REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
McKesson Corporation
San Francisco, California
We have audited the accompanying consolidated balance sheets of McKesson Corporation and subsidiaries (the “Company”) as of March 31,
2017
and
2016
, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended March 31,
2017
. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. We also have audited the Company’s internal control over financial reporting as of March 31,
2017
, based on criteria established in
Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Rexall and its subsidiaries, which was acquired in December 2016. Rexall represented
3%
of the total assets and less than
1%
of total revenues of the Company as of and for the year ended March 31, 2017. Accordingly, our audit did not include the internal control over financial reporting at Rexall. The Company’s 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
Management’s 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 Company’s 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 audits 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 company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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 company’s 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 company’s 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 effectiveness of the internal control over financial reporting to future periods are subject to the risk that 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,
2017
and
2016
, and the results of their operations and their cash flows for each of the three years in the period ended March 31,
2017
, 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,
2017
, based on the criteria established in
Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
|
|
|
/s/ Deloitte & Touche LLP
|
San Francisco, California
|
May 22, 2017
|
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenues
|
$
|
198,533
|
|
|
$
|
190,884
|
|
|
$
|
179,045
|
|
Cost of Sales
|
(187,262
|
)
|
|
(179,468
|
)
|
|
(167,634
|
)
|
Gross Profit
|
11,271
|
|
|
11,416
|
|
|
11,411
|
|
Operating Expenses
|
|
|
|
|
|
Selling, distribution and administrative expenses
|
(7,466
|
)
|
|
(7,276
|
)
|
|
(7,901
|
)
|
Research and development
|
(341
|
)
|
|
(392
|
)
|
|
(392
|
)
|
Restructuring charges
|
(18
|
)
|
|
(203
|
)
|
|
—
|
|
Goodwill impairment charge
|
(290
|
)
|
|
—
|
|
|
—
|
|
Claim and litigation charges
|
6
|
|
|
—
|
|
|
(150
|
)
|
Gain on Healthcare Technology Net Asset Exchange, net
|
3,947
|
|
|
—
|
|
|
—
|
|
Total Operating Expenses
|
(4,162
|
)
|
|
(7,871
|
)
|
|
(8,443
|
)
|
Operating Income
|
7,109
|
|
|
3,545
|
|
|
2,968
|
|
Other Income, Net
|
90
|
|
|
58
|
|
|
63
|
|
Interest Expense
|
(308
|
)
|
|
(353
|
)
|
|
(374
|
)
|
Income from Continuing Operations Before Income Taxes
|
6,891
|
|
|
3,250
|
|
|
2,657
|
|
Income Tax Expense
|
(1,614
|
)
|
|
(908
|
)
|
|
(815
|
)
|
Income from Continuing Operations
|
5,277
|
|
|
2,342
|
|
|
1,842
|
|
Loss from Discontinued Operations, Net of Tax
|
(124
|
)
|
|
(32
|
)
|
|
(299
|
)
|
Net Income
|
5,153
|
|
|
2,310
|
|
|
1,543
|
|
Net Income Attributable to Noncontrolling Interests
|
(83
|
)
|
|
(52
|
)
|
|
(67
|
)
|
Net Income Attributable to McKesson Corporation
|
$
|
5,070
|
|
|
$
|
2,258
|
|
|
$
|
1,476
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share Attributable to
McKesson Corporation
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Continuing operations
|
$
|
23.28
|
|
|
$
|
9.84
|
|
|
$
|
7.54
|
|
Discontinued operations
|
(0.55
|
)
|
|
(0.14
|
)
|
|
(1.27
|
)
|
Total
|
$
|
22.73
|
|
|
$
|
9.70
|
|
|
$
|
6.27
|
|
Basic
|
|
|
|
|
|
Continuing operations
|
$
|
23.50
|
|
|
$
|
9.96
|
|
|
$
|
7.66
|
|
Discontinued operations
|
(0.55
|
)
|
|
(0.14
|
)
|
|
(1.29
|
)
|
Total
|
$
|
22.95
|
|
|
$
|
9.82
|
|
|
$
|
6.37
|
|
|
|
|
|
|
|
Weighted Average Common Shares
|
|
|
|
|
|
Diluted
|
223
|
|
|
233
|
|
|
235
|
|
Basic
|
221
|
|
|
230
|
|
|
232
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2017
|
|
2016
|
|
2015
|
Net Income
|
$
|
5,153
|
|
|
$
|
2,310
|
|
|
$
|
1,543
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
Foreign currency translation adjustments arising during the period
|
(624
|
)
|
|
113
|
|
|
(1,855
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized losses on net investment hedges arising during the period
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedges arising during the period
|
(19
|
)
|
|
9
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Retirement-related benefit plans
|
(8
|
)
|
|
50
|
|
|
(124
|
)
|
Other Comprehensive Income (Loss), Net of Tax
|
(659
|
)
|
|
172
|
|
|
(1,989
|
)
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
4,494
|
|
|
2,482
|
|
|
(446
|
)
|
Comprehensive (Income) Loss Attributable to Noncontrolling Interests
|
(4
|
)
|
|
(72
|
)
|
|
212
|
|
Comprehensive Income (Loss) Attributable to McKesson Corporation
|
$
|
4,490
|
|
|
$
|
2,410
|
|
|
$
|
(234
|
)
|
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
2,783
|
|
|
$
|
4,048
|
|
Receivables, net
|
18,215
|
|
|
17,980
|
|
Inventories, net
|
15,278
|
|
|
15,335
|
|
Prepaid expenses and other
|
672
|
|
|
1,072
|
|
Total Current Assets
|
36,948
|
|
|
38,435
|
|
Property, Plant and Equipment, Net
|
2,292
|
|
|
2,278
|
|
Goodwill
|
10,586
|
|
|
9,786
|
|
Intangible Assets, Net
|
3,665
|
|
|
3,021
|
|
Equity Method Investment in Change Healthcare
|
4,063
|
|
|
—
|
|
Other Noncurrent Assets
|
3,415
|
|
|
3,003
|
|
Total Assets
|
$
|
60,969
|
|
|
$
|
56,523
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
|
|
|
|
Current Liabilities
|
|
|
|
Drafts and accounts payable
|
$
|
31,022
|
|
|
$
|
28,585
|
|
Short-term borrowings
|
183
|
|
|
7
|
|
Deferred revenue
|
346
|
|
|
919
|
|
Current portion of long-term debt
|
1,057
|
|
|
1,610
|
|
Other accrued liabilities
|
3,004
|
|
|
3,948
|
|
Total Current Liabilities
|
35,612
|
|
|
35,069
|
|
Long-Term Debt
|
7,305
|
|
|
6,497
|
|
Long-Term Deferred Tax Liabilities
|
3,678
|
|
|
2,734
|
|
Other Noncurrent Liabilities
|
1,774
|
|
|
1,809
|
|
Commitments and Contingent Liabilities (Note 25)
|
|
|
|
Redeemable Noncontrolling Interests
|
1,327
|
|
|
1,406
|
|
McKesson Corporation Stockholders’ Equity
|
|
|
|
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value, 800 shares authorized at March 31, 2017 and 2016, 273 and 271 shares issued at March 31, 2017 and 2016
|
3
|
|
|
3
|
|
Additional Paid-in Capital
|
6,028
|
|
|
5,845
|
|
Retained Earnings
|
13,189
|
|
|
8,360
|
|
Accumulated Other Comprehensive Loss
|
(2,141
|
)
|
|
(1,561
|
)
|
Other
|
(2
|
)
|
|
(2
|
)
|
Treasury Shares, at Cost, 62 and 46 at March 31, 2017 and 2016
|
(5,982
|
)
|
|
(3,721
|
)
|
Total McKesson Corporation Stockholders’ Equity
|
11,095
|
|
|
8,924
|
|
Noncontrolling Interests
|
178
|
|
|
84
|
|
Total Equity
|
11,273
|
|
|
9,008
|
|
Total Liabilities, Redeemable Noncontrolling Interests and Equity
|
$
|
60,969
|
|
|
$
|
56,523
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended March 31,
2017
,
2016
and
2015
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McKesson Corporation Stockholders’ Equity
|
|
|
|
|
|
Common
Stock
|
|
Additional Paid-in Capital
|
|
Other Capital
|
|
Retained Earnings
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Treasury
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
|
Shares
|
|
Amount
|
|
Common Shares
|
|
Amount
|
Balances, March 31, 2014
|
381
|
|
|
$
|
4
|
|
|
$
|
6,552
|
|
|
$
|
23
|
|
|
$
|
11,453
|
|
|
$
|
(3
|
)
|
|
(150
|
)
|
|
$
|
(9,507
|
)
|
|
$
|
1,796
|
|
|
$
|
10,318
|
|
Issuance of shares under employee plans
|
3
|
|
|
—
|
|
|
152
|
|
|
|
|
|
|
|
|
—
|
|
|
(109
|
)
|
|
|
|
43
|
|
Share-based compensation
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
Tax benefit related to issuance of shares under employee plans
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
Purchase of noncontrolling interests
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
(62
|
)
|
Reclassification of noncontrolling interests to redeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)
|
|
(1,500
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
(1,710
|
)
|
|
|
|
|
|
(174
|
)
|
|
(1,884
|
)
|
Net income
|
|
|
|
|
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
5
|
|
|
1,481
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
(340
|
)
|
|
|
|
(340
|
)
|
Cash dividends declared, $0.96 per common share
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
Other
|
|
|
|
|
(4
|
)
|
|
(30
|
)
|
|
2
|
|
|
|
|
|
|
|
|
17
|
|
|
(15
|
)
|
Balances, March 31, 2015
|
384
|
|
|
$
|
4
|
|
|
$
|
6,968
|
|
|
$
|
(7
|
)
|
|
$
|
12,705
|
|
|
$
|
(1,713
|
)
|
|
(152
|
)
|
|
$
|
(9,956
|
)
|
|
$
|
84
|
|
|
$
|
8,085
|
|
Issuance of shares under employee plans
|
3
|
|
|
—
|
|
|
123
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
(109
|
)
|
|
|
|
14
|
|
Share-based compensation
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
Tax benefit related to issuance of shares under employee plans
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
152
|
|
Net income
|
|
|
|
|
|
|
|
|
2,258
|
|
|
|
|
|
|
|
|
8
|
|
|
2,266
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
(1,504
|
)
|
|
|
|
(1,504
|
)
|
Retirement of common stock
|
(116
|
)
|
|
(1
|
)
|
|
(1,493
|
)
|
|
|
|
(6,354
|
)
|
|
|
|
116
|
|
|
7,848
|
|
|
|
|
—
|
|
Cash dividends declared, $1.08 per common share
|
|
|
|
|
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
(249
|
)
|
Other
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
(3
|
)
|
Balances, March 31, 2016
|
271
|
|
|
$
|
3
|
|
|
$
|
5,845
|
|
|
$
|
(2
|
)
|
|
$
|
8,360
|
|
|
$
|
(1,561
|
)
|
|
(46
|
)
|
|
$
|
(3,721
|
)
|
|
$
|
84
|
|
|
$
|
9,008
|
|
Issuance of shares under employee plans
|
3
|
|
|
—
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
|
64
|
|
Share-based compensation
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
Tax benefit related to issuance of shares under employee plans
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Acquisition of Vantage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
89
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
(580
|
)
|
|
|
|
|
|
|
|
(580
|
)
|
Net income
|
|
|
|
|
|
|
|
|
5,070
|
|
|
|
|
|
|
|
|
39
|
|
|
5,109
|
|
Repurchase of common stock
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
(16
|
)
|
|
(2,200
|
)
|
|
|
|
(2,250
|
)
|
Retirement of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Cash dividends declared, $1.12 per common share
|
|
|
|
|
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
(249
|
)
|
Other
|
(1
|
)
|
|
|
|
(2
|
)
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
(35
|
)
|
Balances, March 31, 2017
|
273
|
|
|
$
|
3
|
|
|
$
|
6,028
|
|
|
$
|
(2
|
)
|
|
$
|
13,189
|
|
|
$
|
(2,141
|
)
|
|
(62
|
)
|
|
$
|
(5,982
|
)
|
|
$
|
178
|
|
|
$
|
11,273
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating Activities
|
|
|
|
|
|
Net income
|
$
|
5,153
|
|
|
$
|
2,310
|
|
|
$
|
1,543
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
324
|
|
|
281
|
|
|
306
|
|
Amortization
|
586
|
|
|
604
|
|
|
711
|
|
Gain on Healthcare Technology Net Asset Exchange, net
|
(3,947
|
)
|
|
—
|
|
|
—
|
|
Goodwill and other impairment charges
|
290
|
|
|
8
|
|
|
241
|
|
Deferred taxes
|
882
|
|
|
64
|
|
|
171
|
|
Share-based compensation expense
|
115
|
|
|
123
|
|
|
174
|
|
Charges (credits) associated with last-in-first-out inventory method
|
(7
|
)
|
|
244
|
|
|
337
|
|
Loss (gain) from sales of businesses
|
94
|
|
|
(103
|
)
|
|
—
|
|
Other non-cash items
|
88
|
|
|
108
|
|
|
47
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Receivables
|
(762
|
)
|
|
(1,957
|
)
|
|
(2,821
|
)
|
Inventories
|
320
|
|
|
(1,251
|
)
|
|
(2,144
|
)
|
Drafts and accounts payable
|
2,070
|
|
|
3,302
|
|
|
4,718
|
|
Deferred revenue
|
(87
|
)
|
|
(120
|
)
|
|
(141
|
)
|
Taxes
|
146
|
|
|
(78
|
)
|
|
(222
|
)
|
Claim and litigation charges (credit)
|
(6
|
)
|
|
—
|
|
|
150
|
|
Litigation settlement payment
|
(150
|
)
|
|
—
|
|
|
—
|
|
Other
|
(365
|
)
|
|
137
|
|
|
42
|
|
Net cash provided by operating activities
|
4,744
|
|
|
3,672
|
|
|
3,112
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
Payments for property, plant and equipment
|
(404
|
)
|
|
(488
|
)
|
|
(376
|
)
|
Capitalized software expenditures
|
(158
|
)
|
|
(189
|
)
|
|
(169
|
)
|
Acquisitions, net of cash and cash equivalents acquired
|
(4,237
|
)
|
|
(40
|
)
|
|
(170
|
)
|
Proceeds from/(payment for) sale of businesses and other assets, net
|
206
|
|
|
210
|
|
|
15
|
|
Payment received on Healthcare Technology Net Asset Exchange, net
|
1,228
|
|
|
—
|
|
|
—
|
|
Restricted cash for acquisitions
|
(506
|
)
|
|
(939
|
)
|
|
—
|
|
Other
|
75
|
|
|
(111
|
)
|
|
23
|
|
Net cash used in investing activities
|
(3,796
|
)
|
|
(1,557
|
)
|
|
(677
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
Proceeds from short-term borrowings
|
8,294
|
|
|
1,561
|
|
|
3,100
|
|
Repayments of short-term borrowings
|
(8,124
|
)
|
|
(1,688
|
)
|
|
(3,152
|
)
|
Proceeds from issuances of long-term debt
|
1,824
|
|
|
—
|
|
|
3
|
|
Repayments of long-term debt
|
(1,601
|
)
|
|
(1,598
|
)
|
|
(353
|
)
|
Common stock transactions:
|
|
|
|
|
|
|
Issuances
|
120
|
|
|
123
|
|
|
152
|
|
Share repurchases, including shares surrendered for tax withholding
|
(2,311
|
)
|
|
(1,612
|
)
|
|
(450
|
)
|
Dividends paid
|
(253
|
)
|
|
(244
|
)
|
|
(227
|
)
|
Other
|
(18
|
)
|
|
5
|
|
|
(41
|
)
|
Net cash used in financing activities
|
(2,069
|
)
|
|
(3,453
|
)
|
|
(968
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(144
|
)
|
|
45
|
|
|
(319
|
)
|
Net increase (decrease) in cash and cash equivalents
|
(1,265
|
)
|
|
(1,293
|
)
|
|
1,148
|
|
Cash and cash equivalents at beginning of year
|
4,048
|
|
|
5,341
|
|
|
4,193
|
|
Cash and cash equivalents at end of year
|
$
|
2,783
|
|
|
$
|
4,048
|
|
|
$
|
5,341
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
Interest
|
$
|
315
|
|
|
$
|
337
|
|
|
$
|
359
|
|
Income taxes, net of refunds
|
$
|
587
|
|
|
$
|
923
|
|
|
$
|
866
|
|
McKESSON CORPORATION
FINANCIAL NOTES
|
|
1.
|
Significant Accounting Policies
|
Nature of Operations
: McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns) delivers a comprehensive offering of pharmaceuticals and medical supplies and provides services to help our customers improve the efficiency and effectiveness of their healthcare operations. We manage our business through
two
operating segments, McKesson Distribution Solutions and McKesson Technology Solutions, as further described in Financial Note 29, “Segments of Business.”
Basis of Presentation:
The consolidated financial statements and accompanying notes are prepared in accordance with U. S. generally accepted accounting principles (“GAAP”). The consolidated financial statements of McKesson include the financial statements of all wholly-owned subsidiaries and majority-owned or controlled companies. For those consolidated subsidiaries where our ownership is less than
100%
, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net Income or Loss Attributable to Noncontrolling Interests” on the consolidated statements of operations. All significant intercompany balances and transactions have been eliminated in consolidation.
We consider ourselves to control an entity if we are the majority owner of or have voting control over such entity. We also assess control through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business entity is the primary beneficiary of the VIE. We consolidate VIEs when it is determined that we are the primary beneficiary of the VIE.
Fiscal Period:
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.
Reclassifications
: Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
: The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual amounts could differ from those estimated amounts.
Cash and Cash Equivalents
: All highly liquid debt and money market instruments purchased with original maturity of three months or less at the date of acquisition are included in cash and cash equivalents.
Cash equivalents are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound sterling.
The remaining cash and cash equivalents are deposited with several financial institutions. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.
Restricted Cash
: Cash that is subject to legal restrictions or is unavailable for general operating purposes is classified as restricted cash and is included within “Prepaid expenses and other” and “Other Noncurrent Assets” in the consolidated balance sheets. At March 31, 2017 and 2016, our restricted cash balance was
$1.5 billion
and
$939 million
, which primarily represents cash paid into the escrow accounts for acquisitions that closed in early April 2017 and 2016.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Marketable Securities Available-for-Sale
: We carry our marketable securities, which are available-for-sale, at fair value and they are included in prepaid expenses and other in the consolidated balance sheets. The 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,
2017
and
2016
, marketable securities were not material.
In determining whether an other-than-temporary decline in market value has occurred, we consider the duration that, and extent to which, the fair value of the investment is below its cost, the financial condition and future prospects of the issuer or underlying collateral of a security, and our intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity securities that we intend to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other income, net, in the period in which the loss occurs.
Equity Method Investments:
Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. We evaluate our equity method investments for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the carrying value of the investment. If a loss in value has occurred that is deemed to be other than temporary, an impairment loss is recorded. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for further information relating to our equity method investment in Change Healthcare, LLC.
Concentrations of Credit Risk and Receivables:
Our trade receivables are subject to a concentration of credit risk with customers primarily in our Distribution Solutions segment. During
2017
, sales to our
ten
largest customers, including group purchasing organizations (“GPOs”) accounted for approximately
54.2%
of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately
20.2%
of our total consolidated revenues. At March 31,
2017
, trade accounts receivable from our
ten
largest customers were approximately
33.7%
of total trade accounts receivable. Accounts receivable from
CVS
were approximately
17.8%
of total trade accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. The accounts receivables balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. A default in payment, a material reduction in purchases from these or any other large customers, or the loss of a large customer or customer groups could have a material adverse impact on our financial condition, results of operations and liquidity. In addition, trade receivables are subject to a concentration of credit risk with customers in the institutional, retail and healthcare provider sectors, which can be affected by a downturn in the economy and changes in reimbursement policies. This credit risk is mitigated by the size and diversity of the customer base as well as its geographic dispersion. We estimate the receivables for which we do not expect full collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers. An allowance is recorded in our consolidated financial statements for these amounts.
Financing Receivables:
We assess and monitor credit risk associated with financing receivables, primarily lease and notes receivables, through regular review of our collection experience in determining our allowance for loan losses. On an ongoing basis, we also evaluate credit quality of our financing receivables utilizing aging of receivables and write-offs, as well as considering existing economic conditions, to determine if an allowance is necessary. Financing receivables are derecognized if legal title to them has been transferred and all related risks and rewards incidental to ownership have passed to the buyer. As of March 31,
2017
and
2016
, financing receivables and the related allowance were not material to our consolidated financial statements.
Inventories:
We report inventories at the lower of cost or market (“LCM”). Inventories for our Distribution Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment, the majority of the cost of domestic inventories is determined using the last-in, first-out (“LIFO”) method. The majority of the cost of inventories held in foreign locations is based on weighted average purchase prices using the first-in, first-out method (“FIFO”). Technology Solutions segment inventories consist of computer hardware with cost generally determined by the standard cost method, which approximates average cost. Rebates, cash discounts, and other incentives received from vendors are recognized within cost of sales upon the sale of the related inventory.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The LIFO method was used to value approximately
70%
and
74%
of our inventories at March 31,
2017
and
2016
. If we had used the FIFO method of inventory valuation, which approximates current replacement costs, inventories would have been approximately
$1,005 million
and
$1,012 million
higher than the amounts reported at March 31,
2017
and
2016
, respectively. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. We recognized LIFO related credits of
$7 million
in 2017 and net LIFO charges of
$244 million
and
$337 million
in 2016 and 2015 in cost of sales within our consolidated statements of operations. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO cost or market. As of March 31, 2017 and 2016, inventories at LIFO did not exceed market.
Shipping and Handling Costs:
We include costs to pack and deliver inventory to our customers in selling, distribution and administrative expenses. Shipping and handling costs of
$814 million
,
$789 million
, and
$819 million
were included in our selling, distribution and administrative expenses in 2017, 2016 and 2015.
Property, Plant and Equipment:
We state our property, plant and equipment (“PPE”) at cost and depreciate them under the straight-line method at rates designed to distribute the cost of PPE over estimated service lives ranging from
one
to
thirty
years. When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts.
Goodwill:
Goodwill is tested for impairment on an annual basis in the fourth quarter or more frequently if indicators for potential impairment exist. Impairment testing is conducted at the reporting unit level, which is generally defined as a component, one level below our Distribution Solutions and Technology Solutions operating segments, for which discrete financial information is available and segment management regularly reviews the operating results of that unit.
The first step in goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. This step may be performed utilizing either a qualitative or quantitative assessment. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is necessary. If the carrying value of the reporting unit is higher than its estimated fair value, the second step must be performed to measure the amount of impairment loss. Under the second step, the implied fair value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any unrecognized intangible assets, from the fair value of the reporting unit calculated in the first step of the impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess.
To estimate the fair value of our reporting units, we use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. The fair value estimates in the goodwill impairment analysis are highly sensitive to the discount rates used in the expected cash flows attributable to the reporting units. The discount rates are the weighted average cost of capital measuring the reporting units’ cost of debt and equity financing weighted by the percentage of debt and percentage of equity in a company’s target capital. Other estimates inherent in both the market and income approaches include long-term growth rates, projected revenues, earnings and cash flow forecasts for the reporting units. In addition, we compare the aggregate of the reporting units’ fair value to the Company’s market capitalization as a further corroboration of the fair values. The testing requires a complex series of assumptions and judgment by management in projecting future operating results, selecting guideline companies for comparisons and assessing risks. The use of alternative assumptions and estimates could affect the fair values and change the impairment determinations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Intangible Assets:
Currently all of our intangible assets are subject to amortization and are amortized based on the pattern of their economic consumption or on a straight-line basis over their estimated useful lives, ranging from
one
to
38
years. We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair market value.
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. At each balance sheet date, or earlier if an indicator of an impairment exists, we evaluate the recoverability of unamortized capitalized software costs based on estimated future undiscounted revenues net of estimated related costs over the remaining amortization period.
Capitalized Software Held for Internal Use:
We capitalize costs of software held for internal use during the application development stage of a project and amortize those costs over their estimated useful lives ranging from
one
to
ten
years. As of March 31,
2017
and
2016
, capitalized software held for internal use was
$455 million
and
$435 million
, net of accumulated amortization of
$1,177 million
and
$1,130 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:
Distribution Solutions
Revenues for our Distribution Solutions segment are recognized when persuasive evidence of an arrangement exists, product is delivered and title passes to the customer or when services have been rendered and there are no further obligations to the customer, the price is fixed or determinable, and collection of the amounts are reasonably assured.
Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarily to a limited number of large customers who warehouse their own products. We order bulk product from the manufacturer, receive and process the product primarily 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 of shipments from the manufacturer to our customers. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of loss for collection from customers as well as delivery or return of the product, are responsible for fulfillment and other customer service requirements, or the transactions have several but not all of these indicators.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy generally allows customers to return products only if they can be resold for value or returned to suppliers for credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from customers were approximately
$3.1 billion
in
2017
and
2016
and
$2.7 billion
in
2015
. We collect taxes from customers and remit to governmental authorities. We report all revenues net of taxes assessed by governmental authorities.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a combination of various products and services. Revenue from a multiple-element arrangement is allocated to the separate elements based on their relative selling price and recognized in accordance with the revenue recognition criteria applicable to each element. Relative selling price is determined based on vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”), if VSOE of selling price is not available, or estimated selling price (“ESP”), if neither VSOE of selling price nor TPE is available.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Technology Solutions
Revenues for our Technology Solutions segment are generated primarily by licensing software and software systems consisting of software, hardware and maintenance support, providing software as a service (“Saas”) or SaaS-based solutions and providing claims processing, 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 if the arrangements require significant production, modification or customization of the software. Contracts accounted for under the percentage-of-completion method are generally measured based on the ratio of labor hours incurred to date to total estimated labor hours 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.
Revenue from time-based software license agreements is recognized ratably over the term of the agreement. Software implementation fees are recognized as the work is performed or under the percentage-of-completion method. Maintenance and support agreements are marketed under annual or multi-year agreements and are recognized ratably over the period covered by the agreements. Hardware revenues are generally recognized upon delivery.
SaaS-based subscription, content and transaction processing fees are generally marketed under annual and multi-year agreements and are recognized ratably over the contracted terms beginning on the service start date for fixed fee arrangements and recognized as transactions are performed beginning on the service start date for per-transaction fee arrangements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing service revenues are recognized as the service is performed.
We also offer certain products on an application service provider basis, making our software functionality available on a remote hosting basis from our data centers. The data centers provide system and administrative support, as well as hosting services. Revenue on products sold on an application service provider basis is recognized on a monthly basis over the term of the contract beginning on the service start date of products hosted.
This segment engages in multiple-element arrangements, which may contain any combination of software, hardware, implementation, SaaS-based offerings, consulting services or maintenance services. For multiple-element arrangements that do not include software, revenue is allocated to the separate elements based on their relative selling price and recognized in accordance with the revenue recognition criteria applicable to each element. Relative selling price is determined based on VSOE of selling price if available, TPE, if VSOE of selling price is not available, or ESP if neither VSOE of selling price nor TPE is available. For multiple-element arrangements accounted for in accordance with specific software accounting guidance when some elements are delivered prior to others in an arrangement and VSOE of fair value 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 arrangement’s revenue is deferred until the delivery of the last element or until the fair value of the undelivered element is determinable. For multiple-element arrangements with both software elements and nonsoftware elements, arrangement consideration is allocated between the software elements as a whole and nonsoftware elements. The segment then further allocates consideration to the individual elements within the software group, and revenue is recognized for all elements under the applicable accounting guidance and our policies described above.
Supplier Incentives:
Fees for service and other incentives received from suppliers, relating to the purchase or distribution of inventory, are generally reported as a reduction to cost of sales. We consider these fees and other incentives to represent product discounts and as a result, the amounts are recognized within cost of sales upon the sale of the related inventory.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplier Reserves:
We establish reserves against amounts due from suppliers relating to various fees for services and price and rebate incentives, including deductions taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in factual circumstances. All adjustments to supplier reserves are included in cost of sales. The ultimate outcome of any outstanding claims may be different than our estimate. As of March 31,
2017
and
2016
supplier reserves were
$201 million
and
$144 million
. All of the supplier reserves at March 31,
2017
and
2016
pertain to our Distribution Solutions segment.
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 or the tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than
50 percent
likely of being realized upon effective settlement. Deferred taxes are not provided on undistributed earnings of our foreign operations that are considered to be permanently reinvested.
Foreign Currency Translation:
The reporting currency of the Company and its subsidiaries is the U.S. dollar. Our foreign subsidiaries generally consider their local currency to be their functional currency. Foreign currency-denominated assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at year-end exchange rates and revenues and expenses are translated at average exchange rates during the corresponding period, and stockholders’ equity accounts are primarily translated at historical exchange rates. Foreign currency translation adjustments are included in other comprehensive income or loss in the statements of consolidated comprehensive income, and the cumulative effect is included 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
2017
,
2016
or
2015
. We release cumulative translation adjustment from stockholders’ equity into net income as a gain or loss only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. We also release all or a pro rata portion of the cumulative translation adjustment into net income upon the sale of an equity method investment that is a foreign entity.
Derivative Financial Instruments:
Derivative financial instruments are used principally in the management of foreign currency exchange and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized as a charge or credit to earnings. We use foreign currency-denominated notes to hedge our net investment in our foreign subsidiaries. If the financial instrument is designated as a cash flow hedge or net investment hedge, the effective portions of changes in the fair value of the derivative are included in other comprehensive income or loss in the statements of consolidated comprehensive income, and the cumulative effect is included in the stockholders’ equity section of the consolidated balance sheets. The cumulative changes in fair value are reclassified to the consolidated statements of operations when the hedged item affects earnings. We periodically evaluate hedge effectiveness, and ineffective portions of changes in the fair value of cash flow hedges and net investment hedges are recognized as a charge or credit to earnings. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change included in earnings.
Comprehensive Income:
Comprehensive income consists of
two
components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. Our other comprehensive income primarily consists of foreign currency translation adjustments from those subsidiaries where the local currency is the functional currency, unrealized gains and losses on cash flow hedges and net investment hedges, as well as
unrealized gains and losses on retirement-related benefit plans.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Noncontrolling Interests and Redeemable Noncontrolling Interests:
Noncontrolling interests represent the portion of profit or loss, net assets and comprehensive income that is not allocable to McKesson Corporation. In 2017, 2016 and 2015, net income attributable to noncontrolling interests included guaranteed dividends or recurring compensation that McKesson is obligated to pay to the noncontrolling shareholders of Celesio AG (“Celesio”) under the profit and loss transfer agreement. In 2017, net income attributable to noncontrolling interests also included third-party equity interests in our consolidated entities including Vantage Oncology Holdings, LLC (“Vantage”) and ClarusOne Sourcing Services LLC, which was established between McKesson and Wal-Mart Stores, Inc. Noncontrolling interests with redemption features, such as put rights, that are not solely within the Company’s control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of Stockholders’ Equity on our consolidated balance sheet. Refer to Financial Note 11, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” for more information.
Share-Based Compensation:
We account for all share-based compensation transactions using a fair-value based measurement method. The share-based compensation expense, for the portion of the awards that is ultimately expected to vest, is recognized on a straight-line basis over the requisite service period. The compensation expense recognized has been classified in the consolidated statements of operations or capitalized on the consolidated balance sheets in the same manner as cash compensation paid to our employees.
Loss Contingencies:
We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.
Disclosure is also provided when it is reasonably possible that a material loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimate.
Business Combinations:
We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained,
100%
of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Recently Adopted Accounting Pronouncements
Share-Based Payments
: In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee share-based compensation arrangements are recognized within income tax expense. Under the previous guidance, windfalls were recognized in additional paid-in capital (“APIC”) and shortfalls were only recognized to the extent they exceeded the pool of windfall tax benefits. The amended guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows, rather than a financing activity. The amended guidance is effective for us commencing in the first quarter of 2018. Early adoption is permitted. We elected to early adopt this amended guidance in the first quarter of 2017. The primary impact of the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than APIC. As a result, discrete tax benefits of
$54 million
were recognized in income tax expense in 2017. We also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of 2017. None of the other provisions in this amended guidance had a material impact on our consolidated financial statements.
Business Combinations:
In the first quarter of 2017, we adopted amended guidance for an acquirer’s accounting for measurement-period adjustments. The amended guidance eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively and instead requires that measurement-period adjustments be recognized during the period in which it determines the adjustment. In addition, the amended guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Fair Value Measurement:
In the first quarter of 2017, we adopted amended fair value guidance on a retrospective basis. This amended guidance limits disclosures and removes the requirement to categorize investments within the fair value hierarchy if the fair value of the investment is measured using the net asset value (“NAV”) per share practical expedient. The amended guidance primarily affected our fiscal 2017 annual disclosures related to our pension benefits. Refer to Financial Note 19, “Pension Benefits,” for more information regarding the impact of this amended guidance on our pension benefits. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Fees Paid in a Cloud Computing Arrangement
: In the first quarter of 2017, we adopted amended guidance for a customer’s accounting for fees paid in a cloud computing arrangement. The amended guidance requires customers to determine whether or not an arrangement contains a software license element. If the arrangement contains a software element, the related fees paid should be accounted for as an acquisition of a software license. If the arrangement does not contain a software license, it is accounted for as a service contract. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Debt Issuance Costs
: In the first quarter of 2017, we adopted amended guidance for the balance sheet presentation of debt issuance costs on a retrospective basis. The amended guidance requires debt issuance costs related to a recognized debt liability to be reported on the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amended guidance. In August 2015, a clarification was added to this amended guidance that debt issuance costs related to line-of-credit arrangements can continue to be deferred and presented as an asset on the balance sheet. Upon adoption, unamortized debt issuance costs of
$40 million
were reclassified primarily from other noncurrent assets to long-term debt at March 31, 2016.
Consolidation:
In the first quarter of 2017, we adopted amended guidance for consolidating legal entities in which a reporting entity holds a variable interest. The amended guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs and changes the consolidation analysis of reporting entities that are involved with VIEs that have fee arrangements and related party relationships. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred Income Taxes
: In November 2015, amended guidance was issued for the balance sheet classification of deferred income taxes. The amended guidance requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The amended guidance would have been effective for us commencing in the first quarter of 2018, however, early adoption was permitted. We early adopted this amended guidance in the fourth quarter of 2016 on a prospective basis. As a result, we reclassified current net deferred tax liabilities of approximately
$2 billion
on our consolidated balance sheet as of March 31, 2016. The adoption of this guidance had no impact on our consolidated statements of earnings, comprehensive income or cash flows. This amended guidance only resulted in a change in presentation of our deferred income taxes on our consolidated balance sheet as of March 31, 2016.
Discontinued Operations:
In the first quarter of 2016, we adopted amended guidance for reporting of discontinued operations and disclosures of disposals of components. The amended guidance revises the criteria for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Refer to Financial Note 7, “Divestiture of Businesses,” for more information regarding the impact of this amended guidance on our consolidated financial statements.
Cumulative Translation Adjustment:
In the first quarter of 2015, we adopted amended guidance for a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The amended guidance requires the release of any cumulative translation adjustment into net income only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. Also, it requires the release of all or a pro rata portion of the cumulative translation adjustment to net income in the case of sale of an equity method investment that is a foreign entity. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Share-Based Payments:
In May 2017, amended guidance was issued for employee share-based payment awards. This amendment provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the amended guidance, we are required to account for the effects of a modification if the fair value, the vesting conditions or the classification (as an equity instrument or a liability instrument) of the modified award change from that of the original award immediately before the modification. The amended guidance is effective for us on a prospective basis commencing in the first quarter of 2019. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Premium Amortization of Purchased Callable Debt Securities:
In March 2017, amended guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The amended guidance requires that the premium of callable debt securities to be amortized to the earliest call date but does not require an accounting change for securities held at a discount as they would still be amortized to maturity. The amended guidance is effective for us on a modified retrospective basis commencing in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Compensation - Retirement Benefits
: In March 2017, amended guidance was issued which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the statements of operations separately from the service cost component. This amended guidance is effective for us in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Derecognition of Nonfinancial Assets:
In February 2017, amended guidance was issued that defines the term “in substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the asset that is promised is concentrated in nonfinancial assets. The scope of this amendment includes nonfinancial assets transferred within a legal entity including a parent entity’s transfer of nonfinancial assets by transferring ownership interests in consolidated subsidiaries. The amendment excludes all businesses and nonprofit activities from its scope and therefore all entities, with limited exceptions, are required to account for the derecognition of a business or nonprofit activity in accordance with the consolidation guidance once this amended guidance becomes effective. We are required to apply this amended guidance at the same time we apply the amended revenue guidance in the first quarter of 2019. It allows for either full retrospective adoption or modified retrospective adoption. Early adoption is permitted but not prior to our first quarter of 2018. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Goodwill Impairment Testing:
In January 2017, amended guidance was issued to simplify goodwill impairment testing by eliminating the second step of the impairment test as previously described. The amended guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The amended guidance is effective for us on a prospective basis commencing in the first quarter of 2021. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Business Combinations:
In January 2017, amended guidance was issued to clarify the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amended guidance provides a practical screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amended guidance requires that to be considered a business, a set must include an input and a substantive process that together significantly contribute to the ability to create output. The amended guidance is effective for us commencing in the first quarter of 2019 on a prospective basis. Early adoption is permitted in certain circumstances. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.
Restricted Cash:
In November 2016, amended guidance was issued that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash or restricted cash equivalents are not reported as cash flow activities in the statement of cash flows. The amended guidance is effective for us commencing in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Consolidation:
In October 2016, amended guidance was issued that requires a single decision maker of a VIE to consider indirect economic interests in the entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. This amendment does not change the existing characteristics of a primary beneficiary. The amended guidance becomes effective for us commencing in the first quarter of 2018 on a retrospective basis. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory:
In October 2016, amended guidance was issued to require entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amended guidance is effective for us commencing in the first quarter of 2019 on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments:
In August 2016, amended guidance was issued to provide clarification on cash flow classification related to eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees. The amended guidance is effective for us commencing in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial Instruments - Credit Losses:
In June 2016, amended guidance was issued, which will change the impairment model for most financial assets and require additional disclosures. The amended guidance requires financial assets that are measured at amortized cost, be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets. The amended guidance also requires us to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount in estimating credit losses. The amended guidance becomes effective for us commencing in 2021 and will be applied through a cumulative-effect adjustment to the beginning retained earnings in the year of adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Investments:
In March 2016, amended guidance was issued to simplify the transition to the equity method of accounting. This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings. The amended guidance is effective for us prospectively commencing in the first quarter of 2018. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Derivatives and Hedging:
In March 2016, amended guidance was issued for derivative instrument novations. The amendments clarify that a novation, a change in the counterparty, to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationships provided all other hedge accounting criteria continue to be met. The amended guidance is effective for us commencing in the first quarter of 2018. The amended guidance allows for either prospective or modified retrospective adoption. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Leases:
In February 2016, amended guidance was issued for lease arrangements. The amended standard will require lessees to recognize assets and liabilities on the balance sheet for all leases with terms longer than 12 months and provide enhanced disclosures on key information of leasing arrangements. The amended guidance is effective for us commencing in the first quarter of 2020, on a modified retrospective basis. Early adoption is permitted. We plan to adopt the new standard on the effective date and are currently evaluating the impact of this amended guidance on our consolidated financial statements. We anticipate that the adoption of the amended lease guidance will materially affect our consolidated balance sheets and will require certain changes to our systems and processes.
Financial Instruments:
In January 2016, amended guidance was issued that requires equity investments to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. This guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The investments that are accounted for under the equity method of accounting or result in consolidation of the investee are excluded from the scope of this amended guidance. The amended guidance will become effective for us commencing in the first quarter of 2019 and will be adopted through a cumulative-effect adjustment. Early adoption is not permitted except for certain provisions. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Inventory:
In July 2015, amended guidance was issued for the subsequent measurement of inventory. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The requirement would replace the current lower of cost or market evaluation. Accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail method. The amended guidance will become effective for us commencing in the first quarter of 2018. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenue Recognition:
In May 2014, amended guidance was issued for recognizing revenue from contracts with customers. The amended guidance eliminates industry specific guidance and applies to all companies. Revenues will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. The amended guidance also requires additional quantitative and qualitative disclosures. In March, April and May 2016, amended guidance was further issued including clarifying guidance on principal versus agent considerations, ability to choose an accounting policy election to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good, and provided certain scope improvements and practical expedients. The amended standard is effective for us commencing in the first quarter of 2019 and allows for either full retrospective adoption or modified retrospective adoption. Early adoption is permitted but not prior to our first quarter of 2018.
While we continue to evaluate the effect of the amended standard, we have conducted a preliminary assessment for our Distribution Solutions segment and do not expect adoption of the amended standard to have a material impact to our consolidated financial statements. We generally anticipate having substantially similar performance obligations under the amended guidance as compared with deliverables and units of account currently being recognized. We intend to make policy elections within the amended standard that are consistent with our current accounting. Our preliminary assessment does not include certain businesses for which we are exploring strategic alternatives and we continue to evaluate the potential impact of the recent acquisitions. This preliminary assessment is subject to change prior to adoption. Additionally, we anticipate adopting this amended standard on a modified retrospective basis in our first quarter of 2019.
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2.
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Healthcare Technology Net Asset Exchange
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On June 28, 2016, we entered into a contribution agreement (“Contribution Agreement”) with Change Healthcare Holdings, Inc. (“Change”), a Delaware corporation, and others including shareholders of Change to form a joint venture, Change Healthcare, LLC (“Change Healthcare”), a Delaware limited liability company. On December 21, 2016, we received notification from the Department of Justice that their review was closed and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, was terminated. On March 1, 2017, the transaction closed upon satisfaction of all other closing conditions pursuant to the Contribution Agreement. Under the terms of the Contribution Agreement, we contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare. We retained our RelayHealth Pharmacy and Enterprise Information Solutions (“EIS”) businesses. Change contributed substantially all of its businesses to the joint venture excluding its pharmacy switch and prescription routing business. In exchange for the contribution, we own
70%
of the joint venture with the remaining equity ownership held by Change shareholders. The joint venture is jointly governed by us and Change shareholders. Change Healthcare is a healthcare technology company which provides software and analytics, network solutions and technology-enabled services that will deliver wide-ranging financial, operational and clinical benefits to payers, providers and consumers.
In connection with the closing of the transaction, Change Healthcare issued long-term debt of
$6.1 billion
, which was utilized to fund cash payments for our promissory notes (as described below) and approximately
$1.75 billion
to Change stockholders, to cover transaction costs and to repay approximately
$2.8 billion
of existing Change’s debt.
McKesson and Change shareholders have agreed to take steps to launch an initial public offering of an entity which holds equity in Change Healthcare, subject to market conditions. Sometime thereafter, we expect to exit our investment in Change Healthcare through a distribution to McKesson shareholders.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Gain from Healthcare Technology
Net Asset Exchange
We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a
70%
interest in the newly formed joint venture. Accordingly, in the fourth quarter of 2017, we deconsolidated the Core MTS Business and recorded a pre-tax gain of
$3,947 million
(after-tax gain of
$3,018 million
). The pre-tax gain was calculated based on the difference between the fair value of our
70%
equity interest in the joint venture, less the carrying amount of the contributed Core MTS Business’ net assets of
$1,132 million
and
$1,258 million
of promissory notes, a
$136 million
noncurrent liability associated with a tax receivable agreement (as described below) and transaction and other related expenses. The
$1,258 million
of promissory notes were subsequently repaid in cash from proceeds of Change Healthcare’s long term debt issuance. The gain is subject to final net working capital and other adjustments within 90 days from the transaction close date, and is included under the caption “Gain from Healthcare Technology Net Asset Exchange, net” within operating expenses in our consolidated statements of operations. This transaction did not meet the criteria to be reported as a discontinued operation since it did not constitute a significant strategic business shift for the Company.
The fair value of the joint venture was determined using a combination of the income and the market valuation approaches. Under the income approach, we used a discounted cash flow model (“DCF”) in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. The discount rate used for cash flows reflects capital market conditions and the specific risks associated with the business. Under the market approach, valuation multiples of reasonably similar publicly traded companies or guideline companies are applied to the operating data of the subject business to derive the estimated fair value. These valuation approaches are considered a Level 3 fair value measurement. Fair value determination requires complex assumptions and judgment by management in projecting future operating results, selecting guideline companies for comparisons, determining appropriate market value multiples, selecting the discount rate to measure the risks inherent in the future cash flows and assessing the asset’s life cycle and the competitive trends impacting the assets, including considering technical, legal, regulatory, or economic barriers to entry. Any material changes in key assumptions, including failure to meet business plans, deterioration in the financial market, an increase in interest rate or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may affect such estimates.
Equity Method Investment in Change Healthcare
Our investment in the joint venture is accounted for using the equity method of accounting on a one-month reporting lag. We disclose intervening events at the joint venture in the lag period that could materially affect our consolidated financial statements, if applicable. In March 2017, our proportionate share of transaction expenses incurred by the joint venture is estimated to be approximately
$80 million
to
$120 million
. However, due to the timing of the transaction and the one-month reporting lag, no net income or loss from our investment was recorded in our financial results for 2017. Commencing April 1, 2017, our proportionate share of the net income or loss from the joint venture including these transaction expenses will be recorded in “Other Income, Net” in our consolidated statement of operations.
At March 31, 2017, our carrying value in our investment was
$4,063 million
, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately
$4,762 million
, primarily reflecting equity method intangible and goodwill assets and other fair value adjustments including a non-cash reduction to the carrying value of deferred revenue.
Agreements with Change Healthcare and Related Party Transactions
At the closing of the transaction, McKesson, Change Healthcare and certain Change shareholders also entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other commercial agreements.
Pursuant to the TSA, McKesson provides various transitional services to the joint venture to support certain operations including information technology, accounting and other administrative services. The total fees charged by us for such transition services were immaterial for 2017. Transition services fees are included under the caption “Selling, distribution and administrative expenses” in our consolidated statements of operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Pursuant to the Advisory Agreement, the joint venture will pay McKesson and Change shareholders an agreed upon amount for each fiscal year on a quarterly basis. Additionally, McKesson and Change are entitled to receive transaction fees equal to
1%
of the aggregate transaction value upon the consummation of any acquisition, divestiture, disposition, merger, consolidation, business combination, change of control, restructuring, reorganization or recapitalization, financing or refinancing or issuance of securities. The foregoing advisory and transaction fees are non-refundable and allocated to McKesson and Change shareholders based on their respective equity ownership percentages. In 2017, we did not earn material advisory fees and transaction fees.
Pursuant to the TRA, McKesson may be required to make certain payments or may be entitled to receive certain payments related to the cash tax savings attributable to the utilization of certain tax attributes, including certain amortizable tax basis in software contributed by McKesson to Change Healthcare. At March 31, 2017, we have recorded a
$136 million
noncurrent liability payable to Change Healthcare shareholders associated with the TRA. The amount is based on certain estimates and could become payable in periods after a disposition of our investment in Change Healthcare. No such payments were required to be made or received for 2017.
Revenues recorded and expenses incurred under commercial arrangements with Change Healthcare were not material during 2017. At March 31, 2017, receivables from and payables to the joint venture were not material.
In conjunction with Healthcare Technology Net Asset Exchange, we are evaluating strategic options for our EIS business, which is a reporting unit within our McKesson Technology Solutions segment. During the year ended March 31, 2017, we recorded a non-cash pre-tax charge of
$290 million
(
$282 million
after-tax) to impair the carrying value of this business’ goodwill. The impairment primarily resulted from a decline in estimated future cash flows.
The goodwill impairment test requires us to compare the fair value of the reporting unit to the fair value of the reporting unit's net assets, excluding goodwill but including any unrecognized intangible assets, to determine the implied fair value of goodwill. The impairment charge was then determined by comparing the carrying value of the reporting unit’s goodwill with its implied fair value. At March 31, 2017, the remaining goodwill balance for this reporting unit was
$124 million
. Refer to Financial Note 22, “Fair Value Measurements,” for more information on this nonrecurring fair value measurement.
In 2017, we completed our acquisitions of Rexall Health, a division of the Katz Group Canada Inc., Vantage, Biologics, Inc. (“Biologics”) and UDG Healthcare Plc (“UDG”), and subsequently our acquisition of CoverMyMeds, LLC (“CMM”) in April 2017, as further discussed below.
Rexall Health
On December 28, 2016, we completed our acquisition of Rexall Health which operates approximately
470
retail pharmacies in Canada, particularly in Ontario and Western Canada. The net cash purchase consideration of
$2.9 billion
Canadian dollars (or, approximately
$2.1 billion
) was funded from cash on hand. As part of the transaction, McKesson agreed to divest
26
local stores that the Competition Bureau of Canada (the “Bureau”) identified during its review of the transaction. We expect to complete the sale of these local market divestitures in the first quarter of 2018. We do not anticipate any store closures as a result of these divestitures. The acquisition of Rexall Health enhances our capability to continue to deliver a broad range of pharmaceutical care and choices to Canadian consumers. Commencing in the fourth quarter of 2017, financial results for Rexall were included in our North America pharmaceutical distribution and services business within our Distribution Solutions segment.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the preliminary recording of the fair values of the assets acquired and liabilities assumed for the acquisition as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Amounts Previously Recognized as of Acquisition Date (Provisional)
(1)
|
Measurement Period Adjustments
|
Amounts Recognized as of Acquisition Date (Provisional as Adjusted)
|
Receivables
|
$
|
114
|
|
$
|
—
|
|
$
|
114
|
|
Inventory
|
271
|
|
(36
|
)
|
235
|
|
Other current assets, net of cash and cash equivalents acquired
|
141
|
|
75
|
|
216
|
|
Goodwill
|
1,142
|
|
(185
|
)
|
957
|
|
Intangible assets
|
656
|
|
199
|
|
855
|
|
Other long-term assets
|
161
|
|
(45
|
)
|
116
|
|
Current liabilities
|
(154
|
)
|
—
|
|
(154
|
)
|
Other long-term liabilities
|
(45
|
)
|
(10
|
)
|
(55
|
)
|
Fair value of net assets, less cash and cash equivalents
|
2,286
|
|
(2
|
)
|
2,284
|
|
Less: Settlement of pre-existing payables
|
165
|
|
(2
|
)
|
163
|
|
Purchase consideration paid in cash, net of cash acquired
|
$
|
2,121
|
|
$
|
—
|
|
$
|
2,121
|
|
(1) As reported on Form 10-Q for the quarter ended December 31, 2016.
During the fourth quarter of 2017, we recorded certain measurement period adjustments to the provisional fair value of assets acquired and liabilities assumed as of the acquisition date. The amounts as of the acquisition date are provisional and subject to change within the measurement period as our fair value assessments are finalized.
Total provisional fair value of assets acquired and liabilities assumed, excluding goodwill and intangibles, were
$681 million
and
$209 million
. Approximately
$1 billion
of the adjusted preliminary purchase price allocation has been assigned to goodwill, which primarily reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. Included in the adjusted preliminary purchase price allocation are acquired identifiable intangibles of
$855 million
, net of intangibles classified as held for sale, primarily representing trade names with a weighted average life of
19
years and customer relationships with a weighted average life of
19
years. Additionally, we classified those stores that we agreed to divest under the agreement reached with the Bureau as held for sale as of the acquisition date. As a result, assets and liabilities which included “Prepaid expenses and other” and “Other accrued liabilities” in the accompanying consolidated balance sheet as of March 31, 2017 are approximately
$184 million
and
nil
.
Vantage & Biologics
On April 1, 2016, we acquired Vantage, which is headquartered in Manhattan Beach, California. Vantage provides comprehensive oncology management services, including radiation oncology, medical oncology, and other integrated cancer care services, through over
51
cancer treatment facilities in
13
states. The net purchase consideration of
$515 million
was funded from cash on hand. On April 1, 2016, we also acquired Biologics for a net purchase consideration of
$692 million
, which was funded from cash on hand. Biologics is one of the largest independent oncology-focused specialty pharmacies in the U.S., and is headquartered in Cary, North Carolina. Financial results for these acquisitions since the acquisition date are included in our consolidated statements of operations within our North America pharmaceutical distribution and services business, which is part of our Distribution Solutions segment. These acquisitions collectively enhance our specialty pharmaceutical distribution scale and oncology-focused pharmacy offerings, provide solutions for manufacturers and payers, and expand the scope of our community-based oncology and practice management services.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the final amounts of the fair values recognized for the assets acquired and liabilities assumed for these two acquisitions as of the acquisition date as well as adjustments made during the measurement period:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Amounts Previously Recognized as of Acquisition Date (Provisional)
(1)
|
|
Measurement Period Adjustments
|
|
Amounts Recognized as of Acquisition Date
|
Receivables
|
$
|
106
|
|
|
$
|
(5
|
)
|
|
$
|
101
|
|
Other current assets, net of cash and cash equivalents acquired
|
19
|
|
|
—
|
|
|
19
|
|
Goodwill
|
1,219
|
|
|
(87
|
)
|
|
1,132
|
|
Intangible assets
|
136
|
|
|
79
|
|
|
215
|
|
Other long-term assets
|
76
|
|
|
54
|
|
|
130
|
|
Current liabilities
|
(117
|
)
|
|
(15
|
)
|
|
(132
|
)
|
Other long-term liabilities
|
(80
|
)
|
|
(89
|
)
|
|
(169
|
)
|
Fair value of net assets, less cash and cash equivalents
|
1,359
|
|
|
(63
|
)
|
|
1,296
|
|
Less: Noncontrolling Interests
|
(152
|
)
|
|
63
|
|
|
(89
|
)
|
Net assets acquired, net of cash and cash equivalents
|
$
|
1,207
|
|
|
$
|
—
|
|
|
$
|
1,207
|
|
|
|
(1)
|
As reported on Form 10-Q for the quarter ended June 30, 2016.
|
At March 31, 2017, approximately
$558 million
and
$574 million
of the final purchase price allocations for Vantage and Biologics have been assigned to goodwill, which primarily reflects the expected future benefits of synergies upon integrating the businesses. Goodwill represents the excess of the purchase price and the fair value of noncontrolling interests over the fair value of the acquired net assets.
Included in the final purchase price allocation are acquired identifiable intangibles of
$22 million
and
$193 million
for Vantage and Biologics. Acquired intangibles for Vantage primarily consist of
$13 million
of non-competition agreements with a weighted average life of
4
years, and for Biologics primarily consist of
$170 million
of trade names with a weighted average life of
9
years. The final fair value of Vantage’s noncontrolling interests as of the acquisition date was approximately
$89 million
, which represents the portion of net assets of Vantage’s consolidated entities that is not allocable to McKesson.
UDG
In the first quarter of 2017, we completed our acquisition of the pharmaceutical distribution businesses of UDG based in Ireland and the United Kingdom (“U.K.”) with a net purchase consideration of
€380 million
(or, approximately
$431 million
), which was funded with cash on hand. The acquired UDG businesses primarily provide pharmaceutical and other healthcare products to retail and hospital pharmacies. The acquisition of UDG expands our offerings and strengthens our market position in Ireland and the U.K. Financial results for UDG since the acquisition date are included in our results of operations within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment.
The fair value measurements of assets acquired and liabilities assumed of UDG as of the acquisition date were finalized upon completion of the measurement period. At March 31, 2017, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were
$469 million
and
$340 million
. Included in the final purchase price allocation are acquired identifiable intangibles of
$120 million
primarily comprised of customer relationships with a weighted average life of
10
years. At March 31, 2017,
$181 million
of the final purchase price allocation has been assigned to goodwill. Goodwill reflects the expected future benefits of synergies upon integrating the businesses. The net effect of the cumulative adjustments was an increase in goodwill of approximately
$16 million
from the provisional amounts as previously reported at June 30, 2016.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
CMM
On April 3, 2017, we completed our acquisition of CMM, a privately-owned company headquartered in Columbus, Ohio. CMM provides electronic prior authorization solutions to pharmacies, providers, payers, and pharmaceutical manufacturers helping patients get their prescribed drugs more efficiently to live healthy lives. The net purchase consideration of
$1.3 billion
was paid into an escrow account prior to our fiscal year end, and is included in “Other Noncurrent Assets” within our consolidated balance sheet at March 31, 2017. The cash paid as of acquisition date was funded from cash on hand. Pursuant to the agreement, McKesson may pay up to an additional
$0.2 billion
of contingent consideration based on CMM’s financial performance through the end of 2019. Upon closing, the financial results of CMM will be included in our North America pharmaceutical and services business within our Distribution Solutions segment.
The fair value of acquired intangibles was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.
Other Acquisitions
During the last two years, we also completed a number of other acquisitions within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.
Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes.
|
|
5.
|
Discontinued Operations
|
Brazil Distribution Business
During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business, which we acquired through our February 2014 acquisition of Celesio, from our Distribution Solutions segment. Accordingly, the results of operations and cash flows of this business were classified as discontinued operations for all periods presented in our consolidated financial statements. We recorded pre-tax non-cash impairment charges of
$241 million
(
$235 million
after-tax) to reduce the carrying value of this Brazilian distribution business to its estimated fair value, less costs to sell, based on our assessment at that time.
On May 31, 2016, we completed the sale of our Brazilian pharmaceutical distribution business and recognized an after-tax loss of
$113 million
within discontinued operations in the first quarter of 2017 primarily for the settlement of certain indemnification matters as well as the release of the cumulative translation losses. We made a payment of approximately
$100 million
related to the sale of this business.
Technology Solutions Businesses
During the first quarter of 2015, we decided to retain the workforce business within our International Technology business. This business consists of workforce management solutions for the National Health Service in the United Kingdom. We reclassified the workforce business, which had been designated as a discontinued operation since the first quarter of 2014, to continuing operations in the first quarter of 2015. As a result, during the first quarter of 2015, we recorded non-cash pre-tax charges of
$34 million
(
$27 million
after-tax) primarily associated with depreciation and amortization expense for 2014 when the business was classified as held for sale. The non-cash charge was recorded in our consolidated statement of operations primarily in cost of sales.
During the second quarter of 2015, we completed the sale of a software business within our International Technology business and recorded a pre-tax and after-tax loss of
$6 million
.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
A summary of results of discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Revenues
|
$
|
—
|
|
|
$
|
1,603
|
|
|
$
|
2,196
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
$
|
(10
|
)
|
|
$
|
(24
|
)
|
|
$
|
(321
|
)
|
Loss on sale
|
(113
|
)
|
|
—
|
|
|
(6
|
)
|
Loss from discontinued operations before income tax
|
(123
|
)
|
|
(24
|
)
|
|
(327
|
)
|
Income tax (expense) benefit
|
(1
|
)
|
|
(8
|
)
|
|
28
|
|
Loss from discontinued operations, net of tax
|
$
|
(124
|
)
|
|
$
|
(32
|
)
|
|
$
|
(299
|
)
|
As of March 31, 2017 and 2016, the carrying amounts of total assets and liabilities of discontinued operations were
$24 million
and
$43 million
and
$635 million
and
$660 million
.
On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives that will be substantially implemented prior to the end of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms, as well as the disposal and abandonment of certain non-core businesses. As a result of the Cost Alignment Plan, we expect to record total pre-tax charges of approximately
$250 million
to
$270 million
, of which
$243 million
of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of exit-related costs and accelerated depreciation and amortization, which are largely attributed to our Distribution Solutions segment.
For the year ended March 31, 2017, we recorded restructuring charges of
$14 million
primarily including asset impairment and accelerated depreciation and amortization.
Restructuring charges for our Cost Alignment Plan for the year ended 2016 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Distribution Solutions
|
|
Technology Solutions
|
|
Corporate
|
|
Total
|
Severance and employee-related costs, net
(1)
|
$
|
147
|
|
|
$
|
44
|
|
|
$
|
16
|
|
|
$
|
207
|
|
Exit-related costs
|
3
|
|
|
1
|
|
|
1
|
|
|
5
|
|
Asset impairments and accelerated depreciation and amortization
(2)
|
11
|
|
|
6
|
|
|
—
|
|
|
17
|
|
Total
|
$
|
161
|
|
|
$
|
51
|
|
|
$
|
17
|
|
|
$
|
229
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
$
|
5
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
26
|
|
Operating Expenses
|
156
|
|
|
30
|
|
|
17
|
|
|
203
|
|
Total
|
$
|
161
|
|
|
$
|
51
|
|
|
$
|
17
|
|
|
$
|
229
|
|
|
|
(1)
|
Severance and employee-related costs, net, include charges of
$117 million
and $
90 million
, for a total of
$207 million
, for a reduction in workforce and business process initiatives.
|
|
|
(2)
|
Asset impairments and accelerated depreciation and amortization charges primarily include impairments for capitalized software projects and software licenses due to abandonments.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to the restructuring liabilities associated with the Cost Alignment Plan for the year ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Distribution
Solutions
|
|
Technology
Solutions
|
|
Corporate
|
|
Total
|
Balance, March 31, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net restructuring charges recognized
|
161
|
|
|
51
|
|
|
17
|
|
|
229
|
|
Non-cash charges
|
(4
|
)
|
|
(3
|
)
|
|
5
|
|
|
(2
|
)
|
Cash payments
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Other
|
—
|
|
|
(3
|
)
|
|
(1
|
)
|
|
(4
|
)
|
Balance, March 31, 2016
(1)
|
$
|
156
|
|
|
$
|
45
|
|
|
$
|
21
|
|
|
$
|
222
|
|
Net restructuring charges recognized
|
19
|
|
|
(10
|
)
|
|
5
|
|
|
14
|
|
Non-cash charges
|
(10
|
)
|
|
—
|
|
|
1
|
|
|
(9
|
)
|
Cash payments
|
(67
|
)
|
|
(20
|
)
|
|
(19
|
)
|
|
(106
|
)
|
Other
|
(8
|
)
|
|
(5
|
)
|
|
(2
|
)
|
|
(15
|
)
|
Balance, March 31, 2017
(2)
|
$
|
90
|
|
|
$
|
10
|
|
|
$
|
6
|
|
|
$
|
106
|
|
|
|
(1)
|
The reserve balance as of March 31, 2016 includes
$172 million
recorded in other accrued liabilities and
$50 million
recorded in other noncurrent liabilities in our consolidated balance sheet.
|
|
|
(2)
|
The reserve balance as of March 31, 2017 includes
$71 million
recorded in other accrued liabilities and
$35 million
recorded in other noncurrent liabilities in our consolidated balance sheet.
|
|
|
7.
|
Divestiture of Businesses
|
During the second quarter of 2016, we sold our ZEE Medical business within our Distribution Solutions segment for total proceeds of
$134 million
and recorded a pre-tax gain of
$52 million
(
$29 million
after-tax) from this sale.
During the first quarter of 2016, we also sold our nurse triage business within our Technology Solutions segment for net sale proceeds of
$84 million
and recorded a pre-tax gain of
$51 million
(
$38 million
after-tax) from the sale.
These divestitures did not meet the criteria to be reported as discontinued operations since they did not constitute a significant strategic business shift. Accordingly, pre-tax gains from both divestitures were recorded in operating expenses within continuing operations of our consolidated statements of operations. Pre- and after-tax income of these businesses were not material for the year ended March 31, 2016.
|
|
8.
|
Share-Based Compensation
|
We provide share-based compensation to our employees, officers and non-employee directors, including stock options, an employee stock purchase plan, restricted stock units (“RSUs”), performance-based restricted stock units (“PeRSUs”) and total shareholder return units (“TSRUs”) (collectively, “share-based awards”). Most of our share-based awards are granted in the first quarter of each fiscal year.
Compensation expense for the share-based awards is recognized for the portion of awards ultimately expected to vest. We estimate the number of share-based awards that will ultimately vest primarily based on historical experience. The estimated forfeiture rate established upon grant is re-assessed throughout the requisite service period and is adjusted when actual forfeitures occur. The actual forfeitures in future reporting periods could be higher or lower than current estimates.
The compensation expense recognized has been classified in the consolidated statements of operations or capitalized in the consolidated balance sheets in the same manner as cash compensation paid to our employees. There was no material share-based compensation expense capitalized as part of the cost of an asset in
2017
,
2016
and
2015
.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Restricted stock unit awards
(1)
|
$
|
79
|
|
|
$
|
88
|
|
|
$
|
137
|
|
Stock options
|
24
|
|
|
22
|
|
|
24
|
|
Employee stock purchase plan
|
12
|
|
|
13
|
|
|
13
|
|
Share-based compensation expense
(2)
|
115
|
|
|
123
|
|
|
174
|
|
Tax benefit for share-based compensation
(3)
|
(92
|
)
|
|
(41
|
)
|
|
(61
|
)
|
Share-based compensation expense, net of tax
|
$
|
23
|
|
|
$
|
82
|
|
|
$
|
113
|
|
|
|
(1)
|
Includes compensation expense recognized for RSUs, PeRSUs and TSRUs. Our TSRUs were awarded beginning in 2015.
|
|
|
(2)
|
2016 includes non-cash credits of
$14 million
representing the reversal of previously recognized share-based compensation, which was recorded due to employee terminations associated with the March 2016 restructuring plan.
|
|
|
(3)
|
Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax compensation expense is not tax-deductible. Income tax expense for 2017 included discrete income tax benefits of
$54 million
related to the early adoption of the amended accounting guidance on share-based compensation.
|
Stock Plans
In July 2013, our stockholders approved the 2013 Stock Plan to replace the 2005 Stock Plan. These stock plans provide our employees, officers and non-employee directors the opportunity to receive equity-based, long-term incentives in the form of stock options, restricted stock, RSUs, PeRSUs, TSRUs and other share-based awards. The 2013 Stock Plan reserves
30 million
shares plus the remaining number of shares reserved but unused under the 2005 Stock Plan. As of March 31,
2017
,
28 million
shares remain available for future grant under the 2013 Stock Plan.
Stock Options
Stock options are granted with an exercise price at no less than the fair market value and those options granted under the stock plans generally have a contractual term of
seven
years and follow a
four
-year vesting schedule.
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 use the Black-Scholes options-pricing model to estimate the fair value of our stock options. Once the fair value of an employee stock option is determined, current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The options-pricing model requires the use of various estimates and assumptions as follows:
|
|
•
|
Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market volatility. We believe that this market-based input provides a reasonable estimate of our future stock price movements and is consistent with employee stock option valuation considerations.
|
|
|
•
|
Expected dividend yield is based on historical experience and investors’ current expectations.
|
|
|
•
|
The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury rate in effect at the time of grant.
|
|
|
•
|
Expected life of the options is based primarily on historical employee stock option exercises and other behavior data and reflects the impact of changes in contractual life of current option grants compared to our historical grants.
|
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,
|
|
2017
|
|
2016
|
|
2015
|
Expected stock price volatility
|
21%
|
|
21%
|
|
22%
|
Expected dividend yield
|
0.7%
|
|
0.4%
|
|
0.6%
|
Risk-free interest rate
|
1.1%
|
|
1.4%
|
|
1.3%
|
Expected life (in years)
|
4
|
|
4
|
|
4
|
The following is a summary of stock options outstanding at March 31,
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Number of
Options
Outstanding
at Year End
(In millions)
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
Weighted-
Average
Exercise Price
|
|
Number of
Options
Exercisable at
Year End
(In millions)
|
|
Weighted-
Average
Exercise Price
|
$
|
67.81
|
|
–
|
$
|
153.87
|
|
|
2
|
|
2
|
|
$
|
95.74
|
|
|
2
|
|
$
|
93.13
|
|
153.88
|
|
–
|
239.93
|
|
|
2
|
|
5
|
|
196.35
|
|
|
—
|
|
196.78
|
|
|
|
|
|
4
|
|
|
|
|
|
2
|
|
|
The following table summarizes stock option activity during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
(2)
|
Outstanding, March 31, 2016
|
4
|
|
$
|
118.95
|
|
|
3
|
|
$
|
201
|
|
Granted
|
1
|
|
181.76
|
|
|
|
|
|
Cancelled
|
—
|
|
192.82
|
|
|
|
|
|
Exercised
|
(1)
|
|
60.28
|
|
|
|
|
|
Outstanding, March 31, 2017
|
4
|
|
$
|
145.76
|
|
|
4
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
(1)
|
4
|
|
$
|
145.54
|
|
|
4
|
|
$
|
96
|
|
Vested and exercisable, March 31, 2017
|
2
|
|
114.00
|
|
|
2
|
|
92
|
|
|
|
(1)
|
The number of options expected to vest takes into account an estimate of expected forfeitures.
|
|
|
(2)
|
The intrinsic value is calculated as the difference between the period-end market price of the Company’s common stock and the exercise price of “in-the-money” options.
|
The following table provides data related to stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions, except per share data)
|
2017
|
|
2016
|
|
2015
|
Weighted-average grant date fair value per stock option
|
$
|
32.19
|
|
|
$
|
44.04
|
|
|
$
|
35.49
|
|
Aggregate intrinsic value on exercise
|
$
|
97
|
|
|
$
|
107
|
|
|
$
|
153
|
|
Cash received upon exercise
|
$
|
54
|
|
|
$
|
47
|
|
|
$
|
76
|
|
Tax benefits realized related to exercise
|
$
|
38
|
|
|
$
|
42
|
|
|
$
|
60
|
|
Total fair value of stock options vested
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
20
|
|
Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax
|
$
|
21
|
|
|
$
|
20
|
|
|
$
|
22
|
|
Weighted-average period in years over which stock option compensation cost is expected to be recognized
|
2
|
|
|
2
|
|
|
2
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Restricted Stock Unit Awards
RSUs, which entitle the holder to receive at the end of a vesting term a specified number of shares of the Company’s common stock, are accounted for at fair value at the date of grant. Total compensation expense for 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 Company’s common stock. The Compensation Committee determines the vesting terms at the time of grant. These awards generally vest in
three
to
four
years. We recognize expense for RSUs on a straight-line basis over the requisite service period.
Non-employee directors receive an annual grant of RSUs, which vest immediately and are expensed upon grant. The director may elect to receive the underlying shares immediately or defer receipt of the shares if they meet director stock ownership guidelines. The shares will be automatically deferred for those directors who do not meet the director stock ownership guidelines. At March 31,
2017
, approximately
109,000
RSUs for our directors are vested.
PeRSUs are RSUs for which the number of RSUs awarded is conditional upon the attainment of one or more performance objectives over a specified period. Each year, the Compensation Committee approves the target number of PeRSUs representing the base number of awards that could be granted if performance goals are attained. PeRSUs are accounted for as variable awards until the performance goals are reached at which time the grant date is established. Total compensation expense for 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 Company’s common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PeRSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted and classified as RSUs and accounted for on that basis. We recognize compensation expense for these awards on a straight-line basis over the requisite aggregate service period of generally
four
years.
TSRUs replaced PeRSUs for our executive officers beginning in 2015. The number of vested TSRUs is assessed at the end of a
three
-year performance period and is conditioned upon attainment of a total shareholder return metric relative to a peer group of companies. We use the Monte Carlo simulation model to measure the fair value of TSRUs. TSRUs have a requisite service period of approximately
three
years. Expense is attributed to the requisite service period on a straight-line basis based on the fair value of the TSRUs. For TSRUs that are designated as equity awards, the fair value is measured at the grant date. For TSRUs that are eligible for cash settlement and designated as liability awards, we re-measure the fair value at the end of each reporting period and also adjust a corresponding liability on our balance sheet for changes in fair value.
The weighted-average assumptions used to estimate the fair value of TSRUs are as follows:
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2017
|
|
2016
|
|
2015
|
Expected stock price volatility
|
23%
|
|
18%
|
|
21%
|
Expected dividend yield
|
0.7%
|
|
0.4%
|
|
0.5%
|
Risk-free interest rate
|
1.1%
|
|
0.9%
|
|
0.7%
|
Expected life (in years)
|
3
|
|
3
|
|
3
|
The following table summarizes activity for restricted stock unit awards (RSUs, PeRSUs, and TSRUs) during
2017
:
|
|
|
|
|
|
|
(In millions, except per share data)
|
Shares
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
Nonvested, March 31, 2016
|
3
|
|
$
|
176.59
|
|
Granted
|
1
|
|
182.37
|
|
Cancelled
|
(1)
|
|
190.41
|
|
Vested
|
(1)
|
|
119.96
|
|
Nonvested, March 31, 2017
|
2
|
|
$
|
188.54
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table provides data related to restricted stock unit award activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Total fair value of shares vested
|
$
|
109
|
|
|
$
|
104
|
|
|
$
|
126
|
|
Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax
|
$
|
99
|
|
|
$
|
144
|
|
|
$
|
206
|
|
Weighted-average period in years over which restricted stock unit award cost is expected to be recognized
|
2
|
|
|
2
|
|
|
2
|
|
Employee Stock Purchase Plan (“ESPP”)
The Company has an ESPP under which
21 million
shares have been authorized for issuance. The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions. The deductions occur over
three
-month purchase periods and the shares are then purchased at
85%
of the market price at the end of each purchase period. Employees are allowed to terminate their participation in the ESPP at any time during the purchase period prior to the purchase of the shares. The
15%
discount provided to employees on these shares is included in compensation expense. The shares related to funds outstanding at the end of a quarter are included in the calculation of diluted weighted average shares outstanding. These amounts have not been significant. Shares issued under the ESPP were not material in
2017
,
2016
, and 2015. At
March 31, 2017
,
4 million
shares remain available for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
2016
|
2015
|
Interest income
|
$
|
29
|
|
|
$
|
18
|
|
|
$
|
20
|
|
Equity in earnings, net
(1)
|
30
|
|
|
15
|
|
|
12
|
|
Other, net
(1)
|
31
|
|
|
25
|
|
|
31
|
|
Total
|
$
|
90
|
|
|
$
|
58
|
|
|
$
|
63
|
|
|
|
(1)
|
Primarily recorded within our Distribution Solutions segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Income from continuing operations before income taxes
|
|
|
|
|
|
U.S.
|
$
|
5,772
|
|
|
$
|
2,319
|
|
|
$
|
1,893
|
|
Foreign
|
1,119
|
|
|
931
|
|
|
764
|
|
Total income from continuing operations before income taxes
|
$
|
6,891
|
|
|
$
|
3,250
|
|
|
$
|
2,657
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Income tax expense related to continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
Federal
|
$
|
524
|
|
|
$
|
658
|
|
|
$
|
453
|
|
State
|
86
|
|
|
96
|
|
|
90
|
|
Foreign
|
122
|
|
|
90
|
|
|
101
|
|
Total current
|
732
|
|
|
844
|
|
|
644
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
767
|
|
|
95
|
|
|
195
|
|
State
|
164
|
|
|
42
|
|
|
53
|
|
Foreign
|
(49
|
)
|
|
(73
|
)
|
|
(77
|
)
|
Total deferred
|
882
|
|
|
64
|
|
|
171
|
|
Income tax expense
|
$
|
1,614
|
|
|
$
|
908
|
|
|
$
|
815
|
|
During 2017, 2016 and 2015, income tax expense related to continuing operations was
$1,614 million
,
$908 million
and
$815 million
, which included net discrete tax benefits of
$82 million
,
$42 million
and
$33 million
. Our discrete tax benefits during 2017 include a tax benefit of
$54 million
related to the adoption of the amended accounting guidance on employee share-based compensation.
In 2016, we recognized a
$19 million
discrete tax benefit due to a reduction in our deferred tax liabilities as a result of enacted tax law changes in certain foreign jurisdictions and a
$25 million
discrete tax benefit associated with the U.S. Tax Court’s decision in Altera Corp. v. Commissioner related to the treatment of share-based compensation expense in an intercompany cost-sharing agreement. Discrete tax benefits in 2015 included a
$55 million
benefit related to an agreement reached with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to years 2003 through 2006.
Our reported income tax rates were
23.4%
,
27.9%
, and
30.7%
in 2017, 2016 and 2015. The fluctuations in our reported income tax rates are primarily due to changes within our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates, discrete items and the impact of an intercompany sale of software.
The reconciliation between our effective tax rate on income from continuing operations and statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Income tax expense at federal statutory rate
|
$
|
2,411
|
|
|
$
|
1,137
|
|
|
$
|
930
|
|
State income taxes net of federal tax benefit
|
153
|
|
|
92
|
|
|
81
|
|
Foreign income taxed at various rates
|
(326
|
)
|
|
(295
|
)
|
|
(247
|
)
|
Unrecognized tax benefits and settlements
|
57
|
|
|
(14
|
)
|
|
10
|
|
Controlled substance distribution reserve
|
—
|
|
|
—
|
|
|
58
|
|
Non-deductible goodwill impairment
|
106
|
|
|
—
|
|
|
—
|
|
Share-Based Compensation excess tax deduction
|
(54
|
)
|
|
—
|
|
|
—
|
|
Net tax benefit on intellectual property transfer
|
(137
|
)
|
|
—
|
|
|
—
|
|
Rate differential on gain from Change Healthcare Net Asset Exchange
|
(587
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
(9
|
)
|
|
(12
|
)
|
|
(17
|
)
|
Income tax expense
|
$
|
1,614
|
|
|
$
|
908
|
|
|
$
|
815
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The non-cash pre-tax charge of
$290 million
to impair the carrying value of goodwill related to our EIS business within our Technology Solutions segment, described in Financial Note 3, “Goodwill Impairment,” had an unfavorable impact on our effective tax rate in 2017 given that the majority of this charge was not deductible for tax purposes.
In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee share-based compensation arrangements are recognized within income tax expense. We elected to early adopt this amended guidance in the first quarter of 2017. The primary impact of the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than APIC. As a result, a tax benefit of
$54 million
was recognized in 2017.
On December 19, 2016, we sold various software and ancillary intellectual property relating to our Technology Solutions business between wholly owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. A McKesson entity based in the U.S. was the recipient of the software and ancillary intellectual property and is entitled to amortize the fair value of the assets for book and tax purposes. The tax benefit associated with the amortization of these assets is being recognized over the tax lives of the assets. As a result, a net tax benefit of
$137 million
was recognized prior to the contribution of a portion of these assets to Change Healthcare as described in Financial Note 2, “Healthcare Technology Net Asset Exchange”.
On March 1, 2017, we contributed assets to Change Healthcare as described in Financial Note 2, “Healthcare Technology Net Asset Exchange”. While this transaction was predominantly structured as a tax free asset contribution for U.S. federal income tax purposes under Section 721(a) of the Internal Revenue Code, we recorded tax expense of
$929 million
on the gain. The tax expense was primarily driven by the recognition of a deferred tax liability on the excess book over tax basis in our equity investment in Change Healthcare.
Deferred tax balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
Assets
|
|
|
|
Receivable allowances
|
$
|
124
|
|
|
$
|
110
|
|
Deferred revenue
|
19
|
|
|
77
|
|
Compensation and benefit related accruals
|
593
|
|
|
710
|
|
Net operating loss and credit carryforwards
|
594
|
|
|
367
|
|
Long-term contractual obligations
|
107
|
|
|
—
|
|
Other
|
222
|
|
|
275
|
|
Subtotal
|
1,659
|
|
|
1,539
|
|
Less: valuation allowance
|
(503
|
)
|
|
(267
|
)
|
Total assets
|
1,156
|
|
|
1,272
|
|
Liabilities
|
|
|
|
Inventory valuation and other assets
|
(2,818
|
)
|
|
(2,619
|
)
|
Fixed assets and systems development costs
|
(224
|
)
|
|
(326
|
)
|
Intangibles
|
(921
|
)
|
|
(981
|
)
|
Change Healthcare Equity Investment
|
(773
|
)
|
|
—
|
|
Other
|
(70
|
)
|
|
(21
|
)
|
Total liabilities
|
(4,806
|
)
|
|
(3,947
|
)
|
Net deferred tax liability
|
$
|
(3,650
|
)
|
|
$
|
(2,675
|
)
|
|
|
|
|
Long-term deferred tax asset
|
28
|
|
|
59
|
|
Long-term deferred tax liability
|
(3,678
|
)
|
|
(2,734
|
)
|
Net deferred tax liability
|
$
|
(3,650
|
)
|
|
$
|
(2,675
|
)
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We assess the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowance was approximately
$503 million
and
$267 million
in 2017 and 2016. The increase of
$236 million
in valuation allowances in the current year relate primarily to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized.
We have federal, state and foreign net operating loss carryforwards of
$126 million
,
$2,099 million
and
$1,367 million
. Federal and state net operating losses will expire at various dates from 2018 through 2038. Substantially all of our foreign net operating losses have indefinite lives. In addition, we have foreign capital loss carryforwards of
$624 million
with indefinite lives.
The following table summarizes the activity related to our gross unrecognized tax benefits for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Unrecognized tax benefits at beginning of period
|
$
|
555
|
|
|
$
|
616
|
|
|
$
|
647
|
|
Additions based on tax positions related to prior years
|
7
|
|
|
116
|
|
|
62
|
|
Reductions based on tax positions related to prior years
|
(67
|
)
|
|
(62
|
)
|
|
(18
|
)
|
Additions based on tax positions related to current year
|
105
|
|
|
28
|
|
|
27
|
|
Reductions based on settlements
|
(113
|
)
|
|
(141
|
)
|
|
(65
|
)
|
Reductions based on the lapse of the applicable statutes of limitations
|
—
|
|
|
(6
|
)
|
|
(12
|
)
|
Exchange rate fluctuations
|
(1
|
)
|
|
4
|
|
|
(25
|
)
|
Unrecognized tax benefits at end of period
|
$
|
486
|
|
|
$
|
555
|
|
|
$
|
616
|
|
As of March 31,
2017
, we had
$486 million
of unrecognized tax benefits, of which
$342 million
would reduce income tax expense and the effective tax rate, if recognized. During the next twelve months, we do not expect any material reduction in our unrecognized tax benefits. However, this may change as we continue to have ongoing negotiations with various taxing authorities throughout the year.
We report interest and penalties on income taxes as income tax expense. We recognized income tax benefit of
$6 million
in 2017, income tax expense of
$12 million
in 2016 and income tax benefit of
$24 million
in 2015, related to interest and penalties in our consolidated statements of operations. The income tax benefit for interest and penalties recognized in 2015 and 2017 was primarily due to the lapses of statutes of limitations. As of March 31,
2017
and 2016, we had accrued
$45 million
and
$77 million
cumulatively in interest and penalties on unrecognized tax benefits.
We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. During the first quarter of 2017, we reached an agreement with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to the fiscal years 2007 through 2009. This settlement did not have a material impact on our provision for income taxes. We are subject to audit by the IRS for fiscal years 2010 through the current fiscal year. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2006 through the current fiscal year.
At March 31, 2017, undistributed earnings of our foreign operations totaling
$6,877 million
were considered to be permanently reinvested. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention to utilize those earnings to support our foreign operations and acquisitions. The determination of the amount of deferred taxes on these earnings depends on judgment regarding withholding taxes, applicable tax laws and factual circumstances in effect at the time of any future distribution. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
11.
|
Redeemable Noncontrolling Interests and Noncontrolling Interests
|
Redeemable Noncontrolling Interests
In December 2014, the domination and profit and loss transfer agreement (the “Domination Agreement”) entered into between McKesson and Celesio AG (“Celesio”) became effective upon the registration in the commercial register of Celesio at the local court of Stuttgart. Upon the effectiveness of the Domination Agreement, Celesio subordinated its management to McKesson and undertook to transfer all of its annual profits to McKesson, and McKesson undertook to compensate any annual losses incurred by Celesio and to grant, subject to a potential court review, the noncontrolling shareholders of Celesio (i) an annual recurring compensation of
€0.83
per Celesio share (“Compensation Amount”), (ii) a one-time dividend for Celesio’s fiscal year ended December 31, 2014 of
€0.83
per Celesio share reduced accordingly for any dividend paid by Celesio in relation to its fiscal year ended December 31, 2014 (“Guaranteed Dividend”) and (iii) a right to put (“Put Right”) their Celesio shares at
€22.99
per share increased annually for interest in the amount of
5
percentage points above a base rate published by the German Bundesbank semiannually, less any Compensation Amount or Guaranteed Dividend already paid in respect of the relevant time period (“Put Amount”). The Domination Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.
Under the Domination Agreement, the noncontrolling shareholders of Celesio ceased to participate in their percentage ownership of Celesio’s profits and losses, but instead became entitled to receive the one-time Guaranteed Dividend in December 2014 and the Compensation Amount from January 2015. As a result, during 2017, 2016 and 2015, we recorded a total attribution of net income to the noncontrolling shareholders of Celesio of
$44 million
,
$44 million
and
$62 million
. All amounts were recorded in our consolidated statement of operations within the caption, “Net Income Attributable to Noncontrolling Interests,” and the corresponding liability balance was recorded within other accrued liabilities on our consolidated balance sheet.
Upon the effectiveness of the Domination Agreement, the noncontrolling interests in Celesio became redeemable as a result of the Put Right. Accordingly, the carrying value of noncontrolling interests related to Celesio of
$1.5 billion
was reclassified from “Total Equity” to “Redeemable Noncontrolling Interests” on our consolidated balance sheet during 2015. The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. At March 31, 2017 and 2016, the carrying value of redeemable noncontrolling interests of
$1.33 billion
and
$1.41 billion
exceeded the maximum redemption value of
$1.21 billion
and
$1.28 billion
. At March 31, 2017 and 2016, we owned approximately
76%
of Celesio’s outstanding common shares.
Appraisal Proceedings
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of Celesio initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court to challenge the adequacy of the Compensation Amount, the Guaranteed Dividend and/or the Put Amount. As long as any Appraisal Proceedings are pending, the Compensation Amount, Guaranteed Dividend and/or Put Amount will be paid as specified currently in the Domination Agreement. If any such Appraisal Proceedings result in an adjustment to the Compensation Amount, Guaranteed Dividend and/or Put Amount, Celesio Holdings would be required to make certain additional payments for any shortfall to all Celesio noncontrolling shareholders who previously received the Guaranteed Dividend, Compensation Amount and/or Put Amount. The Put Right specified in the Domination Agreement may be exercised until two months after the announcement regarding the end of the Appraisal Proceedings (“Time Limitation Period”). In addition, if the Domination Agreement is terminated after the Time Limitation Period, the Put Right may be exercised for a two-month period after the date of termination.
Noncontrolling Interests
In connection with our acquisition of Vantage on April 1, 2016 as described in Financial Note 4, “Business Combinations,” we recognized noncontrolling interests with a fair value of
$89 million
at the acquisition date. Noncontrolling interests which represent third-party equity interests in our consolidated entities, including Vantage and ClarusOne Sourcing Services LLC, were
$178 million
and
$84 million
at March 31, 2017 and 2016. During 2017, 2016 and 2015, we allocated a total of
$39 million
,
$8 million
and
$5 million
of net income to noncontrolling interests.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
12.
|
Earnings Per Common Share
|
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share are computed similar to basic earnings per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
The computations for basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions, except per share amounts)
|
2017
|
|
2016
|
|
2015
|
Income from continuing operations
|
$
|
5,277
|
|
|
$
|
2,342
|
|
|
$
|
1,842
|
|
Net income attributable to noncontrolling interests
|
(83
|
)
|
|
(52
|
)
|
|
(67
|
)
|
Income from continuing operations attributable to McKesson
|
5,194
|
|
|
2,290
|
|
|
1,775
|
|
Loss from discontinued operations, net of tax
|
(124
|
)
|
|
(32
|
)
|
|
(299
|
)
|
Net income attributable to McKesson
|
$
|
5,070
|
|
|
$
|
2,258
|
|
|
$
|
1,476
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
221
|
|
|
230
|
|
|
232
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Options to purchase common stock
|
1
|
|
|
1
|
|
|
1
|
|
Restricted stock units
|
1
|
|
|
2
|
|
|
2
|
|
Diluted
|
223
|
|
|
233
|
|
|
235
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to McKesson:
(1)
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Continuing operations
|
$
|
23.28
|
|
|
$
|
9.84
|
|
|
$
|
7.54
|
|
Discontinued operations
|
(0.55
|
)
|
|
(0.14
|
)
|
|
(1.27
|
)
|
Total
|
$
|
22.73
|
|
|
$
|
9.70
|
|
|
$
|
6.27
|
|
Basic
|
|
|
|
|
|
Continuing operations
|
$
|
23.50
|
|
|
$
|
9.96
|
|
|
$
|
7.66
|
|
Discontinued operations
|
(0.55
|
)
|
|
(0.14
|
)
|
|
(1.29
|
)
|
Total
|
$
|
22.95
|
|
|
$
|
9.82
|
|
|
$
|
6.37
|
|
|
|
(1)
|
Certain computations may reflect rounding adjustments.
|
Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately
2 million
,
2 million
and
1 million
of potentially dilutive securities were excluded from the computations of diluted net earnings per common share in
2017
,
2016
and
2015
, as they were anti-dilutive.
13.
Receivables, Net
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
Customer accounts
|
$
|
14,602
|
|
|
$
|
14,519
|
|
Other
|
3,893
|
|
|
3,711
|
|
Total
|
18,495
|
|
|
18,230
|
|
Allowances
|
(280
|
)
|
|
(250
|
)
|
Net
|
$
|
18,215
|
|
|
$
|
17,980
|
|
Other receivables primarily include amounts due from suppliers and customer unbilled receivables. The allowances are primarily for estimated uncollectible accounts.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
14. Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
Land
|
$
|
166
|
|
|
$
|
228
|
|
Building, machinery, equipment and other
(1)
|
3,637
|
|
|
3,556
|
|
Total property, plant and equipment
|
3,803
|
|
|
3,784
|
|
Accumulated depreciation
|
(1,511
|
)
|
|
(1,506
|
)
|
Property, plant and equipment, net
|
$
|
2,292
|
|
|
$
|
2,278
|
|
|
|
(1)
|
During the fourth quarter of 2017, we completed a sale-leaseback transaction for our corporate headquarters building in San Francisco, California. Refer to Financial Note 28, "Sale-Leaseback" for more information.
|
|
|
15.
|
Goodwill and Intangible Assets, Net
|
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Distribution
Solutions
|
|
Technology
Solutions
|
|
Total
|
Balance, March 31, 2015
|
$
|
7,994
|
|
|
$
|
1,823
|
|
|
$
|
9,817
|
|
Goodwill acquired
|
21
|
|
|
—
|
|
|
21
|
|
Acquisition accounting, transfers and other adjustments
|
8
|
|
|
—
|
|
|
8
|
|
Goodwill disposed
|
(59
|
)
|
|
(27
|
)
|
|
(86
|
)
|
Foreign currency translation adjustments, net
|
23
|
|
|
3
|
|
|
26
|
|
Balance, March 31, 2016
|
$
|
7,987
|
|
|
$
|
1,799
|
|
|
$
|
9,786
|
|
Goodwill acquired
|
2,836
|
|
|
22
|
|
|
2,858
|
|
Acquisition accounting, transfers and other adjustments
|
(146
|
)
|
|
1
|
|
|
(145
|
)
|
Impairment
|
—
|
|
|
(290
|
)
|
|
(290
|
)
|
Amount reclassified to assets held for sale
|
(165
|
)
|
|
—
|
|
|
(165
|
)
|
Goodwill disposed
(1)
|
(30
|
)
|
|
(1,078
|
)
|
|
(1,108
|
)
|
Foreign currency translation adjustments, net
|
(350
|
)
|
|
—
|
|
|
(350
|
)
|
Balance, March 31, 2017
|
$
|
10,132
|
|
|
$
|
454
|
|
|
$
|
10,586
|
|
|
|
(1)
|
2017 Technology Solutions segment amount represents goodwill disposal associated with Healthcare Technology Net Asset Exchange transaction. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for more information.
|
As of March 31,
2017
and 2016, the accumulated goodwill impairment losses were
$290 million
and
$36 million
primarily in our Technology Solutions segment. Refer to Financial Note 3, “Goodwill Impairment,” for more information on the impairment charge recorded in 2017.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
(Dollars in millions)
|
Weighted
Average
Remaining
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
11
|
|
$
|
2,893
|
|
|
$
|
(1,295
|
)
|
|
$
|
1,598
|
|
|
$
|
2,652
|
|
|
$
|
(1,324
|
)
|
|
$
|
1,328
|
|
Service agreements
|
13
|
|
1,009
|
|
|
(316
|
)
|
|
693
|
|
|
959
|
|
|
(269
|
)
|
|
690
|
|
Pharmacy licenses
|
25
|
|
741
|
|
|
(150
|
)
|
|
591
|
|
|
857
|
|
|
(121
|
)
|
|
736
|
|
Trademarks and trade names
|
15
|
|
845
|
|
|
(124
|
)
|
|
721
|
|
|
314
|
|
|
(96
|
)
|
|
218
|
|
Technology
|
4
|
|
69
|
|
|
(64
|
)
|
|
5
|
|
|
195
|
|
|
(182
|
)
|
|
13
|
|
Other
|
5
|
|
201
|
|
|
(144
|
)
|
|
57
|
|
|
163
|
|
|
(127
|
)
|
|
36
|
|
Total
|
|
|
$
|
5,758
|
|
|
$
|
(2,093
|
)
|
|
$
|
3,665
|
|
|
$
|
5,140
|
|
|
$
|
(2,119
|
)
|
|
$
|
3,021
|
|
Amortization expense of intangible assets was
$444 million
,
$431 million
and
$494 million
for
2017
,
2016
and
2015
. Estimated annual amortization expense of intangible assets is as follows:
$385 million
,
$370 million
,
$355 million
,
$341 million
and
$309 million
for
2018
through
2022
, and
$1,905 million
thereafter. All intangible assets were subject to amortization as of March 31,
2017
and
2016
.
|
|
16.
|
Capitalized Software Held for Sale, Net
|
Changes in the carrying amount of capitalized software held for sale, net, which is included in other assets in the consolidated balance sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Balance, at beginning of period
|
$
|
78
|
|
|
$
|
91
|
|
|
$
|
103
|
|
Amounts capitalized
|
16
|
|
|
30
|
|
|
34
|
|
Amortization expense
|
(21
|
)
|
|
(37
|
)
|
|
(40
|
)
|
Disposal
(1)
|
(45
|
)
|
|
(5
|
)
|
|
—
|
|
Foreign currency translations adjustments, net
|
—
|
|
|
(1
|
)
|
|
(6
|
)
|
Balance, at end of period
|
$
|
28
|
|
|
$
|
78
|
|
|
$
|
91
|
|
|
|
(1)
|
2017 disposal primarily includes
$45 million
of capitalized software contributed to Change Healthcare in connection with Healthcare Technology Net Asset Exchange transaction. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for more information.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
17.
|
Debt and
Financing Activities
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
U.S. Dollar notes
(1) (3)
|
|
|
|
5.70% Notes due March 1, 2017
|
—
|
|
|
500
|
|
1.29% Notes Due March 10, 2017
|
—
|
|
|
700
|
|
1.40% Notes due March 15, 2018
|
500
|
|
|
500
|
|
7.50% Notes due February 15, 2019
|
350
|
|
|
350
|
|
2.28% Notes due March 15, 2019
|
1,100
|
|
|
1,100
|
|
4.75% Notes due March 1, 2021
|
599
|
|
|
599
|
|
2.70% Notes due December 15, 2022
|
400
|
|
|
400
|
|
2.85% Notes due March 15, 2023
|
400
|
|
|
400
|
|
3.80% Notes due March 15, 2024
|
1,100
|
|
|
1,100
|
|
7.65% Debentures due March 1, 2027
|
175
|
|
|
175
|
|
6.00% Notes due March 1, 2041
|
493
|
|
|
493
|
|
4.88% Notes due March 15, 2044
|
800
|
|
|
800
|
|
Foreign currency notes
(2) (3)
|
|
|
|
4.00% Euro Bonds due October 18, 2016
|
—
|
|
|
403
|
|
4.50% Euro Bonds due April 26, 2017
|
533
|
|
|
583
|
|
0.63% Euro Notes due August 17, 2021
|
638
|
|
|
—
|
|
1.50% Euro Notes due November 17, 2025
|
635
|
|
|
—
|
|
3.13% Sterling Notes due February 17, 2029
|
564
|
|
|
—
|
|
|
|
|
|
Lease and other obligations
|
75
|
|
|
4
|
|
Total debt
|
8,362
|
|
|
8,107
|
|
Less: Current portion
|
1,057
|
|
|
1,610
|
|
Total long-term debt
|
$
|
7,305
|
|
|
$
|
6,497
|
|
|
|
(1)
|
Interest on these notes is payable semiannually each year.
|
|
|
(2)
|
Interest on these foreign bonds and notes is payable annually each year.
|
|
|
(3)
|
These notes are unsecured and unsubordinated obligations of the Company.
|
Long-Term Debt
Our long-term debt includes both U.S. dollar and foreign currency denominated borrowings. At March 31, 2017 and March 31, 2016,
$8,362 million
and
$8,107 million
of total debt were outstanding, of which
$1,057 million
and
$1,610 million
were included under the caption “Current portion of long-term debt” within our consolidated balance sheets.
On February 17, 2017, we completed a public offering of
0.63%
Euro-denominated notes due August 17, 2021 (the “2021 Euro Notes”) in an aggregate principal amount of
€600 million
,
1.50%
Euro-denominated notes due November 17, 2025 (the “2025 Euro Notes”) in an aggregate principal amount of
€600 million
and
3.13%
British pound sterling-denominated notes due February 17, 2029 (the “2029 Sterling Notes”) in an aggregate principal amount of
£450 million
. Interest on the 2021 Euro Notes is payable on August 17
th
of each year, commencing on August 17, 2017. Interest on the 2025 Euro Notes is payable on November 17
th
of each year, commencing on November 17, 2017. Interest on the 2029 Sterling Notes is payable on February 17
th
of each year, commencing on February 17, 2018. We utilized the net proceeds from these notes of
$1.8 billion
, net of discounts and offering expenses for general corporate purposes including repayments of long-term debt.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Each note, which constitutes a “Series”, is an unsecured and unsubordinated obligation of the Company and ranks equally with all of the Company’s existing and, from time-to-time, future unsecured and unsubordinated indebtedness outstanding. Each Series is governed by materially similar indentures and officers’ certificates. Upon at least
15 days
notice to holders of a Series, we may redeem that Series at any time prior to maturity, in whole or in part, for cash at redemption prices that may include a make-whole premium plus accrued and unpaid interest, as specified in the indenture and officers’ certificate relating to that Series. In the event of the occurrence of both (1) a change of control of the Company and (2) a downgrade of a Series below an investment grade rating by each of Fitch Ratings, Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, an offer must be made to purchase that Series from the holders at a price equal to
101%
of the then outstanding principal amount of that Series, plus accrued and unpaid interest to, but not including, the date of repurchase. The indenture and the related officers’ certificate for each Series, subject to the exceptions and in compliance with the conditions as applicable, specify that we may not consolidate, merge or sell all or substantially all of our assets, incur liens, or enter into sale-leaseback transactions exceeding specific terms, without lenders’ consent. The indentures also contain customary events of default provisions.
In 2017, we repaid at maturity our
€350 million
Euro-denominated bond (or, approximately
$385 million
) due October 18, 2016, our
$500 million
5.70%
notes due March 1, 2017 and our
$700 million
1.29%
due March 10, 2017. In 2016, we repaid at maturity our
$400 million
floating rate notes due September 10, 2015, our
$500 million
0.95%
notes due December 4, 2015, our
$600 million
3.25%
notes due March 1, 2016 and a term loan balance of
$93 million
.
Other Information
Scheduled payments of long-term debt are
$1,057 million
in
2018
, of which
€500 million
Euro-denominated bond (or, approximately
$545 million
) due April 26, 2017 was repaid at maturity,
$1,503 million
in
2019
,
$11 million
in
2020
,
$605 million
in
2021
,
$641 million
in
2022
and
$4,545 million
thereafter.
Revolving Credit Facilities
During the third quarter of 2016, we entered into a syndicated
$3.5 billion
senior unsecured revolving credit facility (the “Global Facility”), which has a
$3.15 billion
aggregate sublimit of availability in Canadian dollars, British pound sterling and Euros. The Global Facility matures on October 22, 2020. Borrowings under the Global Facility bear interest based upon the London Interbank Offered Rate, Canadian Dealer Offered Rate, a prime rate, or alternative overnight rates as applicable, and agreed margins. The Global Facility contains a financial covenant which obligates the Company to maintain a debt to capital ratio of no greater than
65%
and other customary investment grade covenants. If we do not comply with these covenants, our ability to use the Global Facility may be suspended and repayment of any outstanding balances under the Global Facility may be required. At March 31, 2017, we were in compliance with all covenants. There were
no
borrowings outstanding under this facility as of March 31, 2017 and 2016. As of March 31, 2017 and 2016, the amount available under the Global Facility was
$3.5 billion
.
We also maintain bilateral credit lines primarily denominated in Euros with a total committed and uncommitted balance of
$229 million
as of March 31, 2017. Borrowings and repayments were not material in 2017. During 2016 and 2015, we borrowed
$641 million
and
$225 million
and repaid
$635 million
and
$267 million
under these credit lines primarily related to short‑term borrowings. These credit lines have interest rates ranging from
0.2%
to
6%
. As of March 31, 2017, there was
nil
borrowings outstanding under these credit lines.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Accounts Receivable Facilities
Following the execution of the Global Facility, we also terminated an accounts receivable sales facility (the “AR Facility”) with a committed balance of
$1.35 billion
during the third quarter of 2016. There were
no
borrowings under the AR Facility during 2016 and 2015. The AR Facility contained requirements relating to the performance of the accounts receivable and covenants relating to the Company. If we did not comply with these covenants, our ability to use the AR Facility would have been suspended and repayment of any outstanding balances under the AR Facility would have been required. At March 31, 2016, we were in compliance with all covenants.
We also had accounts receivable factoring facilities (the “Factoring Facilities”) denominated in foreign currencies. Transactions under these facilities are accounted for as secured borrowings and have interest rates ranging from
0.85%
to
1.26%
. During 2017, 2016 and 2015 we borrowed
$7 million
,
$919 million
and
$2,875 million
and repaid
$13 million
,
$1,055 million
and
$2,908 million
in short-term borrowings under these facilities. At March 31, 2017 and 2016, there were
nil
and
$7 million
in secured borrowings outstanding under these facilities. All of the Factoring Facilities expired by April 2016.
Commercial Paper
We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, the Company can issue up to
$3.5 billion
in outstanding notes. As of March 31, 2017, we had
$183 million
commercial paper notes outstanding with the weighted average interest rate of
1.20%
. There were
no
borrowings outstanding under the commercial paper program as of March 31, 2016.
|
|
18.
|
Variable Interest Entities
|
We evaluate our ownership, contractual and other interests in entities to determine if they are variable interest entities (“VIEs”), if we have a variable interest in those entities and the nature and extent of those interests. These evaluations are highly complex and involve judgment and the use of estimates and assumptions based on available historical information and management’s judgment, among other factors. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs, we consolidate such entities into our financial statements.
Consolidated Variable Interest Entities
We consolidate VIEs when we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE and, as a result, are considered the primary beneficiary of the VIE. We consolidate certain single-lessee leasing entities where we, as the lessee, have the majority risk of the leased assets due to our minimum lease payment obligations to these leasing entities. As a result of absorbing this risk, the leases provide us with the power to direct the operations of the leased properties and the obligation to absorb losses or the right to receive benefits of the entity. Consolidated VIEs do not have material impact on our consolidated statements of operations and cash flows. Total assets and liabilities included in our consolidated balance sheet for these VIEs were
$821 million
and
$149 million
at March 31, 2017 and
$119 million
and
$44 million
at March 31, 2016.
Investments in Unconsolidated Variable Interest Entities
We are involved with VIEs which we do not consolidate because we do not have the power to direct the activities that most significantly impact their economic performance and thus are not considered the primary beneficiary of the entities. Our relationships include equity investments and lending, leasing, contractual or other relationships with the VIEs. Our most significant relationships are with oncology and other specialty practices. Under these practice arrangements, we generally own or lease all of the real estate and equipment used by the affiliated practices and manage the practices’ administrative functions. We also have relationships with certain pharmacies in Europe with whom we may provide financing, have equity ownership and/or a supply agreement whereby we supply the vast majority of the pharmacies’ purchases. Our maximum exposure to loss (regardless of probability) as a result of all unconsolidated VIEs was
$1.1 billion
at March 31,
2017
and
2016
, which primarily represents the value of intangible assets related to service agreements, equity investments and lease and loan receivables. This amount excludes the customer loan guarantees discussed in Financial Note 24, “Financial Guarantees and Warranties.” We believe there is no material loss exposure on these assets or from these relationships.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We maintain a number of qualified and nonqualified defined benefit pension plans and defined contribution plans for eligible employees.
Defined Benefit Pension Plans
Eligible U.S. employees who were employed by the Company as of December 31, 1995 are covered under the Company-sponsored defined benefit retirement plan. In 1997, the plan was amended to freeze all plan benefits as of December 31, 1996. Benefits for the defined benefit retirement plan are based primarily on age of employees at date of retirement, years of creditable service and the average of the highest
60 months
of pay during the
15 years
prior to the plan freeze date. We also have defined benefit pension plans for eligible employees outside of the U.S., as well as an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives.
Our non-U.S. defined benefit pension plans cover eligible employees located predominantly in Norway, United Kingdom, Germany, and Canada. Benefits for these plans are based primarily on each employee’s final salary, with annual adjustments for inflation. The obligations in Norway are largely related to the state-regulated pension plan which is managed by the Norwegian Public Service Pension Fund (“SPK”). According to the terms of the SPK, the plan assets of state regulated plans in Norway must correspond very closely to the pension obligation calculated using the principles codified in Norwegian law. The shortfall may not exceed
1%
of the obligation. If the shortfall exceeds this threshold, it must be remedied within
two
years. In the United Kingdom, we have subsidiaries that participate in a joint pension plan. This plan is largely funded by contractual trust arrangements that hold Company assets that may only be used to pay pension obligations. The Trustee Board decides on the minimum contribution to the plan in association with selected employees of the entity. A valuation is performed at regular intervals in order to determine the amount of the contribution and to ensure that the minimum contribution is made. The pension obligation in Germany is unfunded with the exception of the contractual trust arrangement used to fund pensions of Celesio’s Management Board.
Defined benefit plan assets and obligations are measured as of the Company’s fiscal year-end.
The net periodic expense for our pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Service cost - benefits earned during the year
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
15
|
|
|
$
|
20
|
|
|
$
|
16
|
|
Interest cost on projected benefit obligation
|
13
|
|
|
18
|
|
|
19
|
|
|
23
|
|
|
24
|
|
|
34
|
|
Expected return on assets
|
(15
|
)
|
|
(19
|
)
|
|
(21
|
)
|
|
(26
|
)
|
|
(30
|
)
|
|
(30
|
)
|
Amortization of unrecognized actuarial loss and prior service costs
|
11
|
|
|
42
|
|
|
19
|
|
|
4
|
|
|
3
|
|
|
3
|
|
Curtailment/settlement loss (gain)
|
—
|
|
|
2
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
6
|
|
Net periodic pension expense
|
$
|
14
|
|
|
$
|
47
|
|
|
$
|
18
|
|
|
$
|
14
|
|
|
$
|
17
|
|
|
$
|
29
|
|
The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for the pension plans. Unrecognized actuarial losses exceeding
10%
of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations and plan assets for our pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in benefit obligations
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
(1)
|
$
|
535
|
|
|
$
|
583
|
|
|
$
|
899
|
|
|
$
|
963
|
|
Service cost
|
5
|
|
|
4
|
|
|
15
|
|
|
20
|
|
Interest cost
|
13
|
|
|
18
|
|
|
23
|
|
|
24
|
|
Actuarial loss (gain)
|
(11
|
)
|
|
(13
|
)
|
|
98
|
|
|
(64
|
)
|
Benefits paid
|
(26
|
)
|
|
(54
|
)
|
|
(34
|
)
|
|
(35
|
)
|
Expenses paid
|
(3
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
—
|
|
Amendments
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Acquisitions
|
—
|
|
|
—
|
|
|
37
|
|
|
—
|
|
Foreign exchange impact and other
|
—
|
|
|
—
|
|
|
(94
|
)
|
|
(7
|
)
|
Benefit obligation at end of period
(1)
|
$
|
513
|
|
|
$
|
535
|
|
|
$
|
943
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
262
|
|
|
$
|
298
|
|
|
$
|
607
|
|
|
$
|
612
|
|
Actual return on plan assets
|
22
|
|
|
(3
|
)
|
|
76
|
|
|
2
|
|
Employer and participant contributions
|
38
|
|
|
24
|
|
|
16
|
|
|
44
|
|
Benefits paid
|
(26
|
)
|
|
(54
|
)
|
|
(34
|
)
|
|
(35
|
)
|
Expenses paid
|
(3
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
—
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
Foreign exchange impact and other
|
—
|
|
|
—
|
|
|
(76
|
)
|
|
(16
|
)
|
Fair value of plan assets at end of period
|
$
|
293
|
|
|
$
|
262
|
|
|
$
|
623
|
|
|
$
|
607
|
|
|
|
|
|
|
|
|
|
Funded status at end of period
|
$
|
(220
|
)
|
|
$
|
(273
|
)
|
|
$
|
(320
|
)
|
|
$
|
(292
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized on the balance sheet
|
|
|
|
|
|
|
|
Assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
21
|
|
Current liabilities
|
(17
|
)
|
|
(2
|
)
|
|
(7
|
)
|
|
(11
|
)
|
Long-term liabilities
|
(203
|
)
|
|
(271
|
)
|
|
(317
|
)
|
|
(302
|
)
|
Total
|
$
|
(220
|
)
|
|
$
|
(273
|
)
|
|
$
|
(320
|
)
|
|
$
|
(292
|
)
|
|
|
(1)
|
The benefit obligation is the projected benefit obligation.
|
The following table provides the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all our pension plans with an accumulated benefit obligation in excess of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31,
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Projected benefit obligation
|
$
|
513
|
|
|
$
|
535
|
|
|
$
|
943
|
|
|
$
|
899
|
|
Accumulated benefit obligation
|
513
|
|
|
535
|
|
|
902
|
|
|
855
|
|
Fair value of plan assets
|
293
|
|
|
262
|
|
|
623
|
|
|
607
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amounts recognized in accumulated other comprehensive income (pre-tax) consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31,
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net actuarial loss
|
$
|
157
|
|
|
$
|
185
|
|
|
$
|
160
|
|
|
$
|
133
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(11
|
)
|
Total
|
$
|
157
|
|
|
$
|
185
|
|
|
$
|
157
|
|
|
$
|
122
|
|
Other changes in accumulated other comprehensive income (pre-tax) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Net actuarial loss (gain)
|
$
|
(17
|
)
|
|
$
|
9
|
|
|
$
|
58
|
|
|
$
|
47
|
|
|
$
|
(38
|
)
|
|
$
|
117
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(8
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
(11
|
)
|
|
(44
|
)
|
|
(27
|
)
|
|
(4
|
)
|
|
(5
|
)
|
|
(5
|
)
|
Prior service credit (cost)
|
—
|
|
|
—
|
|
|
8
|
|
|
2
|
|
|
2
|
|
|
2
|
|
Foreign exchange impact and other
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(1
|
)
|
|
(8
|
)
|
Total recognized in other comprehensive loss (income)
|
$
|
(28
|
)
|
|
$
|
(35
|
)
|
|
$
|
39
|
|
|
$
|
35
|
|
|
$
|
(47
|
)
|
|
$
|
98
|
|
We expect to amortize
$11 million
of actuarial loss for the pension plans from stockholders’ equity to pension expense in
2018
. The comparable
2017
amount was
$15 million
of actuarial loss.
Projected benefit obligations related to our unfunded U.S. plans were
$176 million
and
$175 million
at March 31,
2017
and
2016
. Pension obligations for our unfunded plans are based on the recommendations of independent actuaries. Projected benefit obligations relating to our unfunded non-U.S. plans were
$276 million
and
$272 million
at March 31, 2017 and 2016. Funding obligations for our non-U.S. plans vary based on the laws of each non-U.S. jurisdiction.
Expected benefit payments, including assumed executive lump sum payments, for our pension plans are as follows:
$73 million
,
$206 million
,
$61 million
,
$62 million
and
$64 million
for
2018
to
2022
and
$307 million
for
2023
through
2027
. 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
$30 million
for
2018
.
Weighted-average assumptions used to estimate the net periodic pension expense and the actuarial present value of benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Net periodic pension expense
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates
|
3.40
|
%
|
|
3.36
|
%
|
|
3.74
|
%
|
|
2.72
|
%
|
|
2.36
|
%
|
|
3.85
|
%
|
Rate of increase in compensation
|
4.00
|
|
|
4.00
|
|
|
4.00
|
|
|
2.76
|
|
|
2.80
|
|
|
3.11
|
|
Expected long-term rate of return on plan assets
|
6.25
|
|
|
6.75
|
|
|
7.25
|
|
|
4.51
|
|
|
4.87
|
|
|
5.39
|
|
Benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates
|
3.39
|
%
|
|
3.27
|
%
|
|
3.18
|
%
|
|
2.35
|
%
|
|
2.84
|
%
|
|
2.50
|
%
|
Rate of increase in compensation
|
4.00
|
|
|
4.00
|
|
|
4.00
|
|
|
3.18
|
|
|
2.98
|
|
|
3.24
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Our defined benefit pension plan liabilities are valued using a discount rate based on a yield curve developed from a portfolio of high quality corporate bonds rated AA or better whose maturities are aligned with the expected benefit payments of our plans. For March 31,
2017
, our U.S. defined benefit liabilities are valued using a weighted average discount rate of
3.39%
, which represents an increase of
12
basis points from our
2016
weighted-average discount rate of
3.27%
. Our non-U.S defined benefit pension plan liabilities are valued using a weighted-average discount rate of
2.35%
, which represents a decrease of
49
basis points from our
2016
weighted-average discount rate of
2.84%
.
Plan Assets
Investment Strategy
: The overall objective for U. S. pension plan assets is to generate long-term investment returns consistent with capital preservation and prudent investment practices, with a diversification of asset types and investment strategies. Periodic adjustments are made to provide liquidity for benefit payments and to rebalance plan assets to their target allocations.
The target allocations for U.S. plan assets at March 31,
2017
and 2016 are
50%
equity investments,
45%
fixed income investments including cash and cash equivalents and
5%
real estate. Equity investments include common stock, preferred stock, and equity commingled funds. Fixed income investments include corporate bonds, government securities, mortgage-backed securities, asset-backed securities, other directly held fixed income investments, and fixed income commingled funds. The real estate investment is in a commingled real estate fund.
For both U.S. and non-U.S. plan assets, the investment strategies are subject to local regulations and the asset/liability profiles of the plans in each individual country. Plan assets of the non-U.S. plans are broadly invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the plans. Plan assets are primarily invested in high-quality corporate and government bond funds and equity securities. Assets are properly diversified to avoid excessive reliance on any particular asset, issuer or group of undertakings so as to avoid accumulations of risk in the portfolio as a whole.
We develop the expected long-term rate of return assumption based on the projected performance of the asset classes in which plan assets are invested. The target asset allocation was determined based on the liability and risk tolerance characteristics of the plans and at times may be adjusted to achieve overall investment objectives.
Fair Value Measurements:
The following tables represent our pension plan assets as of March 31,
2017
and
2016
, using the fair value hierarchy by asset class. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on unadjusted quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31, 2017
|
|
March 31, 2017
|
(In millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity commingled funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
40
|
|
|
—
|
|
|
53
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
—
|
|
|
27
|
|
|
—
|
|
|
27
|
|
|
24
|
|
|
68
|
|
|
—
|
|
|
92
|
|
Corporate bonds
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
69
|
|
|
120
|
|
|
10
|
|
|
199
|
|
Mortgage-backed securities
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Asset-backed securities and other
|
—
|
|
|
19
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income commingled funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
29
|
|
|
—
|
|
|
49
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
6
|
|
|
8
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
25
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
93
|
|
|
$
|
130
|
|
|
$
|
257
|
|
|
$
|
16
|
|
|
$
|
403
|
|
Assets held at NAV practical expedient
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity commingled funds
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
94
|
|
Fixed income commingled funds
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
53
|
|
Real estate funds
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
13
|
|
Other
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
60
|
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
$
|
623
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31, 2016
|
|
March 31, 2016
|
(In millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity commingled funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
59
|
|
|
—
|
|
|
65
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
22
|
|
|
68
|
|
|
—
|
|
|
90
|
|
Corporate bonds
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
1
|
|
|
14
|
|
|
—
|
|
|
15
|
|
Mortgage-backed securities
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Asset-backed securities and other
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income commingled funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
64
|
|
|
—
|
|
|
131
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
95
|
|
|
—
|
|
|
116
|
|
Total
|
$
|
20
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
121
|
|
|
$
|
300
|
|
|
$
|
8
|
|
|
$
|
429
|
|
Assets held at NAV practical expedient
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity commingled funds
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
91
|
|
Fixed income commingled funds
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
56
|
|
Real estate funds
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
16
|
|
Other
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
15
|
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
$
|
607
|
|
|
|
(1)
|
Equity commingled funds, fixed income commingled funds, real estate funds and other investments for which fair value is measured using the NAV per share as a practical expedient are not leveled within the fair value hierarchy and are included as a reconciling item to total investments.
|
Cash and cash equivalents - Cash and cash equivalents include short-term investment funds that maintain daily liquidity and aim to have constant unit values of
$1.00
. The funds invest in short-term fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and high credit quality. Directly held cash and cash equivalents are classified as Level 1 investments. Cash and cash equivalents include money market funds and other commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 1 investments.
Common and preferred stock - This investment class consists of common and preferred shares issued by U.S. and non-U.S. corporations. Common shares are traded actively on exchanges and price quotes are readily available. Preferred shares may not be actively traded. Holdings of common shares are generally classified as Level 1 investments.
Equity commingled funds - Some equity investments are held in commingled funds, which have daily net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 1 or Level 2 investments.
Fixed income securities - Government securities consist of bonds and debentures issued by central governments or federal agencies; corporate bonds consist of bonds and debentures issued by corporations; mortgage-backed securities consist of debt obligations secured by a mortgage or pool of mortgages; and asset-backed securities primarily consist of debt obligations secured by an asset or pool of assets other than mortgages. Inputs to the valuation methodology include quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Multiple prices and price types are obtained from pricing vendors whenever possible, enabling cross-provider price validations. Fixed income securities are generally classified as Level 1 or Level 2 investments.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fixed income commingled funds - Some fixed income investments are held in exchange traded or commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 1 or 2 investments.
Real estate funds - The value of the real estate funds is reported by the fund manager and is based on a valuation of the underlying properties. Inputs used in the valuation include items such as cost, discounted future cash flows, independent appraisals and market based comparable data. The real estate funds are classified as Level 1, 2, or 3 investments.
Other - At
March 31, 2017
and
2016
, this includes
$37 million
and
$40 million
of plan asset value relating to the SPK. In principle, the SPK is organized as a pay-as-you-go system guaranteed by the Norwegian government as it holds no Company-owned assets to back the pension liabilities. The Company pays a pension premium used to fund the plan, which is paid directly to the Norwegian government who establishes an account for each participating employer to keep track of the financial status of the plan, including managing the contributions and the payments. Further, the investment return credited to this account is determined annually by the SPK based on the performance of long-term government bonds.
The activity attributable to Level 3 plan assets was insignificant in the years ended March 31, 2017 and 2016.
Multiemployer Plans
The Company contributes to a number of multiemployer pension plans under the terms of collective-bargaining agreements that cover union-represented employees in the U.S. In 2017, we also contributed to the Pensjonsordningen for Apoteketaten (“POA”), a mandatory multiemployer pension scheme for our pharmacy employees in Norway, managed by the association of Norwegian Pharmacies.
The risks of participating in these multiemployer plans are different from single-employer pension plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Actions taken by other participating employers may lead to adverse changes in the financial condition of a multiemployer benefit plan and our withdrawal liability and contributions may increase.
Contributions and amounts accrued for U.S. Plans were not material for the years ended March 31, 2017, 2016, and 2015. Contributions to the POA for non-U.S. Plans exceeding
5%
of total plan contributions were
$18 million
,
$23 million
and
$24 million
in 2017, 2016 and 2015. Based on actuarial calculations, we estimate the funded status for our non-U.S. Plans to be approximately
75%
as of
March 31, 2017
.
No
amounts were accrued for liability associated with the POA as we have no intention to withdraw from the plan.
Defined Contribution Plans
We have a contributory profit sharing investment plan (“PSIP”) for U.S. eligible employees. Eligible employees may contribute to the PSIP up to
75%
of their eligible compensation on a pre-tax or post-tax basis not to exceed IRS limits. The Company makes matching contributions in an amount equal to
100%
of the employee’s first
3%
of pay contributed and
50%
for the next
2%
of pay contributed. The Company also may make an additional annual matching contribution for each plan year to enable participants to receive a full match based on their annual contribution. The Company also contributed to non-U.S. plans that are available in certain countries. Contribution expenses for the PSIP and non-U.S. plans were
$98 million
,
$99 million
and
$103 million
for the years ended March 31,
2017
,
2016
, and
2015
.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
20.
|
Postretirement Benefits
|
We maintain a number of postretirement benefits, primarily consisting of healthcare and life insurance (“welfare”) benefits, for certain eligible U.S. employees. Eligible employees consist of those who retired before March 31, 1999 and those who retired after March 31, 1999, but were an active employee as of that date, after meeting other age-related criteria. We also provide postretirement benefits for certain U.S. executives. Defined benefit plan obligations are measured as of the Company’s fiscal year-end.
The net periodic expense for our postretirement welfare benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Service cost - benefits earned during the year
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost on accumulated benefit obligation
|
2
|
|
|
4
|
|
|
5
|
|
Amortization of unrecognized actuarial gain and prior service credit
|
(1
|
)
|
|
—
|
|
|
(4
|
)
|
Net periodic postretirement expense
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
2
|
|
Information regarding the changes in benefit obligations for our postretirement welfare plans is as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
Benefit obligation at beginning of period
|
$
|
98
|
|
|
$
|
118
|
|
Service cost
|
1
|
|
|
1
|
|
Interest cost
|
2
|
|
|
4
|
|
Plan amendments
|
—
|
|
|
(16
|
)
|
Actuarial (gain) / loss
|
(13
|
)
|
|
3
|
|
Benefit payments
|
(6
|
)
|
|
(11
|
)
|
Curtailment gain
|
—
|
|
|
(1
|
)
|
Benefit obligation at end of period
|
$
|
82
|
|
|
$
|
98
|
|
The components of the amount recognized in accumulated other comprehensive income for the Company’s other postretirement benefits at March 31,
2017
and
2016
were net actuarial gains of
$11 million
and net actuarial losses of
$4 million
and net prior service credits of
$14 million
and
$16 million
. Other changes in benefit obligations recognized in other comprehensive income were net actuarial gains of
$14 million
in
2017
and net actuarial losses of
$3 million
in
2016
and net prior service credits of
$3 million
and
$16 million
in 2017 and
2016
.
We estimate that the amortization of the actuarial income from stockholders’ equity to other postretirement gain in
2018
will be
$4 million
. Comparable
2017
amount was an expense of
$1 million
.
Other postretirement benefits are funded as claims are paid. Expected benefit payments for our postretirement welfare benefit plans are as follows:
$8 million
,
$7 million
,
$7 million
,
$7 million
and
$7 million
for
2018
to
2022
and
$30 million
cumulatively for
2023
through
2027
. 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
$8 million
for
2018
.
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were
3.68%
,
3.59%
and
4.07%
for
2017
,
2016
and
2015
. Weighted-average discount rates for the actuarial present value of benefit obligations were
3.82%
,
3.68%
and
3.61%
for
2017
,
2016
and
2015
.
Actuarial gain or loss for the postretirement welfare benefit plan is amortized to income or expense over a
three
-year period. The assumed healthcare cost trends used in measuring the accumulated postretirement benefit obligation were
3.00%
and
6.50%
for prescription drugs,
3.00
/
3.00%
and
7.00
/
6.50%
for ages pre-
65
/post-
65
medical and
3.00%
and
5.00%
for dental in
2017
and
2016
. For
2017
,
2016
and
2015
, a one-percentage-point increase or decrease in the assumed healthcare cost trend rate would not have a material impact on the postretirement benefit obligations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Pursuant to various collective bargaining agreements, we contribute to multiemployer health and welfare plans that cover union-represented employees. Our liability is limited to the contractual dollar obligations set forth by the collective bargaining agreements. Contributions to the plans and amounts accrued were not material for the years ended March 31,
2017
,
2016
, and
2015
.
In the normal course of business, we are exposed to interest rate and foreign exchange rate fluctuations. At times, we limit these risks through the use of derivatives such as interest rate swaps, cross currency swaps and foreign currency forward contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.
Foreign currency exchange risk
We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We have certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross currency swaps. These forward contracts and cross currency swaps are generally used to offset the potential income statement effects from intercompany loans denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign exchange rate risk.
At March 31, 2017, we had
€1.2 billion
Euro-denominated notes and
£450 million
British pound sterling-denominated notes which hedge portions of our net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar (“Net Investment Hedges”). For all notes that are designated as net investment hedges and meet effectiveness requirements, the changes in carrying value of the notes attributable to the change in spot rates are recorded in Accumulated Other Comprehensive Income in the statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments. We did not have any foreign denominated notes designated as a net investment hedge as of March 31, 2016. To the extent foreign currency denominated notes designated as net investment hedges are ineffective, changes in value are recorded in earnings. Losses from net investment hedges recorded in other comprehensive income were
$13 million
for the year ended March 31, 2017. We did not have any ineffective portion of the net investment hedge as of March 31, 2017.
Derivatives Designated as Hedges
At
March 31, 2017
and
2016
, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional amounts of
$243 million
and
$323 million
, which were designated as cash flow hedges. These contracts will mature between
March 2018
and
March 2020
.
From time to time, we enter into cross currency swaps to hedge intercompany loans denominated in non-functional currencies. For our cross currency swap transactions, we agree with another party to exchange, at specified intervals, one currency for another currency at a fixed exchange rate, generally set at inception, calculated by reference to agreed upon notional amounts. These cross currency swaps are designed to reduce the income statement effects arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges.
At March 31, 2017 and March 31, 2016, we had cross currency swaps with total gross notional amounts of approximately
$2,663 million
and
$546 million
, which are designated as cash flow hedges. These swaps will mature between February 2018 and January 2024.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
For forward contracts and cross currency swaps that are designated as cash flow hedges, the effective portion of changes in the fair value of the hedges is recorded into Accumulated Other Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings. Gains or losses on these hedges recorded in other comprehensive income and earnings were not material in 2017, 2016 and 2015.
Derivatives Not Designated as Hedges
At March 31, 2017, we had a forward contract to primarily hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional amounts of
$173 million
. This contract matured in April 2017 and was not designated for hedge accounting. Gains or losses from this contract were not material for the year ended March 31, 2017.
We also have a number of forward contracts to hedge the Euro against cash flows denominated primarily in British pound sterling and other European currencies. At
March 31, 2017
and
2016
, the total gross notional amounts of these contracts were
$62 million
and
$876 million
.
These contracts will mature through
December 2017
and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not designated as hedges are recorded directly into earnings and accordingly, net gains of
$5 million
and
$60 million
in 2017 and 2016, and net losses of
$189 million
in 2015, were recorded within operating expenses. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.
Information regarding the fair value of derivatives on a gross basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Caption
|
March 31, 2017
|
|
March 31, 2016
|
|
Fair Value of
Derivative
|
U.S. Dollar Notional
|
|
Fair Value of
Derivative
|
U.S. Dollar Notional
|
(In millions)
|
Asset
|
Liability
|
|
Asset
|
Liability
|
Derivatives designated for hedge accounting
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts (current)
|
Prepaid expenses and other
|
$
|
17
|
|
$
|
—
|
|
$
|
81
|
|
|
$
|
16
|
|
$
|
—
|
|
$
|
80
|
|
Foreign exchange
contracts (non-current)
|
Other Noncurrent Assets
|
32
|
|
—
|
|
162
|
|
|
46
|
|
—
|
|
243
|
|
Cross currency
swaps (current)
|
Prepaid expenses and other
|
17
|
|
—
|
|
174
|
|
|
—
|
|
—
|
|
—
|
|
Cross currency
swaps (non-current)
|
Other Noncurrent Assets/Liabilities
|
90
|
|
—
|
|
2,489
|
|
|
—
|
|
8
|
|
546
|
|
Total
|
|
$
|
156
|
|
$
|
—
|
|
|
|
$
|
62
|
|
$
|
8
|
|
|
Derivatives not designated for hedge accounting
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts (current)
|
Prepaid expenses and other
|
$
|
1
|
|
$
|
—
|
|
$
|
198
|
|
|
$
|
23
|
|
$
|
—
|
|
$
|
680
|
|
Foreign exchange
contracts (current)
|
Other accrued liabilities
|
—
|
|
—
|
|
37
|
|
|
—
|
|
—
|
|
196
|
|
Total
|
|
$
|
1
|
|
$
|
—
|
|
|
|
$
|
23
|
|
$
|
—
|
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Refer to Financial Note 22, “Fair Value Measurements,” for more information on these recurring fair value measurements.
|
|
22.
|
Fair Value Measurements
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2 - Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Valuations based on inputs that are both significant to the fair value measurement and unobservable.
At March 31,
2017
and
2016
, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.
The fair value of our commercial paper was determined using quoted prices in active markets for identical liabilities, which are considered to be Level 1 inputs.
Our long-term debt is carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were
$8.4 billion
and
$8.7 billion
at March 31,
2017
and
$8.1 billion
and
$8.6 billion
at March 31,
2016
. The estimated fair value of our long-term debt was determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.
Assets Measured at Fair Value on a Recurring Basis
Our financial assets measured at fair value on a recurring basis primarily represent money market funds with the amounts of
$478 million
and
$2,413 million
at March 31, 2017 and 2016. The fair value of the money market funds was determined by using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature. Fair values for our marketable securities were not material at
March 31, 2017
and
2016
.
Fair values of our forward foreign currency contracts were determined using observable inputs from available market information. Fair values of our cross currency swaps were determined using quoted foreign currency exchange rates and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note 21, “Hedging Activities,” for fair value and other information on our foreign currency derivatives including forward foreign currency contracts and cross currency swaps.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended March 31,
2017
and
2016
.
Assets Measured at Fair Value on a Nonrecurring Basis
We measure certain long-lived assets and goodwill at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. If the cost of an investment exceeds its fair value, we evaluate, among other factors, our intent to hold the investment, general market conditions, the duration and extent to which the fair value is less than cost and the financial outlook for the industry and location. An impairment charge is recorded when the cost of the asset exceeds its fair value and this condition is determined to be other-than-temporary.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
At March 31, 2017, assets measured at fair value on a nonrecurring basis primarily consisted of our equity method investment in Change Healthcare (Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,”) and goodwill for a reporting unit within our Technology Solutions segment, as further discussed below. There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2017.
There were no assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2016.
Goodwill
As discussed in Financial Note 3, "Goodwill Impairment," in 2017, we recorded a non-cash pre-tax charge of
$290 million
(
$282 million
after-tax) to impair the carrying value of goodwill related to our EIS business, which is a reporting unit within our Technology Solutions segment. The impairment primarily resulted from a decline in estimated cash flows. The goodwill impairment test requires us to compare the fair value of the reporting unit to the fair value of the reporting unit's net assets, excluding goodwill but including any unrecognized intangible assets, to determine the implied fair value of goodwill. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess.
Fair value assessment of the reporting unit and the reporting unit's net assets are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. We considered the market approach as well as income approach using a discount cash flow (“DCF”) model to determine the fair value of the reporting unit. The DCF method was used to determine the fair value of intangible assets.
We lease facilities and equipment almost solely under operating leases. At March 31,
2017
, future minimum lease payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year for years ending March 31 are:
|
|
|
|
|
(In millions)
|
Noncancelable
Operating
Leases
|
2018
|
$
|
477
|
|
2019
|
414
|
|
2020
|
315
|
|
2021
|
264
|
|
2022
|
231
|
|
Thereafter
|
932
|
|
Total minimum lease payments
(1)
|
$
|
2,633
|
|
|
|
(1)
|
Amount includes future minimum lease payments for the sale-leaseback transaction of
$45 million
. Minimum lease payments have not been reduced by minimum sublease rentals of
$51
million due under future noncancelable subleases.
|
Rental expense under operating leases was
$474 million
,
$433 million
and
$440 million
in
2017
,
2016
and
2015
. We recognize rent expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the lease. Deferred rent is recognized for the difference between the rent expense recognized on a straight-line basis and the payments made per the terms of the lease. Remaining terms for facilities leases generally range from
one
to
fourteen
years, while remaining terms for equipment leases range from
one
to
eight
years. Most real property leases contain renewal options (generally for
five
-year increments) and provisions requiring us to pay property taxes and operating expenses in excess of base period amounts. Sublease rental income was not material for
2017
,
2016
and
2015
.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
24.
|
Financial Guarantees and Warranties
|
Financial Guarantees
We have agreements with certain of our customers’ financial institutions, mainly in Canada and Europe, under which we have guaranteed the repurchase of our customers’ inventory or our customers’ debt in the event these customers are unable to meet their obligations to those financial institutions. For our inventory repurchase agreements, among other requirements, inventories must be in resalable condition and any repurchase would be at a discount. The inventory repurchase agreements mostly relate to certain Canadian customers and generally range from
one
to
two
years. Customers’ debt guarantees range from
one
to
twelve
years and are primarily provided to facilitate financing for certain customers. The majority of our customers’ debt guarantees are secured by certain assets of the customer. At March 31,
2017
, the maximum amounts of inventory repurchase guarantees and customers’ debt guarantees were
$226 million
and
$98 million
, of which we have not accrued any material amounts. The expirations of these financial guarantees are as follows:
$190 million
,
$14 million
,
$10 million
,
$7 million
and
$11 million
from
2018
through
2022
and
$92 million
thereafter.
At March 31,
2017
, our banks and insurance companies have issued
$255 million
of standby letters of credit and surety bonds, which were issued on our behalf mostly related to our customer contracts and in order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations and our workers’ compensation and automotive liability programs.
Our software license agreements generally include certain provisions for indemnifying customers against liabilities if our software products infringe a third party’s 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 material payments as a result of these indemnification provisions.
Warranties
In the normal course of business, we provide certain warranties and indemnification protection for our products and services. For example, we provide warranties that the pharmaceutical and medical-surgical products we distribute are in compliance with the U.S. 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 products we sell. Our liability under these warranties is to bring the product into compliance with previously agreed upon specifications. For software products, this may result in additional project costs, which are reflected in our estimates used for the percentage-of-completion method of accounting for software installation services within these contracts. In addition, most of our customers who purchase our software and automation products also purchase annual maintenance agreements. Revenues from these maintenance agreements are recognized on a straight-line basis over the contract period and the cost of servicing product warranties is charged to expense when claims become estimable. Accrued warranty costs were not material to the consolidated balance sheets.
|
|
25.
|
Commitments and Contingent Liabilities
|
In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, including claims with customers and vendors, 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. As described below, many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.
Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.
We are party to the legal proceedings described below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.
I. Litigation and Claims
On September 7, 2007, McKesson Specialty Arizona Inc. was served with a complaint filed in the New York Supreme Court, New York County by PSKW, LLC, alleging that McKesson Specialty Arizona misappropriated trade secrets and confidential information in launching its LoyaltyScript® program,
PSKW, LLC v. McKesson Specialty Arizona Inc., Index No. 602921/07
. PSKW later amended its complaint twice to add additional, but related claims. On March 9, 2017, the court entered judgment after trial in McKesson Specialty Arizona’s favor on all claims. On April 6, 2017, PSKW filed a notice of appeal.
On April 16, 2013, the Company’s wholly-owned subsidiary, U.S. Oncology, Inc. (“USON”), was served with a third amended
qui tam
complaint filed in the United States District Court for the Eastern District of New York by
two
relators, purportedly on behalf of the United States,
21
states and the District of Columbia, against USON and
five
other defendants, alleging that USON solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts,
United States ex rel. Piacentile v. Amgen Inc., et al.
, CV 04-3983 (SJ). Previously, the United States declined to intervene in the case as to all allegations and defendants except for Amgen. On February 5, 2013, the United States filed a motion to dismiss the claims pled against Amgen. On September 30, 2013, the court granted the United States’ motion to dismiss. On April 4, 2014, USON filed a motion to dismiss the claims pled against it. The court has not yet ruled on USON’s motion.
On May 17, 2013, the Company was served with a complaint filed in the United States District Court for the Northern District of California by True Health Chiropractic Inc., alleging that McKesson sent unsolicited marketing faxes in violation of the Telephone Consumer Protection Act of 1991 (“TCPA”), as amended by the Junk Fax Protection Act of 2005 or JFPA,
True Health Chiropractic Inc., et al. v. McKesson Corporation, et al.,
CV-13-02219 (HG). True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. On August 22, 2016, the court denied plaintiffs’ motion for class certification. On November 18, 2016, plaintiffs were granted leave to appeal that ruling to the United States Court of Appeals for the Ninth Circuit. Separately, in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), certain third parties challenged the Federal Communications Commission’s (“FCC”) authority to require opt-out language on solicited faxes. Simultaneously, other third parties challenged the FCC’s authority to grant waivers, like those granted to the Company, of opt-out language requirements on solicited faxes. On March 31, 2017, the D.C. Circuit vacated the FCC order requiring opt-out language on solicited faxes and dismissed as moot the challenge relating to waivers.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 21, 2014, four hedge funds managed by Magnetar Capital filed a complaint against Celesio Holdings (formerly known as “Dragonfly GmbH & Co KGaA”), a wholly-owned subsidiary of the Company, in a German court in Frankfurt, Germany, alleging that Celesio Holdings violated German takeover law in connection with the Company’s acquisition of Celesio by paying more to some holders of Celesio’s convertible bonds than it paid to the shareholders of Celesio’s stock,
Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA, No. 3- 05 O 44/14
. On December 5, 2014, the court dismissed Magnetar’s lawsuit. Magnetar subsequently appealed that ruling. On January 19, 2016, the Appellate Court reversed the lower court’s ruling and entered judgment against Celesio Holdings. On February 22, 2016, Celesio Holdings filed a notice of appeal. Written statements have been submitted to the court. A hearing has not yet been set.
On June 17, 2014, U.S. Oncology Specialty, LP (“USOS”) was served with a fifth amended
qui tam
complaint filed in July 2008 in the United States District Court for the Eastern District of New York by a relator against USOS, among others, alleging that USOS solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts,
United States ex rel. Hanks v. Amgen, Inc., et al.
, CV-08-03096 (SJ). Previously, the United States declined to intervene in the case as to all allegations and defendants except for Amgen. On August 1, 2014, USOS filed a motion to dismiss the claims pled against it and the hearing occurred on October 7, 2014. The court has not yet ruled on USOS’s motion.
On January 28, 2016, the Company was served with a
qui tam
complaint, filed in the United States District Court, for the Southern District of Texas by a relator, purportedly on behalf of the United States, 29 states and the District of Columbia, against the Company and two other defendants, alleging that the defendants reported materially inaccurate data to manufacturers, which caused manufacturers to submit inaccurate Average Manufacturer Prices (“AMPs”) to the Centers for Medicare and Medicaid Services from January 1, 2004 to the present, in violation of the False Claims Act and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees, interest and costs of suit,
United States ex rel. Green v. AmerisourceBergen, et al.
, 4:15-CV-00379. The United States declined to intervene in the case as to all allegations and defendants. On April 18, 2016, the Company, along with the other defendants, filed a joint motion to dismiss the claims pled against them. On March 31, 2017, the court granted defendants’ joint motion to dismiss the lawsuit in its entirety without leave to amend.
On January 26, 2016, the Company was served with an amended complaint filed in the Circuit Court of Boone County, West Virginia, by the State of West Virginia, including the Attorney General of West Virginia, alleging that since 2007, the Company has oversupplied controlled substances to West Virginia and failed to report suspicious orders of controlled substances in violation of the West Virginia Controlled Substances Act, the West Virginia Consumer and Protection Act, as well as common law claims for negligence, public nuisance and unjust enrichment, and seeking injunctive relief, monetary damages and civil penalties, all in unspecified amounts.
State of West Virginia ex rel. Morrisey v. McKesson Corporation
, Civil Action No.: 16-C-1. Following removal to the United States District Court for the Southern District of West Virginia (Civil Action No.: 2:16-cv-01772), the court remanded the matter to state court in January 2017 without ruling on the pending motion for judgment on the pleadings.
Since December 27, 2016, the Company has been served with nine complaints filed in state and federal courts in West Virginia against the Company and other defendants, alleging substantially similar claims to the West Virginia Attorney General action, including negligence, violation of the West Virginia Controlled Substances Act, and unjust enrichment, and seeking injunctive relief and compensatory and punitive damages, all in unspecified amounts. These lawsuits are
McDowell County v. McKesson Corporation, et al.,
McDowell County, West Virginia Circuit Court, Civil Action No.: 16-C-137M, removed to the United States District Court for the Southern District of West Virginia, Civil Action No.:1:17-cv-00946;
The City of Huntington v. Amerisourcebergen Drug Corporation, et al.,
Cabell County, West Virginia Circuit Court, Civil Action No. 17-C-38, removed to the United States District Court for the Southern District of West Virginia, Civil Action 3:17-1362;
Kanawha County Commission v. Rite Aid of Maryland, Inc., et al.
, United States District Court for the Southern District of West Virginia, Action No. 2:17-cv-01666;
Cabell County Commission v. Amerisourcebergen Drug Corporation, et al.,
United States District Court for the Southern District of West Virginia, Civil Action No. 3:17-cv-01665;
Fayette County Commission v. Cardinal Health, Inc., et al.,
United States District Court for the Southern District of West Virginia, Civil Action No. 2:17-cv-01957;
Wayne County Commission v. Rite Aid of Maryland, Inc., et al.,
United States District Court for the Southern District of West Virginia, Civil Action No. 3:17-cv-01962;
Boone County Commission v. Amerisourcebergen Drug Corporation, et al.,
United States District Court for the Southern District of West Virginia, Civil Action No. 2:17-cv-02028;
Wyoming County Commission v. Amerisourcebergen Drug Corporation, et al.,
United States District Court for the Southern District of West Virginia, Civil Action No. 5:17-cv-02311; and
Logan County Commission v. Cardinal Health, Inc., et al.,
United States District Court for the Southern District of West Virginia, Civil Action No. 2:17-cv-02296. McKesson filed motions to dismiss in all cases in which responses were due.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 2, 2017, the Company was served with a complaint filed in the District Court of the Cherokee Nation by the Cherokee Nation against the Company and five other defendants, alleging that the defendants oversupplied controlled substances to the Cherokee Nation in violation of the Cherokee National Unfair and Deceptive Practices Act, as well as common law claims for nuisance, negligence, unjust enrichment and civil conspiracy, and seeking injunctive relief, civil penalties, compensatory damages, restitution, punitive damages, and attorneys’ fees and costs, all in unspecified amounts,
Cherokee Nation v. AmerisourceBergen, et al
., CV-2017-203. The Company has not yet responded to the complaint.
On January 31, 2017, Steve Silverman, a purported shareholder, filed a shareholder derivative complaint in the United States District Court for the Northern District of California against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties and unjust enrichment relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts,
Silverman v. McKesson Corporation, et al.,
No. 3:17-cv-00494. On April 3, 2017, the Company filed a motion to dismiss.
On April 3, 2017, Eli Inzlicht, a purported shareholder, filed a shareholder derivative complaint in the United States District Court for the Northern District of California against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts,
Inzlicht v. McKesson Corporation, et.al.,
No. 5:17-cv-01850.
II. Government Subpoenas and Investigations
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 time and effort and can result in considerable costs being incurred by the Company. For example, in May 2017, the Company was served with a Civil Investigative Demand by the U.S. Attorney’s Office for the Eastern District of New York relating to the certification it obtained for a software product under the U.S. Department of Health and Human Services’ Electronic Health Record Incentive Program. The Company is currently responding to this request. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the health care industry, as well as to settlements.
In 2015, the Company recorded a pre-tax charge of
$150 million
relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances. In January 2017, the Company finalized the settlements and paid
$150 million
in cash.
III. Environmental Matters
Primarily as a result of the operation of the Company’s former chemical businesses, which were fully divested by 1987, the Company is involved in various matters pursuant to environmental laws and regulations. The Company has received claims and demands from governmental agencies relating to investigative and remedial actions purportedly required to address environmental conditions alleged to exist at
five
sites where it, or entities acquired by it, formerly conducted operations and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation.
Based on a determination by the Company’s environmental staff, in consultation with outside environmental specialists and counsel, the current estimate of the Company’s probable loss associated with the remediation costs for these
five
sites is
$10.4 million
, net of amounts anticipated from third parties. The
$10.4 million
is expected to be paid out between
April 2017
and
March 2047
. The Company’s estimated probable loss for these environmental matters has been entirely accrued for in the accompanying consolidated balance sheets.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In addition, the Company has been designated as a Potentially Responsible Party (“PRP”) under the Superfund law for environmental assessment and cleanup costs as the result of its alleged disposal of hazardous substances at
13
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. At one of these sites, the United States Environmental Protection Agency has selected a preferred remedy with an estimated cost of approximately
$1.38 billion
. It is not certain at this point in time what proportion of this estimated liability will be borne by the Company or by the numerous other PRPs. Accordingly, the Company’s estimated probable loss at those
13
sites is approximately
$24.3 million
, which has been entirely accrued for in the accompanying consolidated balance sheets. However, it is possible that the ultimate costs of these matters may exceed or be less than the reserves.
IV. Value Added Tax Assessments
We operate in various countries outside the United States which collect value added taxes (“VAT”). The determination of the manner in which a VAT applies to our foreign operations is subject to varying interpretations arising from the complex nature of the tax laws. We have received assessments for VAT which are in various stages of appeal. We disagree with these assessments and believe that we have strong legal arguments to defend our tax positions. Certain VAT assessments relate to years covered by an indemnification agreement. Due to the complex nature of the tax laws, it is not possible to estimate the outcome of these matters. However, based on the currently available information, we believe the ultimate outcome of these matters will not have a material adverse effect on our financial position, cash flows or results of operations.
V. Other Matters
The Company is involved in various other litigation, governmental proceedings and claims, not described above, that arise in the normal course of business. While it is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, the Company believes, based on current knowledge and the advice of counsel, that such litigation, proceedings and claims will not have a material impact on the Company’s financial position or results of operations.
Each share of the Company’s outstanding common stock is permitted
one
vote on proposals presented to stockholders and is entitled to share equally in any dividends declared by the Company’s Board of Directors (the “Board”).
In July 2015, the quarterly dividend was raised from
$0.24
to
$0.28
per common share for dividends declared after such date, until further action by the Board. Dividends were
$1.12
per share in
2017
,
$1.08
per share in
2016
and
$0.96
per share in
2015
. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors.
Share Repurchase Plans
Stock repurchases may be made from time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the share repurchase activity over the last three years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
(1)
|
(In millions, except price per share data)
|
|
Total
Number of
Shares
Purchased
(2) (3)
|
|
Average Price
Paid Per Share
|
|
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs
|
Balance, March 31, 2014
|
|
|
|
|
|
$
|
340
|
|
Shares repurchased
|
|
1.5
|
|
$
|
226.55
|
|
|
(340
|
)
|
Balance, March 31, 2015
|
|
|
|
|
|
$
|
—
|
|
Shares repurchase plans authorized
|
|
|
|
|
|
|
May 2015
|
|
|
|
|
|
500
|
|
October 2015
|
|
|
|
|
|
2,000
|
|
Shares repurchased
|
|
8.7
|
|
$
|
173.64
|
|
|
(1,504
|
)
|
Balance, March 31, 2016
|
|
|
|
|
|
$
|
996
|
|
Shares repurchase plans authorized
|
|
|
|
|
|
|
October 2016
|
|
|
|
|
|
4,000
|
|
Shares repurchased
|
|
15.5
|
|
$
|
141.16
|
|
|
(2,250
|
)
|
Balance, March 31, 2017
|
|
|
|
|
|
$
|
2,746
|
|
|
|
(1)
|
This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
|
|
|
(2)
|
All of the shares purchased were part of the publicly announced programs.
|
|
|
(3)
|
The number of shares purchased reflects rounding adjustments.
|
During the last three years, our share repurchases were transacted through both open market transactions and ASR programs with third party financial institutions.
In May and October 2015, the Board authorized the repurchase of up to
$500 million
and
$2 billion
of the Company’s common stock.
In 2016, we repurchased
4.5 million
of the Company’s shares for
$854 million
through open market transactions at an average price per share of
$192.27
. In February 2016, we entered into an ASR program with a third-party financial institution to repurchase
$650 million
of the Company’s common stock. The ASR program was completed during the fourth quarter of 2016 and we repurchased
4.2 million
shares at an average price per share of
$154.04
. During 2016, we completed the May 2015 share repurchase authorization. At March 31, 2016,
$1.0 billion
remained available for future authorized repurchases of the Company’s common stock under the October 2015 authorization.
In October 2016, the Board authorized the repurchase of up to
$4.0 billion
of the Company’s common stock.
In 2017, we repurchased
14.1 million
of the Company’s shares for
$2 billion
through open market transactions at an average price per share of
$140.96
. In March 2017, we entered into an ASR program with a third-party financial institution to repurchase
$250 million
of the Company’s common stock. As of March 31, 2017, we had received
1.4 million
shares under this program. This ASR program was completed in April 2017 and we received
0.3 million
additional shares. The total number of shares repurchased under this ASR program was
1.7 million
shares at an average price per share of
$143.19
. During 2017, we completed the October 2015 share repurchase authorization. The total authorization outstanding for repurchases of the Company’s common stock was
$2.7 billion
at March 31, 2017.
In 2016, we retired
115.5 million
or
$7.8 billion
of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by
$6.4 billion
and
$1.5 billion
during 2016.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Other Comprehensive Income (Loss)
Information regarding other comprehensive income (loss) including noncontrolling interests and redeemable noncontrolling interests, net of tax, by component is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Foreign currency translation adjustments
(1)
|
|
|
|
|
|
Foreign currency translation adjustments arising during period, net of income tax expense (benefit) of ($1), ($23) and nil
(2) (3)
|
$
|
(644
|
)
|
|
$
|
113
|
|
|
$
|
(1,845
|
)
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
4)
|
20
|
|
|
—
|
|
|
(10
|
)
|
|
(624
|
)
|
|
113
|
|
|
(1,855
|
)
|
Unrealized gains (losses) on net investment hedges
(5)
|
|
|
|
|
|
Unrealized gains (losses) on net investment hedges arising during period, net of income tax benefit of $5, nil and nil
|
(8
|
)
|
|
—
|
|
|
—
|
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Unrealized gains (losses) on cash flow hedges
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax benefit of nil, nil and nil
|
(19
|
)
|
|
6
|
|
|
(13
|
)
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
|
—
|
|
|
3
|
|
|
3
|
|
|
(19
|
)
|
|
9
|
|
|
(10
|
)
|
Changes in retirement-related benefit plans
|
|
|
|
|
|
Net actuarial gain (loss) and prior service credit (cost) arising during period, net of income tax expense (benefit) of $4, $13 and ($66)
(6)
|
(20
|
)
|
|
23
|
|
|
(140
|
)
|
Amortization of actuarial gain (loss), prior service cost and transition obligation, net of income tax expense (benefit) of $4, $18 and $6
(7)
|
9
|
|
|
30
|
|
|
11
|
|
Foreign currency translation adjustments and other, net of income tax expense of nil, nil and nil
|
3
|
|
|
(3
|
)
|
|
4
|
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
|
—
|
|
|
—
|
|
|
1
|
|
|
(8
|
)
|
|
50
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), net of tax
|
$
|
(659
|
)
|
|
$
|
172
|
|
|
$
|
(1,989
|
)
|
|
|
(1)
|
Foreign currency translation adjustments over the last three years primarily resulted from the conversion of non-U.S. dollar financial statements of our foreign subsidiary, Celesio, into the Company’s reporting currency, U.S. dollars.
|
|
|
(2)
|
The 2017 net foreign currency translation losses of
$644 million
were primarily due to the weakening of the Euro and British pound sterling against the U.S. dollar from April 1, 2016 to March 31, 2017. The 2016 net foreign currency translation gains of
$113 million
were primarily due to the recovery of the Euro against the U.S. dollar, partly offset by the weakening of the Canadian dollar and British pound sterling against the U.S. dollar during the period between April 1, 2015 and March 31, 2016.
|
|
|
(3)
|
2017 includes net foreign currency translation losses of
$74 million
and 2016 includes net foreign currency translation gains of
$16 million
attributable to noncontrolling and redeemable noncontrolling interests.
|
|
|
(4)
|
These net foreign currency losses were reclassified from accumulated other comprehensive income (loss) to discontinued operations within our consolidated statement of operations due to the Healthcare Technology Net Asset Exchange in 2017 and the sale of a business in 2015.
|
|
|
(5)
|
2017 includes foreign currency losses of
$13 million
on the net investment hedges from the
€1.2 billion
Euro-denominated notes and
£450 million
British pound sterling-denominated notes.
|
|
|
(6)
|
The net actuarial losses of
$5 million
and net gains of
$4 million
attributable to noncontrolling and redeemable noncontrolling interests in 2017 and 2016.
|
|
|
(7)
|
Pre-tax amount was reclassified into cost of sales and operating expenses in the consolidated statements of operations. The related tax expense was reclassified into income tax expense in the consolidated statements of operations.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in our accumulated other comprehensive income (loss) by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign Currency Translation Adjustments, Net of Tax
|
|
Unrealized Losses on Net Investment Hedges,
Net of Tax
|
|
Unrealized Gains (Losses) on Cash Flow Hedges,
Net of Tax
|
|
Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
Balance at March 31, 2015
|
$
|
(1,420
|
)
|
|
$
|
—
|
|
|
$
|
(21
|
)
|
|
$
|
(272
|
)
|
|
$
|
(1,713
|
)
|
Other comprehensive income (loss) before reclassifications
|
113
|
|
|
—
|
|
|
6
|
|
|
23
|
|
|
142
|
|
Amounts reclassified to earnings
|
—
|
|
|
—
|
|
|
3
|
|
|
27
|
|
|
30
|
|
Other comprehensive income (loss)
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
50
|
|
|
$
|
172
|
|
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests
|
16
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
20
|
|
Other comprehensive income (loss) attributable to McKesson
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
46
|
|
|
$
|
152
|
|
Balance at March 31, 2016
|
$
|
(1,323
|
)
|
|
$
|
—
|
|
|
$
|
(12
|
)
|
|
$
|
(226
|
)
|
|
$
|
(1,561
|
)
|
Other comprehensive income (loss) before reclassifications
|
(644
|
)
|
|
(8
|
)
|
|
(19
|
)
|
|
(17
|
)
|
|
(688
|
)
|
Amounts reclassified to earnings and other
|
20
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
29
|
|
Other comprehensive income (loss)
|
$
|
(624
|
)
|
|
$
|
(8
|
)
|
|
$
|
(19
|
)
|
|
$
|
(8
|
)
|
|
$
|
(659
|
)
|
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests
|
(74
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(79
|
)
|
Other comprehensive income (loss) attributable to McKesson
|
$
|
(550
|
)
|
|
$
|
(8
|
)
|
|
$
|
(19
|
)
|
|
$
|
(3
|
)
|
|
$
|
(580
|
)
|
Balance at March 31, 2017
|
$
|
(1,873
|
)
|
|
$
|
(8
|
)
|
|
$
|
(31
|
)
|
|
$
|
(229
|
)
|
|
$
|
(2,141
|
)
|
|
|
27.
|
Related Party Balances and Transactions
|
Celesio has investments in pharmacies located across Europe that are accounted for under the equity-method. Celesio maintains distribution arrangements with these pharmacies for the sale of related goods and services under which revenues of
$112 million
,
$112 million
, and
$114 million
are included in our consolidated statement of operations for the years ended March 31,
2017
,
2016
and 2015 and receivables of
$12 million
and
$8 million
are included in our consolidated balance sheet as of
March 31, 2017
and
2016
.
Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,” for the information regarding related party balances and transactions with Change Healthcare.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
During the fourth quarter of 2017, we completed a sale-leaseback transaction for our corporate headquarters building in San Francisco, California. The transaction resulted in net cash proceeds of
$223 million
and a pre-tax gain of
$15 million
, which represents the amount of total gain in excess of the present value of the minimum lease payments. Additionally, we deferred a pre-tax gain of
$48 million
; such gain will be amortized on a straight-line basis over the lease term as a reduction to selling, distribution, and administrative expense in the accompanying consolidated statements of operations. Refer to Financial Note 23, “Lease Obligations,” for the future minimum lease payments associated with this sale-leaseback.
We report our operations in
two
operating segments: McKesson Distribution Solutions and McKesson Technology Solutions. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including operating profit before interest expense, income taxes and results from discontinued operations.
Our Distribution Solutions segment distributes branded and generic pharmaceutical drugs and other healthcare-related products internationally and provides practice management, technology, clinical support and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers including offering multiple distribution channels and clinical trial access to our network of oncology physicians. It also provides medical-surgical supply distribution, logistics and other services to healthcare providers within the United States. Additionally, this segment operates retail pharmacy chains in Europe and Canada, and supports independent pharmacy networks within North America and Europe. It also supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies.
On March 1, 2017, upon the closing of Healthcare Technology Net Asset Exchange, we contributed the majority of our McKesson Technology Solutions businesses to the newly formed joint venture, Change Healthcare. We retained our RelayHealth Pharmacy and EIS businesses. Accordingly, beginning March 31, 2017, Technology Solutions segment provides clinical, financial and supply chain management solutions to healthcare organizations and includes our equity method investment in Change Healthcare. Prior to March 1, 2017, this segment also delivered enterprise-wide clinical, patient care and strategic management technology solutions, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for additional information about Change Healthcare.
Corporate includes expenses associated with Corporate functions and projects, and the results of certain investments. Corporate expenses are allocated to operating segments to the extent that these items are directly attributable.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Revenues
|
|
|
|
|
|
Distribution Solutions
(1)
|
|
|
|
|
|
North America pharmaceutical distribution and services
|
$
|
164,832
|
|
|
$
|
158,469
|
|
|
$
|
143,711
|
|
International pharmaceutical distribution and services
|
24,847
|
|
|
23,497
|
|
|
26,358
|
|
Medical-Surgical distribution and services
|
6,244
|
|
|
6,033
|
|
|
5,907
|
|
Total Distribution Solutions
|
195,923
|
|
|
187,999
|
|
|
175,976
|
|
|
|
|
|
|
|
Technology Solutions - products and services
|
2,610
|
|
|
2,885
|
|
|
3,069
|
|
Total Revenues
|
$
|
198,533
|
|
|
$
|
190,884
|
|
|
$
|
179,045
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
Distribution Solutions
(2) (5)
|
$
|
3,361
|
|
|
$
|
3,553
|
|
|
$
|
3,047
|
|
Technology Solutions
(3) (4) (5)
|
4,215
|
|
|
$
|
519
|
|
|
$
|
438
|
|
Total
|
7,576
|
|
|
4,072
|
|
|
3,485
|
|
Corporate Expenses, Net
(5)
|
(377
|
)
|
|
$
|
(469
|
)
|
|
$
|
(454
|
)
|
Interest Expense
|
(308
|
)
|
|
$
|
(353
|
)
|
|
$
|
(374
|
)
|
Income From Continuing Operations Before Income Taxes
|
$
|
6,891
|
|
|
$
|
3,250
|
|
|
$
|
2,657
|
|
|
|
|
|
|
|
Depreciation and amortization
(6)
|
|
|
|
|
|
Distribution Solutions
|
$
|
735
|
|
|
$
|
669
|
|
|
$
|
750
|
|
Technology Solutions
|
65
|
|
|
107
|
|
|
156
|
|
Corporate
|
110
|
|
|
109
|
|
|
111
|
|
Total
|
$
|
910
|
|
|
$
|
885
|
|
|
$
|
1,017
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
(7)
|
|
|
|
|
|
Distribution Solutions
|
$
|
276
|
|
|
$
|
306
|
|
|
$
|
301
|
|
Technology Solutions
|
30
|
|
|
15
|
|
|
27
|
|
Corporate
|
98
|
|
|
167
|
|
|
48
|
|
Total
|
$
|
404
|
|
|
$
|
488
|
|
|
$
|
376
|
|
|
|
|
|
|
|
Revenues, net by geographic area
(8)
|
|
|
|
|
|
United States
|
$
|
164,428
|
|
|
$
|
158,255
|
|
|
$
|
142,810
|
|
Foreign
|
34,105
|
|
|
32,629
|
|
|
36,235
|
|
Total
|
$
|
198,533
|
|
|
$
|
190,884
|
|
|
$
|
179,045
|
|
|
|
(1)
|
Revenues derived from services represent less than
2%
of this segment’s total revenues.
|
|
|
(2)
|
Distribution Solutions segment operating profit for 2016 includes a pre-tax gain of
$52 million
recognized from the sale of our ZEE Medical business. Operating profit for 2017 and 2016 includes
$144 million
and
$76 million
of net cash proceeds representing our share of net settlements of antitrust class action lawsuits.
|
|
|
(3)
|
Technology Solutions segment operating profit for 2017 includes a pre-tax gain of
$3,947 million
recognized from the Healthcare Technology Net Asset Exchange, net of transaction and related expenses.
|
|
|
(4)
|
Technology Solutions segment operating profit for 2017 includes a non-cash pre-tax charge of
$290 million
for goodwill impairment related to the EIS reporting unit. Operating profit for 2016 includes a pre-tax gain of
$51 million
recognized from the sale of our nurse triage business.
|
|
|
(5)
|
In 2016, the Company implemented the Cost Alignment Plan to reduce its operating expenses and recorded pre-tax restructuring charges of
$229 million
in 2016. Pre-tax charges for 2016 were recorded as follows:
$161 million
,
$51 million
and
$17 million
within our Distribution Solutions segment, Technology Solutions segment and Corporate.
|
|
|
(6)
|
Amounts primarily include amortization of acquired intangible assets purchased in connection with business acquisitions, capitalized software held for sale and capitalized software for internal use.
|
|
|
(7)
|
Long-lived assets consist of property, plant and equipment.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
(8)
|
Net revenues were attributed to geographic areas based on the customers’ shipment locations.
|
Segment assets and property, plant and equipment, net by geographic areas were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2017
|
|
2016
|
Segment assets
|
|
|
|
Distribution Solutions
|
$
|
52,322
|
|
|
$
|
47,088
|
|
Technology Solutions
|
4,995
|
|
|
3,072
|
|
Corporate
|
3,652
|
|
|
6,363
|
|
Total
|
$
|
60,969
|
|
|
$
|
56,523
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
United States
|
$
|
1,383
|
|
|
$
|
1,500
|
|
Foreign
|
909
|
|
|
778
|
|
Total
|
$
|
2,292
|
|
|
$
|
2,278
|
|
Assets by operating segment are not reviewed by management for purpose of assessing performance or allocating resources.
|
|
30.
|
Quarterly Financial Information (Unaudited)
|
The quarterly results of operations are not necessarily indicative of the results that may be expected for the entire year. Selected quarterly financial information for the last two years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
49,733
|
|
|
$
|
49,957
|
|
|
$
|
50,130
|
|
|
$
|
48,713
|
|
Gross profit
(1) (2)
|
2,907
|
|
|
2,756
|
|
|
2,812
|
|
|
2,796
|
|
Income (loss) after income taxes:
|
|
|
|
|
|
|
|
Continuing operations
(1) (2) (3) (4)
|
$
|
673
|
|
|
$
|
325
|
|
|
$
|
649
|
|
|
$
|
3,630
|
|
Discontinued operations
|
(113
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(7
|
)
|
Net income
|
$
|
560
|
|
|
$
|
324
|
|
|
$
|
646
|
|
|
$
|
3,623
|
|
Net income attributable to McKesson
|
$
|
542
|
|
|
$
|
307
|
|
|
$
|
633
|
|
|
$
|
3,588
|
|
Earnings (loss) per common share attributable
to McKesson
(5)
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.88
|
|
|
$
|
1.35
|
|
|
$
|
2.86
|
|
|
$
|
16.79
|
|
Discontinued operations
|
(0.50
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.03
|
)
|
Total
|
$
|
2.38
|
|
|
$
|
1.34
|
|
|
$
|
2.85
|
|
|
$
|
16.76
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.91
|
|
|
$
|
1.36
|
|
|
$
|
2.89
|
|
|
$
|
16.95
|
|
Discontinued operations
|
(0.50
|
)
|
|
—
|
|
|
(0.02
|
)
|
|
(0.03
|
)
|
Total
|
$
|
2.41
|
|
|
$
|
1.36
|
|
|
$
|
2.87
|
|
|
$
|
16.92
|
|
|
|
(1)
|
Gross profit for the first, second, third and fourth quarters of 2017 includes pre-tax charge of
$47 million
, pre-tax credits of
$43 million
and
$155 million
and pre-tax charge of
$144 million
related to our last-in-first-out (“LIFO”) method of accounting for inventories.
|
|
|
(2)
|
Gross profit for the first and third quarters of 2017 includes
$142 million
and
$2 million
of cash proceeds representing our share of net settlements of antitrust class action lawsuits.
|
|
|
(3)
|
Financial results for the fourth quarter of 2017 include a pre-tax gain of
$3,947 million
(
$3,018 million
after-tax) recognized from the Healthcare Technology Net Asset Exchange, net of transaction and related expenses.
|
|
|
(4)
|
Financial results for the second quarter of 2017 include a non-cash pre-tax charge of
$290 million
for goodwill impairment related to the EIS reporting unit within our Technology Solutions segment.
|
|
|
(5)
|
Certain computations may reflect rounding adjustments.
|
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal 2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
47,546
|
|
|
$
|
48,761
|
|
|
$
|
47,899
|
|
|
$
|
46,678
|
|
Gross profit
(1) (2) (3)
|
2,848
|
|
|
2,844
|
|
|
2,872
|
|
|
2,852
|
|
Income (loss) after income taxes:
|
|
|
|
|
|
|
|
Continuing operations
(1) (2) (3) (4)
|
$
|
599
|
|
|
$
|
636
|
|
|
$
|
642
|
|
|
$
|
465
|
|
Discontinued operations
|
(10
|
)
|
|
(6
|
)
|
|
5
|
|
|
(21
|
)
|
Net income
|
$
|
589
|
|
|
$
|
630
|
|
|
$
|
647
|
|
|
$
|
444
|
|
Net income attributable to McKesson
|
$
|
576
|
|
|
$
|
617
|
|
|
$
|
634
|
|
|
$
|
431
|
|
Earnings (loss) per common share attributable
to McKesson
(5)
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.50
|
|
|
$
|
2.65
|
|
|
$
|
2.71
|
|
|
$
|
1.97
|
|
Discontinued operations
|
(0.05
|
)
|
|
(0.02
|
)
|
|
0.02
|
|
|
(0.09
|
)
|
Total
|
$
|
2.45
|
|
|
$
|
2.63
|
|
|
$
|
2.73
|
|
|
$
|
1.88
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.53
|
|
|
$
|
2.68
|
|
|
$
|
2.74
|
|
|
$
|
1.99
|
|
Discontinued operations
|
(0.04
|
)
|
|
(0.02
|
)
|
|
0.02
|
|
|
(0.09
|
)
|
Total
|
$
|
2.49
|
|
|
$
|
2.66
|
|
|
$
|
2.76
|
|
|
$
|
1.90
|
|
|
|
(1)
|
Gross profit for the first, second, third and fourth quarters of 2016 includes pre-tax charges related to our last-in-first-out (“LIFO”) method of accounting for inventories of
$91 million
,
$91 million
,
$33 million
and
$29 million
.
|
|
|
(2)
|
Gross profit for the first and third quarters of 2016 includes
$59 million
and
$17 million
of cash proceeds representing our share of net settlements of antitrust class action lawsuits.
|
|
|
(3)
|
In the fourth quarter of 2016, the Company approved a restructuring plan to reduce its operating expenses. Financial results for the fourth quarter of 2016 include pre-tax restructuring charges of
$229 million
within our continuing operations. Charges were recorded as follows:
$26 million
in cost of sales and
$203 million
in operating expenses.
|
|
|
(4)
|
Financial results for the first quarter of 2016 include an after-tax gain of
$38 million
from the sale of our nurse triage business, and for the second quarter of 2016 include an after-tax gain of
$29 million
from the sale of ZEE Medical business.
|
|
|
(5)
|
Certain computations may reflect rounding adjustments.
|