.99 |
|
Granted |
|
|
|
|
|
|
47.06 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
The following table provides data related to RS and RSU activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Total fair value of shares vested |
|
$ |
20 |
|
|
$ |
5 |
|
|
$ |
11 |
|
Total compensation cost, net of
estimated forfeitures, related to
nonvested RSU awards not yet recognized,
pre-tax (1) |
|
$ |
49 |
|
|
$ |
32 |
|
|
$ |
45 |
|
Weighted-average period in years over
which RSU cost is expected to be
recognized |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
(1) |
|
Compensation cost in 2006 did not reflect any forfeiture assumptions as required under APB
Opinion No. 25. |
In May 2007, 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 2009 (the 2008 PeRSU). These target share units are not included
in the table above as they have not been granted in the form of a RSU. As of March 31, 2008, the
total compensation cost, net of estimated forfeitures, related to nonvested 2008 PeRSUs not yet
recognized was approximately $44 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 2 years.
In accordance with the provisions of SFAS No. 128, Earnings per Share, the 2008 PeRSUs are
included in the calculation of diluted weighted average shares for the year ended March 31, 2008 as
the performance goals have been achieved.
V. Employee Stock Purchase Plan (ESPP)
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, and any amounts accumulated during that period are refunded.
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.
101
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
20. Related Party Balances and Transactions
Notes receivable outstanding from certain of our current and former officers and senior
managers totaled $16 million and $25 million at March 31, 2008 and 2007. These notes related to
purchases of common stock under our various employee stock purchase plans. The notes bear interest
at rates ranging from 4.7 % to 7.1 % and were due at various dates through February 2004. Interest
income on these notes is recognized only to the extent that cash is received. These notes, which
are included in other capital in the consolidated balance sheets, were issued for amounts equal to
the market value of the stock on the date of the purchase and are at full recourse to the borrower.
At March 31, 2008, the value of the underlying stock collateral was $10 million. The
collectability of these notes is evaluated on an ongoing basis. As a result, we recorded net
credits of $2 million and $9 million in 2007 and 2006 based on changes in price of the underlying
stock collateral. At March 31, 2008 and 2007, we provided a reserve of approximately $6 million
for the outstanding notes. Other receivable balances held with related parties, consisting of
loans made to certain officers and senior managers and an equity-held investment, at March 31, 2008
and 2007 amounted to $1 million.
In 2008, 2007 and 2006 we incurred $10 million, $8 million and $7 million of annual rental
expense paid to an equity-held investment. In addition, in 2007 and 2006 we purchased $3 million
of services per year from an equity-held investment. At March 31, 2008, we had a $7 million loan
receivable from an equity-held investment. The loan bears interest at 7.9%.
21. Segments of Business
Beginning with the first quarter of 2008, we report our operations in two operating segments:
McKesson Distribution Solutions and McKesson Technology Solutions. This change resulted from a
realignment of our businesses to better coordinate our operations with the needs of our customers.
The factors for determining the reportable segments included the manner in which management
evaluated the performance of the Company combined with the nature of the individual business
activities. We evaluate the performance of our operating segments based on operating profit before
interest expense, income taxes and results from discontinued operations. In accordance with SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information, all prior period
amounts are reclassified to conform to the 2008 segment presentation.
102
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical
supplies and equipment, and health and beauty care products throughout North America. We have
combined two of our former segments known as our Pharmaceutical Solutions and Medical-Surgical
Solutions segments into this new segment, which reflects the increasing synergies the Company seeks
through combined activities and best-practice process improvements. 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), the leading pharmaceutical distributor in Mexico and a
39% interest in Parata, which sells automated pharmaceutical dispensing systems to retail
pharmacies.
The Technology Solutions segment (formerly known as our Provider Technologies segment)
delivers enterprise-wide clinical, patient care, financial, supply chain, strategic management
software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and
other services, to healthcare organizations. We have added our Payor group of businesses, which
includes our InterQual® and clinical auditing and compliance software businesses, and our disease
and medical management programs to this segment. The change to move our Payor group to this
segment from our former Pharmaceutical Solutions segment reflects our decision to more closely
align this business with the strategy of our Technology Solutions segment, that is to create value
by promoting connectivity, economic alignment and transparency of information between payors and
providers. The segments customers include hospitals, physicians, homecare providers, retail
pharmacies and payors from North America, the United Kingdom, Ireland, other European countries,
Australia, New Zealand and Israel.
Revenues for our Technology Solutions segment are classified in one of three categories:
services, software and software systems and hardware. Service revenues primarily include fees
associated with installing our software and software systems, as well as revenues associated with
software maintenance and support, remote processing, disease and medical management, and other
outsourcing and professional services. Software and software systems revenues primarily include
revenues from licensing our software and software systems, including the segments clinical
auditing and compliance and InterQual® businesses.
Our Corporate segment includes expenses associated with Corporate functions and projects,
certain employee benefits and the results of certain joint venture investments. Corporate expenses
are allocated to the operating segments to the extent that these items can be directly attributable
to the segment.
103
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial information relating to the reportable operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (1) |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pharmaceutical direct distribution & services |
|
$ |
60,436 |
|
|
$ |
54,127 |
|
|
$ |
51,730 |
|
U.S. pharmaceutical sales to customers warehouses |
|
|
27,668 |
|
|
|
27,555 |
|
|
|
25,462 |
|
|
|
|
Subtotal |
|
|
88,104 |
|
|
|
81,682 |
|
|
|
77,192 |
|
Canada pharmaceutical distribution & services |
|
|
8,106 |
|
|
|
6,692 |
|
|
|
5,910 |
|
Medical-Surgical
distribution & services |
|
|
2,509 |
|
|
|
2,364 |
|
|
|
2,037 |
|
|
|
|
Total Distribution Solutions |
|
|
98,719 |
|
|
|
90,738 |
|
|
|
85,139 |
|
|
|
|
Technology
Solutions |
|
|
Services |
|
|
2,240 |
|
|
|
1,537 |
|
|
|
1,217 |
|
Software and software systems |
|
|
591 |
|
|
|
536 |
|
|
|
476 |
|
Hardware |
|
|
153 |
|
|
|
166 |
|
|
|
151 |
|
|
|
|
Total Technology Solutions |
|
|
2,984 |
|
|
|
2,239 |
|
|
|
1,844 |
|
|
|
|
Total |
|
$ |
101,703 |
|
|
$ |
92,977 |
|
|
$ |
86,983 |
|
|
|
|
Operating profit (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions (3) (4) |
|
$ |
1,483 |
|
|
$ |
1,395 |
|
|
$ |
1,250 |
|
Technology Solutions |
|
|
319 |
|
|
|
206 |
|
|
|
187 |
|
|
|
|
Total |
|
|
1,802 |
|
|
|
1,601 |
|
|
|
1,437 |
|
Corporate |
|
|
(208 |
) |
|
|
(211 |
) |
|
|
(127 |
) |
Securities Litigation charge (credit) |
|
|
5 |
|
|
|
6 |
|
|
|
(45 |
) |
Interest Expense |
|
|
(142 |
) |
|
|
(99 |
) |
|
|
(94 |
) |
|
|
|
Income from continuing operations before income taxes |
|
$ |
1,457 |
|
|
$ |
1,297 |
|
|
$ |
1,171 |
|
|
|
|
Depreciation and amortization (5) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Solutions |
|
$ |
144 |
|
|
$ |
126 |
|
|
$ |
117 |
|
Technology Solutions |
|
|
180 |
|
|
|
123 |
|
|
|
105 |
|
Corporate |
|
|
47 |
|
|
|
46 |
|
|
|
40 |
|
|
|
|