Expanding
Globally
For Better
Health
Annual Report
Fiscal Year Ended March 31, 2015
Improving the Global Business of Healthcare
Improving the Global Business of Healthcare
At McKesson, we know that better business health and better patient health go hand
At McKesson, we know that better business health and better patient health go hand
in hand. Our supply chain and information technology solutions help healthcare
in hand. Our supply chain and information technology solutions help healthcare
businesses run better, improve patient care and integrate the care experience—all for
businesses run better, improve patient care and integrate the care experience—all for
better health. United by our strong company values, our global team of nearly 77,000
better health. United by our strong company values, our global team of nearly 77,000
associates is working to create a healthier future for patients worldwide.
associates is working to create a healthier future for patients worldwide.
28%
28%
appreciation
appreciation
in stock price;
in stock price;
>$11B
>$11B
to
added
added
to
Market Capitalization
Market Capitalization
77K
77K
Nearly
Nearly
employees
employees
worldwide
worldwide
Market Leadership
Market Leadership
(cid:127) Global pharmaceutical
(cid:127) Global pharmaceutical
distribution
distribution
(cid:127) U.S. Medical-Surgical
(cid:127) U.S. Medical-Surgical
alternate site distribution
alternate site distribution
(cid:127) U.S. Specialty distribution
(cid:127) U.S. Specialty distribution
for community
for community
oncology
oncology
(cid:127) U.S. pharmacy
(cid:127) U.S. pharmacy
management
management
systems
systems
182
182
year history
year history
of serving
of serving
customers
customers
More than
More than
12,000
12,000
owned and
owned and
banner
banner
pharmacies
pharmacies
Deliver
Deliver
1/3
1/3
of all prescription
of all prescription
medications in
medications in
North America
North America
Operations in
Operations in
more than
more than
20
20
countries
countries
$3.1B
$3.1B
in operating
in operating
cash flow
cash flow
3.3B
3.3B
financial transactions
processed annually
financial transactions
processed annually
99.98%
99.98%
Order
Order
Accuracy
Accuracy
Revenues
$179B
Adjusted EPS
29%
*
increase
Compound
Annual
Growth Rate
17%
Since Fiscal
2009
Dear Shareholders:
I am pleased to report that McKesson completed a strong Fiscal 2015 as we helped our
customers improve their performance in the name of better patient care. We extended our
steady track record of top-line growth, recording revenues of $179 billion compared to $137.4
billion in Fiscal 2014. Our Fiscal 2015 Adjusted EPS of $11.11* represents a 29% increase over
last year, contributing to a 17% compound annual growth rate since Fiscal 2009.
For 182 years, McKesson has been a leader in healthcare services. And while we are very
proud of our history, we could not be more excited about the promise of our future. Our busi-
ness model, our strategy and our performance position us for continued growth, increased
scale, and deeper relationships with our customers and our supplier and manufacturer
partners.
In Business for Better Health
As a company, we believe that better business health and better patient health are inextri-
cably linked. To achieve one means to succeed in the other. And we know that the only way
to accomplish both is to join efforts across the industry to work together with all parties to
deliver better, safer care. McKesson pursues this purpose across three broad dimensions.
First, we focus on business health. Through our distribution and technology solutions, we
help our customers improve the efficiency and effectiveness of their healthcare operations,
because a hospital, clinic or pharmacy that runs smoothly can provide patients with more
consistent, convenient and cost-effective services.
Second, we focus on care. The science of medicine and the art of care have never been more
advanced or complex. By truly understanding the process of care delivery across virtually
every healthcare setting, we are able to offer solutions that give providers access to the right
information and the right medication or medical tools at the right time, so they can provide
the clinical care, focus and support that patients need.
Third, we focus on connectivity. The sheer size and scale of healthcare demands new ways
to improve the flow of information among all parts of the healthcare ecosystem. From the
manufacturer, to the hospital, to the pharmacy, to the payer, and ultimately to the patient,
better access to and management of information enables high-quality care at a lower cost.
Our leadership role in the CommonWell Health Alliance, a not-for-profit association of
healthcare companies working to create universal access to healthcare data, is just the latest
example of our pioneering work to improve connectivity across every setting of care.
Clearly, the business of healthcare is evolving at an unprecedented pace. In the face of so
much change, our customers are looking to McKesson more than ever to provide the re-
sources, scale and expertise that will position them for continued health and vitality.
Fiscal 2015: Expanding Our Scale and Strength
Against this backdrop, we drove progress in several key areas over the past year that posi-
tion McKesson as a partner of choice for our customers and an investment of choice for our
shareholders.
Increasing Our Global Scale
At the top of the list, achieving operational control of Celesio was a major step in our strat-
egy to expand the scale and strength of our global supply chain. In Fiscal 2014, we acquired
Celesio, a German company that provides logistics and services to the pharmaceutical and
healthcare sectors primarily in Europe. Like McKesson, Celesio has a long, successful history
in pharmaceutical distribution and a customer-first approach. Together, we are one of the
*See Appendix A to this 2015 Annual Report for a reconciliation of earnings per share as reported under U.S. generally accepted accounting principles
(“GAAP”) to adjusted earnings per share. Non-GAAP measures such as adjusted earnings per share and adjusted operating profit should be viewed in
addition to, and not as an alternative for, financial results prepared in accordance with GAAP.
largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide,
with purchasing scale that drives value for our customers and shareholders.
At the same time, McKesson and Celesio have much to offer each other beyond scale advantages. McKesson has
best-in-class operational practices for supply chain management that will help strengthen Celesio’s performance
and profitability. Celesio, in turn, offers deep experience in retail that will help McKesson provide even greater
value to our retail pharmacy partners in North America. With the addition of our Lloyd’s pharmacy brand in Eu-
rope, McKesson is now one of the largest pharmacy retailers in Europe.
We estimate annual synergies of $275–$325 million of our combined operations by the end of Fiscal 2019, and we
are well on track to achieve that goal through a combination of procurement and operational efficiencies.
Helping Our Retail Pharmacy Partners Thrive
We are a strong partner to our retail and independent pharmacy customers, and our business strategy is focused
on helping them thrive. We value our partnerships with independent pharmacies and are always looking for new
ways to deepen our relationships. In Fiscal 2015, we added more than 500 new Health Mart stores and increased
our presence in the Canadian market with the acquisition of Remedy, that nation’s fastest-growing independent
pharmacy network.
Enhancing Manufacturer Relationships
Our focus is on our customers and the patients they serve, but we simply could not be as successful as we are today
without the long-term and healthy relationships we have with our manufacturing partners. Our supplier partners
play a key role in our ongoing growth, and we work hard to add value to their business models. For example, in
the specialty market, we have taken advantage of opportunities to expand value-added services to manufacturers,
including offering multiple distribution channels, a distinctive go-to market approach and clinical trial access to
our network of oncology physicians.
Leading in Specialty
The specialty market continues to expand, and McKesson is proud to be a leader in the distribution of specialty
drugs to physicians and other healthcare providers throughout the U.S. In addition to distribution services, our
Specialty business supports our manufacturing partners with additional offerings, including comprehensive pro-
grams for clinical trial research and commercialization.
This business delivered excellent results with growth across its broad portfolio of solutions. In Fiscal 2015, we con-
tinued to add physicians to our US Oncology Network, one of the nation’s largest networks of integrated, commu-
nity-based oncology practices dedicated to advancing high-quality, evidence-based cancer care.
An important development in the coming year will be the emergence of biosimilars in the United States. McKes-
son is well positioned to support our customers and manufacturing partners as this new category is introduced in
the U.S. market.
Extending Medical-Surgical Market Leadership
In our Medical-Surgical business, we continued to make great progress on the integration of PSS World Medical. In
Fiscal 2015, our team did a tremendous amount of work to harmonize our distribution network, product portfolio
and general operations. We are pleased to have successfully increased our market share while expanding the sup-
port we provide to our Medical-Surgical customers.
Focusing on Innovation and Technology
Innovative technology is playing an increasingly important role in healthcare. The shift to value-based reimburse-
ment, combined with increasing consumerism and the proliferation of alternative, technology-enabled care-
delivery services, is reshaping the landscape for healthcare information technology. In response to these emerging
needs, our Technology Solutions businesses are focused on several areas we know are crucial to our customers’
future success: connectivity, imaging solutions, payer and financial solutions, and provider revenue and risk man-
agement. These are the areas where we are best positioned to help our customers and business partners navigate
the changing landscape of healthcare to emerge as stronger, more efficient organizations.
Our Greatest Advantage: Our People
Looking toward the future, the challenges and opportunities may be different from the ones we have previously
faced, but the recipe for our success remains unchanged: by helping our customers succeed, so do we. We have an or-
ganization filled with people of diverse backgrounds who are committed to this philosophy. They work at McKesson
because they want to make a difference. They want to improve, extend and save lives by helping doctors, pharmacies,
hospitals and others across healthcare perform at the highest level.
This commitment starts at the top, with our executive leadership team. We have an exceptionally talented, experi-
enced and strategic team of leaders with a strong bench of talent behind them. We welcomed two new members to
our Executive Committee this year: Lori Schechter, executive vice president, general counsel and chief compliance
officer, and Bansi Nagji, executive vice president for corporate strategy and business development. Both of these
talented executives bring tremendous experience and a history of accomplishment to their new roles. We also added
three new directors in Fiscal 2015, and their strong business and healthcare backgrounds add great perspectives and
experience to our Board.
Our management team has historically mapped out an ambitious strategy for growth and then executed against that
strategy to deliver the value our customers and shareholders expect of us. There are few companies in our industry
that can match our consistent record of growth and performance. From our strategy to our proven and experienced
leadership team and our remarkable performance, I think you will agree that the future of our company is very bright.
We stand out as a business dedicated to an important mission and guided by a deeply held value system. We are hum-
ble, we learn from our failures and we are grateful for our success. For nearly two centuries, we have been creating a
healthier future for our customers and their patients. As one of the largest pharmaceutical wholesalers and providers
of healthcare services in the world, we are excited by the opportunities that lie ahead for our company, our customers
and our investors.
On behalf of the entire organization, thank you for your commitment to McKesson.
John H. Hammergren
Chairman of the Board,
President and Chief Executive Officer
McKesson Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2015
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 1-13252
McKESSON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
One Post Street, San Francisco, California
(Address of principal executive offices)
94-3207296
(I.R.S. Employer
Identification No.)
94104
(Zip Code)
(415) 983-8300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
Common stock, $0.01 par value
(Name of each exchange on which registered)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer È
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
‘
Accelerated filer
Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to
the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 30, 2014, was
approximately $45.0 billion.
Number of shares of common stock outstanding on April 30, 2015: 231,553,531
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
McKESSON CORPORATION
TABLE OF CONTENTS
Item
1 Business
1A Risk Factors
1B Unresolved Staff Comments
2
3
Properties
Legal Proceedings
4 Mine Safety Disclosures
Executive Officers of the Registrant
PART I
PART II
5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
6
Selected Financial Data
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A Quantitative and Qualitative Disclosures About Market Risk
8
Financial Statements and Supplementary Data
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A Controls and Procedures
9B Other Information
10 Directors, Executive Officers and Corporate Governance
11 Executive Compensation
PART III
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13 Certain Relationships and Related Transactions and Director Independence
14 Principal Accounting Fees and Services
15 Exhibits and Financial Statement Schedule
Signatures
PART IV
Page
3
12
28
28
28
28
29
30
32
34
56
58
122
122
122
123
123
123
125
125
126
127
McKESSON CORPORATION
PART I
Item 1.
Business.
General
McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar
pronouns), currently ranked 15th on the Fortune 500, delivers pharmaceuticals, medical supplies and healthcare
information technology that make healthcare safer while reducing costs.
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references
in this document to a particular year shall mean the Company’s fiscal year.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act,”) are available free of charge on our website (www.mckesson.com
under the “Investors — Financial Information — SEC Filings” caption) as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC” or the
“Commission”). The content on any website referred to in this Annual Report on Form 10-K is not incorporated
by reference into this report, unless expressly noted otherwise.
The public may also read or copy any materials that we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains
reports, proxy and information statements, and other information regarding issuers, including the Company, that
file electronically with the SEC. The address of the website is www.sec.gov.
Business Segments
We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary
drugs and equipment and health and beauty care products throughout North America and internationally. This
segment includes our International pharmaceutical distribution and services business which reflects the results of
operations of Celesio AG (“Celesio”), which we acquired in February 2014. Celesio supplies pharmaceuticals and
other healthcare-related products through its pharmaceutical wholesale business and retail pharmacies.
segment provides
The Distribution Solutions
for biotech and
pharmaceutical manufacturers, and practice management, technology, clinical support and business solutions to
oncology and other specialty practices operating in the community setting. It also provides medical-surgical
supply distribution, equipment,
logistics and other services to healthcare providers through a network of
distribution centers within the U.S. In addition, this segment sells financial, operational and clinical solutions for
pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing and other services.
specialty pharmaceutical
solutions
The Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain
and strategic management software solutions, as well as connectivity, outsourcing and other services, including
remote hosting and managed services, to healthcare organizations.
Net revenues for our segments for the last three years were as follows:
(Dollars in billions)
Distribution Solutions
Technology Solutions
Total
Years Ended March 31,
2015
2014
2013
$176.0
98% $134.1
98% $119.0
97%
3.1
2
3.3
2
3.2
3
$179.1
100% $137.4
100% $122.2
100%
3
McKESSON CORPORATION
Distribution Solutions Segment
McKesson Distribution Solutions consists of the following businesses: North America pharmaceutical
distribution and services, International pharmaceutical distribution and services and Medical Surgical distribution
and services.
North America pharmaceutical distribution and services
Our North America pharmaceutical distribution and services business is comprised of the following
business units: U.S. Pharmaceutical Distribution, McKesson Specialty Health, McKesson Canada, and
McKesson Pharmacy Systems and Automation.
U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and/or other healthcare-related
products to customers throughout the United States in three primary customer channels: (1) retail national
accounts (including national and regional chains, food/drug combinations, mail order pharmacies and mass
merchandisers); (2) independent retail pharmacies; and (3) institutional healthcare providers (including hospitals,
health systems, integrated delivery networks, clinics and alternate site providers). This business also provides
solutions and services to pharmaceutical manufacturers. This business sources materials and products from a
wide-array of different suppliers, including certain generic pharmaceutical drugs produced through a contract-
manufacturing program.
integrates and tracks all
Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through
a network of 29 distribution centers, as well as a primary redistribution center, a strategic redistribution center
and two repackaging facilities, serving all 50 states and Puerto Rico. We invest in technology and other systems
at all of our distribution centers to enhance safety and reliability and provide the best product availability for our
customers. For example, in most of our distribution centers we use Acumax® Plus, an award-winning technology
that
inventory-related functions such as receiving, put-away and order
fulfillment. Acumax® Plus uses bar code technology, wrist-mounted computer hardware and radio frequency
signals to provide customers with real-time product availability and industry-leading order quality and fulfillment
in excess of 99.9% adjusted accuracy. In addition, we offer Mobile ManagerSM, which integrates portable
handheld technology with Acumax® Plus to give customers complete ordering and inventory control. We also
offer McKesson ConnectSM, an internet-based ordering system that provides item lookup and real-time inventory
availability as well as ordering, purchasing, third-party reconciliation and account management functionality.
Together, these features help ensure customers have the right products at the right time for their facilities and
patients.
internal
To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology — an
analytical approach that emphasizes setting high-quality objectives, collecting data and analyzing results to a fine
degree in order to improve processes, reduce costs and minimize errors. We continue to implement information
systems to help achieve greater consistency and accuracy both internally and for our customers.
The major customer groups of our U.S. Pharmaceutical Distribution business can be categorized as retail
national accounts, institutional healthcare providers and independent retail pharmacies.
Retail National Accounts — Business solutions that help national account customers increase revenues and
profitability. Solutions include:
• Central FillSM — Prescription refill service that enables pharmacies to more quickly refill prescriptions
remotely, more accurately and at a lower cost, while reducing inventory levels and improving customer
service.
4
McKESSON CORPORATION
• Redistribution Centers — Two facilities totaling over 750,000 square feet that offer access to inventory
for single source warehouse purchasing, including pharmaceuticals and biologics. These distribution
centers also provide the foundation for a two-tiered distribution network that supports best-in-class
direct store delivery.
• McKesson SynerGx® — Generic pharmaceutical purchasing program and inventory management that
helps pharmacies maximize their cost savings with a broad selection of generic drugs, low pricing and
one-stop shopping.
• EnterpriseRx® — A Software as a Service (SaaS) pharmacy management system, that allows large
retail chain, health system and retail independent pharmacies to meet demand for prescriptions while
maximizing profits and optimizing operations.
• RxPakSM — Bulk-to-bottle repackaging service that leverages our purchasing scale and supplier
relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce
working capital investment.
•
Inventory Management — An integrated solution comprising forecasting software and automated
replenishment technologies that reduce inventory-carrying costs.
• ExpressRx Track™ — Pharmacy automation solution featuring state-of-the-art robotics, upgraded
imaging and expanded vial capabilities, and industry-leading speed and accuracy in a radically small
footprint.
•
Supplylogix® — Develops and delivers practical supply chain intelligence solutions for pharmacy and
related businesses and services a wide array of healthcare providers nationwide.
Institutional Healthcare Providers — Electronic ordering/purchasing and supply chain management systems
that help customers improve financial performance, increase operational efficiencies and deliver better patient
care. Solutions include:
•
Fulfill-RxSM — Ordering and inventory management system that empowers hospitals to optimize the
often complicated and disjointed processes related to unit-based cabinet replenishment and inventory
management.
• Asset Management — Award-winning inventory optimization and purchasing management program
that helps institutional providers lower costs while ensuring product availability.
•
SKY Packaging — Blister-format packaging containing the most widely prescribed dosages and
strengths in generic oral-solid medications. SKY Packaging enables acute care, long-term care and
institutional pharmacies to provide cost-effective, uniform packaging.
• McKesson Plasma and BioLogics — A full portfolio of plasma-derivatives and biologic products.
• McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies
maximize their cost savings with a broad selection of generic drugs, low pricing and one-stop
shopping.
• McKesson 340B Solution Suite and Macro Helix® — Solutions that help providers manage, track and
report on medication replenishment associated with the federal 340B Drug Pricing Program.
Independent Retail Pharmacies — Solutions for managed care contracting, branding and advertising,
merchandising, purchasing, operational efficiency and automation that help independent pharmacists focus on
patient care while improving profitability. Solutions include:
• Health Mart® — Health Mart® is a national network of more than 3,500 independently-owned
the industry’s most comprehensive pharmacy franchise programs.
pharmacies and is one of
5
McKESSON CORPORATION
Health Mart® provides franchisees support for managed care contracting, branding and local marketing
solutions, the Health Mart private label line of products, merchandising solutions and programs for
enhanced patient support.
• AccessHealth® — Comprehensive managed care and reconciliation assistance services that help
independent pharmacies save time, access competitive reimbursement rates and improve cash flow.
• McKesson Reimbursement AdvantageSM (“MRA”) — MRA is one of
the industry’s most
comprehensive reimbursement optimization packages, comprising financial services (automated claim
resubmission), analytic services and customer care.
• McKesson OneStop Generics® — described above.
• EnterpriseRx® — described above.
•
•
Sunmark® — Complete line of more than 700 products that provide retail independent pharmacies with
value-priced alternatives to national brands.
FrontEdge™ — Strategic planning, merchandising and price maintenance program that helps
independent pharmacies maximize store profitability.
• McKesson Sponsored Clinical Services (SCS) Network — Access to patient-support services that
allow pharmacists to earn service fees and develop stronger patient relationships.
McKesson Specialty Health: This business provides solutions for oncology and other specialty practices
operating in communities across the country, as well as for pharmaceutical and biotech suppliers who
manufacture specialty drugs and vaccines, payers and hospitals. Through expertise in specialty drug distribution,
commercialization, revenue cycle and practice management and reimbursement support, McKesson Specialty
Health seeks to empower the community patient care delivery system and facilitates collaboration among
community healthcare providers, drug manufacturers and payers. We provide direct-to-physician specialty
distribution services, ensuring supply chain safety and delivery of specialty drugs in manufacturer recommended
conditions. Third party logistics, or 3PL, are offered primarily for vaccine distribution, including our exclusive
distributor relationship in the Centers for Disease Control and Prevention’s (CDC) Vaccines for Children
program. When classifying a pharmaceutical product or service as “specialty,” we consider the following factors:
high cost; diseases requiring complex treatment regimens such as cancer and rheumatoid arthritis; special
handling, storage and delivery requirements; and, in some cases, exclusive distribution arrangements. This
business also provides practice management and other consulting services
to healthcare providers,
pharmaceutical manufacturers and third party payers supporting the clinical research and distribution of specialty
pharmaceutical products and services. Our use of the term “specialty” to define a portion of our distribution
business may not be comparable to that used by other industry participants, including our competitors.
We also offer our industry leading iKnowMedSM and iKnowMed Generation 2 Electronic Health Record,
Lynx® integrated technologies, and clinical and practice management tools, all of which help community
practices achieve better business health-improving inventory management and practice workflow and
reimbursement processes, as well as delivering business efficiencies and clinical-decision support. McKesson
Specialty Health works with manufacturers across all phases of the product development and commercialization
lifecycle, including clinical research, to optimize delivery of complex medication to patients. Through custom
distribution and safety programs, we help support appropriate product utilization, as well as the development and
management of Risk Evaluation Mitigation Strategies reimbursement, healthcare informatics and patient access
programs, and we enable manufacturers to deliver cost effective patient access to needed therapies. McKesson
Specialty Health supports The US Oncology Network and US Oncology Research. The US Oncology Network is
one of the nation’s largest networks of community-based oncology physicians dedicated to advancing high-
quality, evidence-based cancer care. US Oncology Research is one of the nation’s largest research networks,
specializing in Phase I — Phase IV oncology clinical trials.
6
McKESSON CORPORATION
McKesson Canada: McKesson Canada is one of the largest pharmaceutical distributors in Canada.
McKesson Canada, through its network of 16 distribution centers, provides logistics and distribution for more
than 900 manufacturers — delivering their products to retail pharmacies, hospitals, long-term care centers,
clinics and institutions throughout Canada. Beyond pharmaceutical distribution, logistics and order fulfillment,
McKesson Canada provides automation solutions to its retail and hospital customers, dispensing millions of
doses each year. McKesson Canada also provides health information exchange solutions that streamline clinical
and administrative communication and retail banner services that help independent pharmacists compete and
grow through innovative services and operation support. In partnership with other McKesson businesses,
McKesson Canada provides a full range of services to Canadian manufacturers and healthcare providers,
contributing to the quality and safety of care for patients.
McKesson Pharmacy Systems and Automation: This business supplies integrated pharmacy management
systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail
order pharmacies. Its primary approach is to provide the customer with a pharmacy management system that best
suits the particular needs of their business operation. This objective is achieved by offering three pharmacy
management products: EnterpriseRx®, an industry-leading, Software as a Service or SaaS-based management
system that intelligently integrates all workflow and communication processes within the pharmacy environment;
Pharmaserv®, a fully integrated, server-based pharmacy management system that gives the customer complete
control of their pharmacy data; and PharmacyRx, a cost-effective, SaaS-based pharmacy management system
that can be installed quickly and makes processing prescriptions fast and easy. These offerings allow large retail
chain, hospital outpatient pharmacies and small and independent pharmacies to meet the high demand for
prescriptions while maximizing profits and optimizing operations.
International pharmaceutical distribution and services
Our international pharmaceutical distribution and services business provides logistics and services to the
pharmaceutical and healthcare sectors primarily in Europe. The pharmaceutical wholesale business supplies
pharmaceuticals and other healthcare-related products generally to retail pharmacies and institutional customers.
Its wholesale network consisting of approximately 130 branches delivers to over 65,000 pharmacies daily in ten
European countries. This business functions as a vital link between manufacturers and pharmacies in supplying
pharmaceuticals to patients, and generally procures the pharmaceuticals approved in each country as well as
other products sold in pharmacies directly from the manufacturers. Pharmaceutical and other healthcare-related
products are stored at regional wholesale branches with the support of its efficient warehousing management
system. With a refined distribution system, this business strives to ensure rapid and reliable delivery directly to
its pharmacy customers. The retail pharmacy business serves patients and consumers in six European countries
directly through over 2,100 of its own pharmacies and almost 4,300 participant pharmacies operating under brand
partnership arrangements. The retail business provides traditional prescription pharmaceuticals, non-prescription
products and medical services and operates under the Lloyds Pharmacy brand in the United Kingdom, which
accounted for approximately 68% of the total volume of the retail pharmacy business for the year ended
March 31, 2015. In 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business,
which we acquired through our February 2014 acquisition of Celesio. Refer to Financial Note 4, “Discontinued
Operations” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Medical-Surgical distribution and services
This business provides medical-surgical supply distribution, equipment, logistics and other services to
healthcare providers including physicians’ offices, surgery centers, extended care facilities, homecare and
occupational health sites through a network of distribution centers within the U.S. This business is a leading
provider of supplies to the full range of alternate-site healthcare facilities, including physicians’ offices, clinics
and surgery centers (primary care), long-term care and homecare sites (extended care). Through a variety of
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products and services geared towards the supply chain, our Medical-Surgical Distribution business is focused on
helping its customers operate more efficiently while providing one of the industry’s most extensive product
offerings, including our own private label line.
Technology Solutions Segment
Our Technology Solutions segment provides a comprehensive portfolio of software and services to help
healthcare organizations improve quality and patient safety, reduce the cost and variability of care and better
manage their resources and revenue stream. The Technology Solutions segment markets its products and services
to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and
payers.
The product portfolio for the Technology Solutions segment is designed to address a wide array of
healthcare clinical and business performance needs ranging from medication safety and information access to
revenue cycle management, resource utilization and physician adoption of electronic health records (“EHR”).
Analytics software enables organizations to measure progress as they automate care processes for optimal
clinical outcomes, business and operating results and regulatory compliance. To ensure that organizations
achieve the maximum value for their information technology investment, we also offer a wide range of services
to support the implementation and use of solutions as well as assist with business and clinical redesign, process
re-engineering and staffing (both information technology and back-office).
Technology Solutions consists of the following businesses: McKesson Health Solutions, Connected Care
and Analytics, Imaging and Workflow Solutions, Business Performance Services and Enterprise Information
Solutions. The workforce business within our International Technology business will transition to another service
provider during the first quarter of 2016.
McKesson Health Solutions: This suite of services and software products is designed to manage the cost and
quality of care for payers, providers, hospitals and government organizations. Solution sets include:
•
InterQual® Criteria for clinical decision support and utilization management;
• Clear CoverageTM for point-of-care utilization management, coverage determination and network
compliance;
• Claims payment solutions to facilitate accurate and efficient medical claim payments;
• Business intelligence tools for measuring, reporting and improving clinical and financial performance;
• Network management tools to enable health plans to transform the performance of their networks; and
• RelayHealth® financial solutions to facilitate communication between healthcare providers and
patients, and to aggregate data for claims management and trend analysis, and optimize revenue cycle
management processes.
Connected Care and Analytics: Through our vendor-neutral RelayHealth® and its intelligent network, the
Company provides health information exchange solutions
streamline clinical and administrative
communication between patients, providers, payers, pharmacies, manufacturers, government entities and
financial institutions. RelayHealth® helps to accelerate the delivery of high-quality care and improve financial
performance through online consultation of physicians by patients, electronic prescribing by physicians, and
point-of-service resolution of pharmacy claims by payers. We provide disease management programs to improve
the health status and health outcomes of patients with chronic conditions, nurse advice services to provide health
information and recommend appropriate levels of care, and clinical and analytical software to support utilization,
case and disease management workflows and a comprehensive solution for homecare. We also provide
that
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performance management solutions designed to enhance an organization’s ability to plan and optimize quality
care delivery. Enterprise visibility and performance analytics provide business intelligence that enables providers
to manage capacity, outcomes, productivity and patient flow.
Imaging and Workflow Solutions: We offer medical imaging and information management systems for
healthcare enterprises, including a picture archiving communications system, a radiology information system and
a comprehensive cardiovascular information system. Our enterprise-wide approach to medical imaging enables
organizations to take advantage of specialty-specific workstations while building an integrated image repository
that manages all of the images and information captured throughout the care continuum.
Business Performance Services: We help providers focus their resources on delivering healthcare while
managing their revenue cycle operations and information technology through a comprehensive suite of managed
services. Services include full and partial revenue cycle outsourcing, remote hosting and business office
administration. We also provide a complete solution for physician practices of all sizes, whether they are
independent or employed, that includes software, revenue cycle outsourcing and connectivity services. Software
solutions include practice management and EHR software for physicians of every size and specialty. Our
physician practice offering includes outsourced billing, collection, data input, medical coding, billing, contract
management, cash collections, accounts receivable management and extensive reporting of metrics related to the
physician practice. We also offer a full suite of physician and hospital consulting services, including financial
management, coding and compliance services, revenue cycle services and strategic services.
Enterprise Information Solutions: We provide comprehensive clinical and financial information systems for
hospitals and health systems of all sizes. These systems are designed to improve the safety and quality of patient
care and improve clinical, financial and operational performance. Clinical functionality includes a data
repository, care planning, physician order entry and documentation, nursing documentation with bar-coded
medication administration, pharmacy, surgical management, emergency department and ambulatory EHR
systems, and a Web-based physician portal. Revenue management solutions are designed to improve financial
performance by reducing days in accounts receivable, preventing insurance claim denials, reducing costs and
improving productivity. Solutions include online patient billing, contract management, electronic claims
processing and coding compliance checking. These solutions streamline patient access and help organizations to
forecast financial responsibility for constituents before and during care, allowing providers to collect their
reimbursements more quickly and at a lower cost. We also provide professional services to help customers
achieve business results from their software or automation investment. A wide array of service options is
available, including consulting for business and/or clinical process improvement and re-design as well as
implementation, project management, technical and education services relating to all products in the Technology
infrastructure designed to maximize application
Solutions segment as well as providing the technical
accessibility, availability, security and performance. In addition, workflow management solutions assist
caregivers with staffing and maintaining labor rule continuity between scheduling, time and attendance and
payroll. We also offer a comprehensive supply chain management solution that integrates enterprise resource
planning applications, including financials, materials, human resources/payroll, scheduling, point of use, surgical
and anesthesia services and enterprise-wide analytics.
Business Combinations, Equity Investments and Discontinued Operations
We have undertaken additional strategic initiatives in recent years designed to further focus on our core
healthcare businesses and enhance our competitive position. We expect to continue to undertake such strategic
initiatives in the future. These initiatives are detailed in Financial Notes 2, 4 and 6, “Business Combinations,”
“Discontinued Operations” and “Equity Investments,” to the consolidated financial statements appearing in this
Annual Report on Form 10-K.
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Competition
In every area of healthcare distribution operations, our Distribution Solutions segment faces a highly
competitive global environment with strong competition, both in price and service, from international, national,
regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains,
manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations. In
addition, this segment faces competition from various other service providers and from pharmaceutical and other
healthcare manufacturers as well as other potential customers of the segment, which may from time-to-time
decide to develop, for their own internal needs, supply management capabilities that would otherwise be
provided by the segment. Price, quality of service, innovation and, in some cases, convenience to the customer
are generally the principal competitive elements in this segment.
Our Technology Solutions segment experiences substantial competition from many firms, including other
software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers,
care management organizations, hardware vendors and internet-based companies with technology applicable to
the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and
in scope and breadth of products and services offered.
Patents, Trademarks, Copyrights and Licenses
McKesson and its subsidiaries hold patents, copyrights, trademarks and trade secrets related to McKesson
products and services. We pursue patent protection for our innovation, and obtain copyrights covering our
original works of authorship, when such protection is advantageous. Through these efforts, we have developed a
portfolio of patents and copyrights in the U.S. and worldwide. In addition, we have registered or applied to
register certain trademarks and service marks in the U.S. and in foreign countries.
We believe that, in the aggregate, McKesson’s confidential information, patents, copyrights, and trademarks
are important to its operations and market position, but we do not consider any of our businesses to be dependent
upon any one patent, copyright, trademark, or trade secret, or any family or families of the same. We cannot
guarantee that our intellectual property portfolio will be sufficient to deter misappropriation, theft, or misuse of
our technology, nor that we can successfully enjoin infringers. We periodically receive notices alleging that our
products or services infringe on third party patents and other intellectual property rights. These claims may result
in McKesson entering settlement agreements, paying damages, discontinuing use or sale of accused products, or
ceasing other activities. While the outcome of any litigation or dispute is inherently uncertain, we do not believe
that the resolution of any of these infringement notices would have a material adverse impact on our results of
operation.
We hold inbound licenses for certain intellectual property that is used internally, and in some cases, utilized
in McKesson’s products or services. While it may be necessary in the future to seek or renew licenses relating to
various aspects of our products and services, we believe, based upon past experience and industry practice, such
licenses generally can be obtained on commercially reasonable terms. We believe our operations and products
and services are not materially dependent on any single license or other agreement with any third party.
Other Information about the Business
Customers: During 2015, sales to our ten largest customers accounted for approximately 44% of our total
consolidated revenues. Sales to our largest customer, CVS Caremark Corporation (“CVS”), accounted for
approximately 15% of our total consolidated revenues. At March 31, 2015, trade accounts receivable from our ten
largest customers were approximately 36% of total trade accounts receivable. Accounts receivable from CVS were
trade accounts receivable. We also have agreements with group purchasing
approximately 14% of total
organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals, pharmacies
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and other healthcare providers. The accounts receivables balances are with individual members of the GPOs.
Substantially all of these revenues and accounts receivable are included in our Distribution Solutions segment.
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for
more than approximately 7% of our purchases in 2015. The loss of a supplier could adversely affect our business
if alternate sources of supply are unavailable. We believe that our relationships with our suppliers, as a whole,
are good. The ten largest suppliers in 2015 accounted for approximately 45% of our purchases.
A significant portion of our distribution arrangements with the manufacturers provides us compensation
based on a percentage of our purchases.
In addition, we have certain distribution arrangements with
pharmaceutical manufacturers that include an inflation-based compensation component whereby we benefit when
the manufacturers increase their prices as we sell our existing inventory at the new higher prices. For these
manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the
amount of inventory available to us, could have a material adverse impact on our gross profit margin.
Research and Development: Research and development costs were $392 million, $457 million and
$433 million during 2015, 2014 and 2013. These costs do not include $34 million, $40 million and $49 million of
costs capitalized for software held for sale during 2015, 2014 and 2013. Development expenditures are primarily
incurred by our Technology Solutions segment. Our Technology Solutions segment’s product development
efforts apply computer technology and installation methodologies to specific information processing needs of
hospitals and other customers. We believe that a substantial and sustained commitment to such expenditures is
important to the long-term success of this business. Additional information regarding our development activities
is included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements
appearing in this Annual Report on Form 10-K.
Environmental Regulation: Our operations are subject to regulations under various federal, state, local and
foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and
water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites.
We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party
damage or personal injury claims, if in the future we were to violate or become liable under environmental laws.
We are committed to maintaining compliance with all environmental laws applicable to our operations,
products and services and to reducing our environmental impact across all aspects of our business. We meet this
commitment through an environmental strategy and sustainability program.
We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental
obligations. Agreements with the Environmental Protection Agency and certain states may require environmental
assessments and cleanups at several closed sites. These matters are described further in Financial Note 23, “Other
Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual
Report on Form 10-K.
The liability for environmental remediation and other environmental costs is accrued when the Company
considers it probable and can reasonably estimate the costs. Environmental costs and accruals, including that
related to our legacy chemical distribution operations, are presently not material to our operations or financial
position. Although there is no assurance that existing or future environmental laws applicable to our operations
or products will not have a material adverse impact on our operations or financial condition, we do not currently
anticipate material capital expenditures for environmental matters. Other than the expected expenditures that may
be required in connection with our legacy chemical distribution operations, we do not anticipate making
substantial capital expenditures either for environmental issues, or to comply with environmental laws and
regulations in the future. The amount of our capital expenditures for environmental compliance was not material
in 2015 and is not expected to be material in the next year.
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Employees: On March 31, 2015, we employed approximately 70,400 full-time equivalent employees.
Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic
operations is included in Financial Notes 1 and 26, “Significant Accounting Policies” and “Segments of
Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K, including the Chairman’s 2015 letter, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report and the “Risk
Factors” in Item 1A of Part I of this report, contains forward-looking statements within the meaning of section
27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as
amended. Some of these statements can be identified by use of forward-looking words such as “believes,”
“expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans” or “estimates,” or
the negative of these words, or other comparable terminology. The discussion of financial trends, strategy, plans
or intentions may also include forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied.
Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not
limited to, the factors discussed in Item 1A of Part I of this report under “Risk Factors.” The reader should not
consider the list to be a complete statement of all potential risks and uncertainties.
These and other risks and uncertainties are described herein and in other information contained in our
publicly available SEC filings and press releases. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date such statements were first made. Except to the
extent required by federal securities laws, we undertake no obligation to publicly release the result of any
revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect
the occurrence of unanticipated events.
Item 1A. Risk Factors
The risks described below could have a material adverse impact on our financial position, results of
operations, liquidity and cash flows. Although it is not possible to predict or identify all such risks and
uncertainties, they may include, but are not limited to, the factors discussed below. Our business operations could
also be affected by additional factors that are not presently known to us or that we currently consider not to be
material. The reader should not consider this list to be a complete statement of all risks and uncertainties.
Changes in the United States healthcare industry and regulatory environment could have a material adverse
impact on our results of operations.
Many of our products and services are intended to function within the structure of the healthcare financing
and reimbursement system currently being used in the United States. In recent years, the healthcare industry in
the United States has changed significantly in an effort to reduce costs. These changes have included cuts in
Medicare and Medicaid reimbursement
increases in the use of managed care, consolidation of
pharmaceutical and medical-surgical supply distributors and the development of large, sophisticated purchasing
groups. We expect the healthcare industry in the United States to continue to change and for healthcare delivery
models to evolve in the future.
levels,
Changes in the healthcare industry’s or our pharmaceutical suppliers’ pricing, selling, inventory, distribution
or supply policies or practices could significantly reduce our revenues and net income. Due to the diverse range
of healthcare supply management and healthcare information technology products and services that we offer,
such changes could have a material adverse impact on our results of operations, while not affecting some of our
competitors who offer a narrower range of products and services.
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McKESSON CORPORATION
The majority of our U.S. pharmaceutical distribution business agreements with manufacturers are structured
to ensure that we are appropriately and predictably compensated for the services we provide; however, failure to
successfully renew these contracts in a timely and favorable manner could have a material adverse impact on our
results of operations. In addition, branded pharmaceutical price inflation can be the partial economic basis of
some of our distribution business agreements with pharmaceutical manufacturers. If the frequency or rate of
branded price increases slows, it could have a material adverse impact on our results of operations.
In addition, we distribute generic pharmaceuticals, which can be subject to both price deflation and price
inflation. In recent years, our financial results have improved from our generic drug offerings combined with an
increase in the number of generic drugs available in the marketplace. In fiscal year 2016, we anticipate the
number of branded to generics conversions to increase as compared to the prior year. Continued volatility in the
availability, pricing trends or reimbursement of these generic drugs, or significant fluctuations in the rate of
increase in the number of generic drugs, could have a material adverse impact on our results of operations.
Generic drug manufacturers are increasingly challenging the validity or enforceability of patents on branded
pharmaceutical products. During the pendency of these legal challenges, a generics manufacturer may begin
manufacturing and selling a generic version of the branded product prior to the final resolution of its legal
challenge over the branded product’s patent. To the extent we source, contract manufacture, and distribute such
generic products, the brand-name company could assert infringement claims against us. While we generally
obtain indemnification against such claims from generic manufacturers as a condition of distributing their
products, there can be no assurances that these rights will be adequate or sufficient to protect us.
The healthcare industry is highly regulated and further regulation of our distribution businesses and
technology-related products and services could impose increased costs, negatively impact our profit margins, and
the profit margins of our customers, delay the introduction or implementation of our new products, or otherwise
negatively impact our business and expose the Company to litigation and regulatory investigations.
Healthcare Fraud: We are subject to extensive and frequently changing local, state and federal laws and
regulations relating to healthcare fraud, waste and abuse. Local, state and federal governments continue to
strengthen their position and scrutiny over practices involving fraud, waste and abuse affecting Medicare,
Medicaid and other government healthcare programs. Our relationships with pharmaceutical and medical-
surgical product manufacturers and healthcare providers, as well as our provision of products and services to
government entities, subject our business to laws and regulations on fraud and abuse, which among other things:
(1) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral
of a patient for treatment or to induce the ordering or purchasing of items or services that are in any way paid for
by Medicare, Medicaid or other government-sponsored healthcare programs; (2) impose a number of restrictions
upon referring physicians and providers of designated health services under Medicare and Medicaid programs;
and (3) prohibit the knowing submission of a false or fraudulent claim for payment to, and knowing retention of
an overpayment by, a federal healthcare program such as Medicare and Medicaid. Many of the regulations
applicable to us, including those relating to marketing incentives, are vague or indefinite and have not been
interpreted by the courts. The regulations may be interpreted or applied by a prosecutorial, regulatory, or judicial
authority in a manner that could require us to make changes in our operations. If we fail to comply with
applicable laws and regulations, we could become liable for damages and suffer civil and criminal penalties,
including the loss of licenses or our ability to participate in Medicare, Medicaid and other federal and state
healthcare programs.
Reimbursements: Both our profit margins and the profit margins of our customers may be adversely affected
by laws and regulations reducing reimbursement rates for pharmaceuticals, medical treatments and related
services, or changing the methodology by which reimbursement levels are determined. For example, the Patient
Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the
“Affordable Care Act”), signed into law in 2010, revised the federal upper limits for Medicaid reimbursement for
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McKESSON CORPORATION
multiple source generic drugs available for purchase by retail community pharmacies on a nationwide basis to a
limit of not less than 175% of the weighted average (determined on the basis of utilization) of the most recently
reported monthly average manufacturer price (“AMP”) using a smoothing process. The Centers for Medicare and
Medicaid Services (“CMS”) has proposed new rules for calculating AMP (“Revised AMP”) and is also offering
states the option to replace traditional reimbursement metrics for certain drugs with alternatives such as the
average acquisition cost (“AAC”) method or the national average drug acquisition cost benchmark (“NADAC”).
Under AAC and NADAC, reimbursement is based on the actual acquisition costs from invoiced amounts and
from a statistically validated cost of dispensing survey. States will have the option of using any of these metrics
to determine appropriate Medicaid reimbursement to pharmacies for generic or brand drugs. We expect that the
use of a Revised AMP benchmark or the use of an alternative reimbursement metric, such as AAC or NADAC,
would result in a reduction in the Medicaid reimbursement rates to our customers for certain pharmaceuticals,
which could indirectly impact the prices that we can charge our customers and cause corresponding declines in
our profitability.
The federal government may adopt measures that could reduce Medicare and/or Medicaid spending, or
impose additional requirements on healthcare entities. For example, under the terms of the Budget Control Act of
2011, an automatic 2% reduction of Medicare program payments for all healthcare providers became generally
effective for services provided on or after April 1, 2013. This automatic reduction is known as “sequestration.”
Medicare generally reimburses physicians for Part B drugs at the rate of average sales price (“ASP”) plus 6%.
The implementation of sequestration pursuant to the Budget Control Act of 2011 has effectively reduced
reimbursement below the ASP plus 6% level for the duration of sequestration (which lasts through fiscal 2024 in
the absence of additional legislation). As another example, the Medicare Access and CHIP Reauthorization Act
(“MACRA”), signed into law in April 2015, seeks to reform Medicare reimbursement policy for physician fee
schedule services and adopts a series of policy changes affecting a wide range of providers and suppliers. Most
notably, MACRA repeals the statutory Sustainable Growth Rate formula, which has called for cuts in Medicare
rates in recent years, but which Congress routinely stepped in to override the full application of the formula.
Instead, after a period of stable payment updates, MACRA links physician payment updates to quality and value
measurements and participation in alternative payment models. MACRA also extends certain expiring Medicare
and other health policy provisions, including extending the Children’s Health Insurance Program. Additionally,
concerns held by federal policymakers about the federal deficit and national debt levels could result in enactment
of further federal spending reductions, further entitlement reform legislation affecting the Medicare program, or
both. We cannot predict what alternative or additional deficit reduction initiatives or Medicare payment
reductions, if any, will ultimately be enacted into law, or the timing or affect any such initiatives or reductions
will have on us.
There can be no assurance that the preceding changes would not have a material adverse impact on our
results of operations.
Operating, Security and Licensure Standards: We are subject to the operating and security standards of the
Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”), various state
boards of pharmacy, state health departments, the U.S. Department of Health and Human Services (“HHS”), the
CMS and other comparable agencies. Certain of our businesses may be required to register for permits and/or
licenses with, and comply with operating and security standards of the DEA, FDA, HHS, CMS, various state
boards of pharmacy, state health departments and/or comparable state agencies as well as foreign agencies and
certain accrediting bodies, depending upon the type of operations and location of product development,
manufacture, distribution, and sale. For example, we are required to hold valid DEA and state-level registrations
and licenses, meet various security and operating standards and comply with the Controlled Substances Act and
its accompanying regulations governing the sale, marketing, packaging, holding and distribution of controlled
substances.
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McKESSON CORPORATION
As part of these operating, security and licensure standards, we regularly receive requests for information and
occasionally subpoenas from government authorities. In some instances, these can lead to monetary penalties and/or
license revocation. In March 2015, we reached an agreement in principle with the DEA and Department of Justice
pursuant to which we agreed to pay the sum of $150 million to settle all potential administrative and civil claims
relating to investigations about the Company’s suspicious order reporting practices for controlled substances.
Although we have enhanced our procedures to ensure compliance, there can be no assurance that a
regulatory agency or tribunal would conclude that our operations are compliant with applicable laws and
regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits,
licenses or any other regulatory approvals or obtain without significant delay future permits, licenses or other
approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and
regulations or the failure to maintain, renew or obtain necessary permits and licenses could lead to litigation and
have a material adverse impact on our results of operations.
Pedigree Tracking: There have been increasing efforts by Congress and state and federal agencies,
including state boards of pharmacy and departments of health and the FDA, to regulate the pharmaceutical
distribution system in order to prevent the introduction of counterfeit, adulterated and/or mislabeled drugs into
the pharmaceutical distribution system, otherwise known as pedigree tracking. In November 2013, Congress
passed and the President signed into law the Drug Quality and Security Act (“DQSA”). The DQSA establishes
federal standards requiring supply-chain stakeholders to participate in an electronic, interoperable, lot-level
prescription drug track and trace system. The law also preempts state drug pedigree requirements.
In addition, the Food and Drug Administration Amendments Act of 2007, which went into effect on
October 1, 2007, requires the FDA to establish standards and identify and validate effective technologies for the
purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards may include
track-and-trace or authentication technologies, such as radio frequency identification devices and other similar
technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (“SNI”) guidance for
manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI
regulations in our distribution operations. The DQSA and other pedigree tracking laws and regulations could
increase the overall regulatory burden and costs associated with our pharmaceutical distribution business, and
could have a material adverse impact on our results of operations.
Privacy: State, federal and foreign laws regulate the confidentiality of personal information, how that
information may be used, and the circumstances under which such information may be released. These regulations
govern the disclosure and use of confidential personal and patient medical record information and require the users
of such information to implement specified privacy and security measures. Regulations currently in place,
including regulations governing electronic health data transmissions, continue to evolve and are often unclear and
difficult to apply. Although we modified our policies, procedures and systems to comply with the current
requirements of applicable state, federal and foreign laws,
including the Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”) and the Health Information Technology for Economic and Clinical Health
(“HITECH”) Act portion of the American Recovery and Reinvestment Act of 2009, new laws and regulations in
this area could further restrict our or our customers’ ability to obtain, use or disseminate personal or patient
information, or could require us to incur significant additional costs to re-design our products or systems in a
timely manner, either of which could have a material adverse impact on our results of operations. In addition, the
HITECH Act expanded HIPAA privacy and security requirements and increased financial penalties for violations.
It also extended certain provisions of the federal privacy and security standards to us in our capacity as a business
associate of our payer and provider customer. These standards may be interpreted by a regulatory authority in a
manner that could require us to make a material change to our operations. Furthermore, our failure to maintain the
confidentiality of personal information in accordance with applicable regulatory requirements could expose us to
breach of contract claims, tort damages, fines and penalties, costs for remediation and harm to our reputation.
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Healthcare Reform: The Affordable Care Act significantly expanded health insurance coverage to uninsured
Americans and changed the way healthcare is financed by both governmental and private payers. While certain
provisions of the Affordable Care Act took effect immediately, others have delayed effective dates. We do not
currently anticipate that the Affordable Care Act or any resulting federal and state healthcare reforms will have a
material impact on our financial position and results of operations. However, given the scope of the changes
made and under consideration, as well as the uncertainties associated with implementation of healthcare reforms,
we cannot predict their full effect on the Company at this time.
Interoperability and Meaningful Use Requirement: There is increasing demand among customers, industry
groups and government authorities that healthcare software and systems provided by various vendors be
compatible with each other. In 2013, in order to address this demand for interoperability we and a number of
other healthcare IT companies co-founded the CommonWell Health Alliance with the aim of developing a
standard for data sharing among doctors, hospitals, clinics and pharmacies. Certain federal and state agencies
also are developing standards that could become mandatory for software and systems purchased by these
agencies, or used by our customers. With respect to legislation addressing interoperability, MACRA promotes
and defines interoperability, requires metrics to measure interoperability, and requires vendors and providers to
attest that they are not blocking data. Regarding meaningful use requirements, the HITECH Act requires
meaningful use of “certified” healthcare information technology products by healthcare providers in order to
receive stimulus funds from the federal government.
Although several of our healthcare information technology products have received certification, rules
regarding meaningful use may be changed or supplemented in the future. As a result of interoperability and
meaningful requirements, we may incur increased development costs and delays in receiving certification for our
products, and changing or supplementing rules also may lengthen our sales and implementation cycle. We also
may incur costs in periods prior to the corresponding recognition of revenue. To the extent these requirements
subsequently are changed or supplemented, or we are delayed in receiving certification for our products,
customers may postpone or cancel their decisions to purchase or implement these products.
FDA Regulation of Medical Software: The FDA has increasingly focused on the regulation of medical
software and health information technology products as medical devices under the federal Food, Drug and
Cosmetic Act. For example, in 2011 the FDA issued a rule on medical device data systems that regulates certain
software systems that electronically store, transfer or display data originating from medical devices as Class 1
medical devices (i.e., those devices deemed by the FDA to be low risk and subject to the least regulatory
controls) themselves. However, in February 2015, the FDA issued guidance to inform manufacturers and
distributors of medical device data systems that it did not intend to enforce compliance with regulatory controls
that apply to medical device data systems, medical image storage devices, and medical image communication
devices. If the FDA chooses to regulate more of our products as medical devices, or subsequently changes or
reverses its guidance regarding not enforcing regulatory controls for certain medical device products, it can
impose extensive requirements upon us. If we fail to comply with the applicable requirements, the FDA could
respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending
production, refusing to grant pre-market clearance of products, withdrawing clearances and initiating criminal
prosecution. Any additional FDA regulations governing health information technology products, once issued,
may increase the cost and time to market of new or existing products or may prevent us from marketing our
products.
Standards for Submission of Healthcare Claims: HHS previously adopted two rules that impact healthcare
claims submitted for reimbursement. The first rule modifies the standards for electronic healthcare transactions
(e.g., eligibility, claims submission and payment and electronic remittance) from Version 4010/4010A to Version
5010. The second rule updated and expanded the standard medical code sets for diagnosis and procedure coding
from International Classification of Diseases, Ninth Revision (“ICD-9”) to International Classification of
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McKESSON CORPORATION
Diseases, Tenth Revision (“ICD-10”). As a consequence of the passage of the Protecting Access to Medicare Act
of 2014, the compliance date for ICD-10 conversion has been postponed from October 1, 2014 to October 1,
2015. Updating systems to Version 5010 for electronic healthcare transactions (e.g., eligibility, claims
submission and payment and electronic remittance) is required for use of the ICD-10 code set. Generally, claims
submitted not using Version 5010 and ICD-10 when required will not be processed, and health plans not
accepting transactions using Version 5010 and ICD-10 may experience significant increases in customer service
inquiries. We may incur increased development costs and delays in delivering solutions and upgrading our
software and systems to be in compliance with these new rules. In addition, these rules may lengthen our sales
and implementation cycle and we may incur costs in periods prior to the corresponding recognition of revenue.
Delays in providing software and systems that are in compliance with the new rules may result in postponement
or cancellation of our customers’ decisions to purchase our software and systems.
Medical Billing and Coding: Medical billing, coding and collection activities are governed by numerous
federal and state civil and criminal laws. In connection with these laws, we may be subjected to federal or state
government investigations and possible penalties may be imposed upon us, false claims actions may have to be
defended, private payers may file claims against us and we may be excluded from Medicare, Medicaid or other
government-funded healthcare programs. Any such proceeding or investigation could have a material adverse
impact on our results of operations.
Our foreign operations subject us to a number of operating, economic, political and regulatory risks that may
have a material adverse impact on our financial position and results of operations.
We have operations based in, and we source and contract manufacture pharmaceutical and medical-surgical
products in, a number of foreign countries. The Company’s acquisition of Celesio significantly increases the
importance of our foreign operations to our future operations and growth.
Our foreign operations expose us to a number of risks including changes in trade protection laws, policies
and measures and other regulatory requirements affecting trade and investment; changes in licensing regimes for
pharmacies; unexpected regulatory, social, political, or economic changes in a specific country or region;
changes in intellectual property, privacy and data protection; import/export regulations and trade sanctions in
both the United States and foreign countries and difficulties in staffing and managing foreign operations. Political
changes, labor strikes, acts of war or terrorism and natural disasters, some of which may be disruptive, can
interfere with our supply chain, our customers and all of our activities in a particular location. We may also be
affected by potentially adverse tax consequences and difficulties associated with repatriating cash generated or
held abroad.
Foreign operations are also subject to risks of violations of laws prohibiting improper payments and bribery,
including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar regulations in foreign
jurisdictions. The U.K. Bribery Act, for example, prohibits both domestic and international bribery, as well as
bribery across both private and public sectors. An organization that fails to prevent bribery committed by anyone
associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish
the defense of having implemented adequate procedures to prevent bribery. Failure to comply with these laws
could subject us to civil and criminal penalties that could have a material adverse impact on our financial position
and results of operations.
We also may experience difficulties and delays inherent in sourcing products and contract manufacturing
from foreign countries, including but not limited to: (1) difficulties in complying with the requirements of
applicable federal, state and local governmental authorities in the United States and of foreign regulatory
authorities; (2) inability to increase production capacity commensurate with demand or the failure to predict
market demand; (3) other manufacturing or distribution problems including changes in types of products
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McKESSON CORPORATION
produced, limits to manufacturing capacity due to regulatory requirements, physical limitations, or scarce or
inadequate resources that could impact continuous supply; and (4) damage to our reputation due to real or
perceived quality issues. For example, the FDA has conducted investigations and banned certain generics
manufacturers from selling certain raw materials and drug ingredients in the U.S. from overseas plants due to
quality issues. Difficulties in manufacturing or access to raw materials could result in production shutdowns,
product shortages and other similar delays in product manufacturing that could have a material adverse impact on
our financial position and results of operations.
Changes in the Canadian healthcare industry and regulatory environment could have a material adverse
impact on our results of operations.
Provincial governments in Canada provide partial funding for the purchase of pharmaceuticals and
independently regulate the sale and reimbursement of drugs. Similar to the United States, provincial governments
in Canada have introduced significant changes in recent years in an effort to reduce the costs of publicly funded
health programs. For example, in 2006, the Government of Ontario considerably revised the drug reimbursement
system with the passage of the Transparent Drug System for Patients Act. In recent years, to reduce the cost for
taxpayers, provincial governments have taken further steps to reform the rules regarding the sale of generic
drugs. These changes include the significant lowering of prices for generic pharmaceuticals and, in some
provinces, the elimination or reduction of professional allowances paid to pharmacists by generic manufacturers.
These reforms may adversely affect the distribution of drugs as well as the pricing for prescription drugs for the
Company’s operations in Canada. Other provinces have implemented or are considering similar changes, which
would also lower pharmaceutical pricing and service fees. Individually or in combination, such changes in the
Canadian healthcare environment may significantly reduce our Canadian revenue and operating profit.
General European economic conditions, together with austerity measures being taken by certain European
governments, could have a material adverse impact on our results of operations.
The Company’s acquisition of Celesio increased our assets and operations within Europe and, accordingly,
our exposure to economic conditions in Europe. A slowdown within the European economy could affect our
business in Europe by reducing the prices our customers may be able or willing to pay for our products and
services. A slowdown may also reduce the demand for our products, either of which could result in a material
adverse impact on our results of operations.
In addition, in many European countries the government provides or subsidizes healthcare to consumers and
regulates pharmaceutical prices, patient eligibility, and reimbursement levels to control costs for the government-
sponsored healthcare system. In recent years, in response to the recessionary environment and financial crisis in
Europe, a number of European governments have announced or implemented austerity measures to reduce
healthcare spending and constrain overall government expenditures. For example,
the French
government
introduced a new wholesale mark-up system that constrained distribution margins on
pharmaceuticals. These measures, which include efforts aimed at reforming healthcare coverage and reducing
healthcare costs, continue to exert pressure on the pricing of and reimbursement timelines for pharmaceuticals
and may cause our customers to purchase fewer of our products and services and reduce the prices they are
willing to pay.
in 2011,
Countries with existing healthcare-related austerity measures may impose additional laws, regulations, or
requirements on the healthcare industry. In addition, European governments that have not yet
imposed
healthcare-related austerity measures may impose them in the future. New austerity measures may be similar to
or vary from existing austerity measures and could have a material adverse impact on our results of operations.
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McKESSON CORPORATION
Changes in the European regulatory environment regarding privacy and data protection regulations could
have a material adverse impact on our results of operations.
In Europe, we are subject to the European Union (“EU”) data protection regulations, including the EU
Directive on Data Protection, which requires member states to impose minimum restrictions on the collection
and use of personal data that, in some respects, are more stringent, and impose more significant burdens on
subject businesses,
than current privacy standards in the United States. We may also face audits or
investigations by one or more foreign government agencies relating to our compliance with these regulations
that could result in the imposition of penalties or fines. The EU regulations establish several obligations that
organizations must follow with respect to use of personal data, including a prohibition on the transfer of
personal information from the EU to other countries whose laws do not protect personal data to an adequate
level of privacy or security. In addition to this EU-wide legislation, certain member states have adopted more
stringent data protection standards. The Company has addressed these requirements by certification to the
U.S.-EU Safe Harbor Frameworks. The costs of compliance with, and other burdens imposed by, such laws,
regulations and policies that are applicable to us may limit the use and adoption of our products and solutions
and could have a material adverse impact on our results of operations.
Our results of operations, which are stated in U.S. dollars, could be adversely impacted by foreign currency
fluctuations.
As all of Celesio’s revenues are generated outside of the United States, the Company’s acquisition of
Celesio significantly increases our exposure to foreign currency fluctuation risks. These risks include
uncertainty regarding the Brazilian real, the British pound sterling, the Canadian dollar, the Euro, and the
Norwegian krone that could adversely impact our results of operations and capital ratios based on the
movements of the applicable foreign currency exchange rates in relation to the U.S. dollar. Fluctuating
exchange rates cause the value of items on both the assets and liabilities side of the balance sheet to change,
which could also negatively impact our results of operations. Our financial results and capital ratios will
therefore be sensitive to movements in foreign exchange rates. A depreciation of non-U.S. dollar currencies
relative to the U.S. dollar could have a material adverse impact on our results of operations.
Our business could be hindered if we are unable to complete and integrate acquisitions successfully.
An element of our strategy is to identify, pursue and consummate acquisitions that either expand or
complement our business. Integration of acquisitions involves a number of significant risks, including the
diversion of management’s attention to the assimilation of the operations of businesses we have acquired;
difficulties in the integration of operations and systems; the realization of potential operating synergies; the
assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance
issues that could arise,
including internal control over financial reporting; challenges in retaining the
customers of the combined businesses. Further, acquisitions may have a material adverse impact on our
operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated
depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related
to potential impairment charges, assumed litigation and unknown liabilities. In addition, we may potentially
require additional financing in order to fund future acquisitions, which may or may not be attainable and is
subject to potential volatility in the credit markets. If we are unable to successfully complete and integrate
strategic acquisitions in a timely manner, our business and our growth strategies could be negatively affected.
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of
Celesio and certain convertible bonds of Celesio. Upon the acquisition, our ownership of Celesio’s fully diluted
shares was 75.6%. Celesio is an international wholesale and retail company and provider of logistics and services
to the pharmaceutical and healthcare sectors. On December 2, 2014, we obtained the ability to pursue the
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McKESSON CORPORATION
integration of the two companies upon the effectiveness of the domination and profit and loss transfer agreement
(the “Domination Agreement”).
Achieving the anticipated benefits of our acquisition of Celesio is subject to a number of risks and
uncertainties, including foreign exchange fluctuations, challenges of managing new international operations, and
whether we can ensure continued performance or market growth of Celesio’s product and services. The
integration process is subject to a number of uncertainties and no assurance can be given that the anticipated
benefits of the transaction will be realized or, if realized, the timing of its realization. It is possible that the
integration process could take longer than anticipated, and could result in the loss of employees, the disruption of
each company’s ongoing businesses, processes and systems, or inconsistencies in standards, controls, procedures,
practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the
anticipated benefits of the Celesio acquisition and which could have a material adverse impact on our financial
position, results of operations, liquidity and cash flows.
Any significant diversion of management’s attention away from the ongoing businesses, and any difficulties
encountered in the acquisition, transition and integration process, could adversely affect our financial results.
Moreover, the failure to achieve the anticipated benefits of the Celesio acquisition could result in increased costs
or decreases in the amount of expected revenues, and could adversely affect our future business, financial
position and operating results. Events outside of our control, including the market price of Celesio shares that we
did not acquire in the acquisition, changes in regulations and laws, as well as economic trends, could also
adversely affect our ability to realize the expected benefits from our acquisition of Celesio.
Our business and results of operations could be impacted if we fail to manage and complete divestitures.
We regularly evaluate our portfolio in order to determine whether an asset or business may no longer help
us meet our objectives. For example, during the fourth quarter of 2015, we committed to a plan to sell our
Brazilian pharmaceutical distribution business and a small business from our Distribution Solutions segment, as
well as a small business from our Technology Solutions segment. When we decide to sell assets or a business, we
may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner,
which could delay the achievement of our strategic objectives. We may also experience greater dissynergies than
expected, and the impact of the divestiture on our revenue growth may be larger than projected. After reaching an
agreement with a buyer, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory
and governmental approvals, which, if not satisfied or obtained, may prevent us from completing the sale.
Dispositions may also involve continued financial involvement in the divested business, such as through
continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements,
performance by the divested businesses or other conditions outside of our control could have a material adverse
impact on our results of operations.
We are subject to legal and regulatory proceedings that could have a material adverse impact on our financial
position and results of operations.
From time-to-time and in the ordinary course of our business, we and certain of our subsidiaries may
become involved in various legal and regulatory proceedings involving false claims, healthcare fraud and abuse,
antitrust, commercial, employment, environmental, intellectual property, licensing, tort and other various claims.
All such legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or
injunctive relief that may affect how we operate our business or we may enter into settlements of claims for
monetary payments. In some cases, substantial non-economic remedies or punitive damages may be sought. For
some complaints filed against the Company, we are currently unable to estimate the amount of possible losses
that might be incurred should these legal proceedings be resolved against the Company.
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McKESSON CORPORATION
The outcome of litigation and other legal matters is always uncertain and outcomes that are not justified by
the evidence or existing law can occur. The Company believes that it has valid defenses to the legal matters
pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or any
combination of more than one legal matter could result in a material adverse impact on our financial position or
results of operations.
Litigation is costly, time-consuming and disruptive to normal business operations. The defense of these
matters could also result in continued diversion of our management’s time and attention away from business
operations, which could also harm our business. Even if these matters are not resolved against us, the uncertainty
and expense associated with unresolved legal proceedings could harm our business and reputation.
Competition may erode our profit.
In every area of healthcare distribution operations, our Distribution Solutions segment faces strong
competition, both in price and service, from international, national, regional and local full-line, short-line and
specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct
distribution, third-party logistics companies and large payer organizations. In addition, this segment faces
competition from various other service providers and from pharmaceutical and other healthcare manufacturers as
well as other potential customers of the segment, which may from time-to-time decide to develop, for their own
internal needs, supply management capabilities that would otherwise be provided by the segment. Price, quality
of service, and in some cases, convenience to the customer are generally the principal competitive elements in
this segment.
In recent years, pharmaceutical suppliers have been subject to increasing consolidation. As a result, a small
number of very large companies control a significant share of the market. Accordingly, we depend on fewer
suppliers for our products and therefore we may be less able to negotiate price terms with suppliers. Many
healthcare organizations that purchase our products and services have also consolidated to create larger
healthcare enterprises with greater market power. If this consolidation trend continues, it could reduce the
number of market participants and give the resulting enterprises greater bargaining power, which may lead to
erosion of the prices for our products and services. In addition, when healthcare organizations combine they often
consolidate infrastructure including IT systems, which in turn may erode the diversity of our customer and
revenue base.
Our Technology Solutions segment experiences substantial competition from many firms, including other
software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers,
care management organizations, hardware vendors and internet-based companies with technology applicable to
the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and
in scope and breadth of products and services offered. These competitive pressures could have a material adverse
impact on our results of operations.
A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as
substantial defaults in payment by a large customer or group purchasing organization, could have a material
adverse impact on our financial position and results of operations.
In recent years, a significant portion of our revenue growth has been with a limited number of large
customers. During 2015, sales to our ten largest customers accounted for approximately 44% of our total
consolidated revenues. Sales to our largest customer, CVS Caremark Corporation (“CVS”), accounted for
approximately 15% of our total consolidated revenues. At March 31, 2015, trade accounts receivable from our
ten largest customers were approximately 36% of total trade accounts receivable. Accounts receivable from CVS
were approximately 14% of total trade accounts receivable. As a result, our sales and credit concentration is
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McKESSON CORPORATION
significant. We also have agreements with group purchasing organizations (“GPOs”), each of which functions as
a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with
government entities and agencies. A material default in payment, change in our customer mix, reduction in
purchases, or the loss of a large customer or GPO could have a material adverse impact on our financial position
and results of operations.
We generally sell our products and services to customers on credit that is short-term in nature and
unsecured. Any adverse change in general economic conditions can adversely reduce sales to our customers,
affect consumer buying practices or cause our customers to delay or be unable to pay accounts receivable owed
to us, which may in turn materially reduce our revenue growth and cause a material decrease in our profitability
and cash flow. Further, interest rate fluctuations and changes in capital market conditions may also affect our
customers’ ability to obtain credit to finance their business under acceptable terms, which in turn may materially
reduce our revenue growth and cause a decrease in our profitability.
Contracts with foreign and domestic government entities and their agencies pose additional risks relating to
future funding and compliance.
Contracts with foreign and domestic government entities and their agencies are subject
to various
uncertainties, restrictions and regulations,
including oversight audits by various government authorities.
Government contracts also are exposed to uncertainties associated with funding. Contracts with the U.S. federal
government, for example, are subject to the uncertainties of Congressional funding. Governments are typically
under no obligation to maintain funding at any specific level, and funds for government programs may even be
eliminated. As a result, our government clients may terminate our contracts for convenience or decide not to
renew our contracts with little or no prior notice. The loss of such contracts could have a material adverse impact
on our results of operations.
In addition, because government contracts are subject to specific procurement regulations and a variety of
other socio-economic requirements, we must comply with such requirements. For example, for contracts with the
U.S. federal government, with certain exceptions, we must comply with the Federal Acquisition Regulation, the
Truth in Negotiations Act, and the Cost Accounting Standards. We must also comply with various other
government
regulations and requirements as well as various statutes related to employment practices,
environmental protection, recordkeeping and accounting. These regulations and requirements affect how we
transact business with our clients and, in some instances, impose additional costs on our business operations.
Government contracts also contain terms that expose us to higher levels of risk and potential liability than non-
government contracts.
We also are subject to government audits, investigations, and proceedings. For example, government
agencies routinely review and audit government contractors to determine whether allowable costs are in
accordance with applicable government regulations. These audits can result in adjustments to the amount of
contract costs we believe are reimbursable by the agencies and the amount of our overhead costs allocated to the
agencies.
If we violate these rules or regulations, fail to comply with a contractual or other requirement or do not
satisfy an audit, a variety of penalties can be imposed by a government including disallowance of costs claimed,
monetary damages and criminal and civil penalties. In addition, any or all of our government contracts could be
terminated or we could be suspended or debarred from all government contract work. The occurrence of any of
these actions could harm our reputation and could have a material adverse impact on our results of operations.
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McKESSON CORPORATION
Our future results could be materially affected by a number of public health issues whether occurring in the
United States or abroad.
Public health issues, whether occurring in the United States or abroad, could disrupt our operations, disrupt
the operations of suppliers or customers, or have a broader adverse impact on consumer spending and confidence
levels that would negatively affect our suppliers and customers. We have developed contingency plans to address
infectious disease scenarios and the potential impact on our operations, and we will continue to update these
plans as necessary. However, there can be no assurance that these plans will be effective in eliminating the
negative impact of any such diseases on the Company’s operating results. We may be required to suspend
operations in some or all of our locations, which could have a material adverse impact on our financial position
and results of operations.
We are dependent upon sophisticated information systems. The malfunction, failure or breach of these
systems to perform as designed could have a material adverse impact on our results of operations.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information,
including protected health information, financial information and other sensitive information relating to our
customers, company and workforce. We also rely on sophisticated information systems in our business to obtain,
rapidly process, analyze and manage data to: (1) facilitate the purchase and distribution of thousands of inventory
items from numerous distribution centers; (2) receive, process and ship orders and handle other product and
services on a timely basis; (3) manage the accurate billing and collections for thousands of customers; and
(4) process payments to suppliers. In Europe, Celesio outsources a significant part of its IT infrastructure to an
external service provider. If these systems are interrupted, damaged or breached by an unforeseen event or
actions of a third party, including a cyber attack, or fail for any extended period of time, it could have a material
adverse impact on our results of operations.
If we sustain cyber attacks or other privacy or data security incidents that result in security breaches, we could
suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm and other
serious negative consequences.
We routinely process, store and transmit large amounts of data in our operations, including sensitive
personal information as well as proprietary or confidential information relating to our business or third parties.
Some of the data we process, store and transmit may be outside of the U.S. due to our information technology
systems and international business operations. We may be subject to breaches of the information technology
systems we use. Experienced computer programmers and hackers may be able to penetrate our layered security
controls and misappropriate or compromise sensitive personal
information or proprietary or confidential
information, create system disruptions or cause shutdowns. They also may be able to develop and deploy viruses,
worms, and other malicious software programs that attack our systems or otherwise exploit any security
vulnerabilities. Our systems and the data we store on those systems may also be vulnerable to security incidents
or security attacks; acts of vandalism or theft; coordinated attacks by activist entities; misplaced or lost data;
human errors; or other similar events that could negatively affect our systems and our and our customer’s data.
The costs to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber
incident could be significant. Our remediation efforts may not be successful and could result in interruptions,
delays, or cessation of service, and loss of existing or potential customers. In addition, breaches of our security
measures and the unauthorized dissemination of sensitive personal information or proprietary information or
confidential information about us or our customers or other third parties, could expose our customers’ private
information and our customers to the risk of financial or medical identity theft, or expose us or other third parties
to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand
and reputation, or otherwise harm our business.
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McKESSON CORPORATION
We could experience losses or liability not covered by insurance.
In order to provide prompt and complete service to our major Distribution Solutions segment’s customers,
we maintain significant product inventory at certain of our distribution centers. While we seek to maintain
property insurance coverage in amounts sufficient for our business, there can be no assurance that our property
insurance will be adequate or available on acceptable terms. One or more large casualty losses caused by fire,
earthquake or other natural disaster in excess of our coverage limits could have a material adverse impact on our
results of operations.
Our business exposes us to risks that are inherent in the distribution, manufacturing, dispensing and
administration of pharmaceuticals and medical-surgical supplies, the provision of ancillary services, the conduct
of our payer businesses (which include care management programs and our nurse advice services) and the
provision of products that assist clinical decision-making and relate to patient medical histories and treatment
plans. If customers or individuals assert liability claims against our products and/or services, any ensuing
litigation, regardless of outcome, could result in a substantial cost to us, divert management’s attention from
operations and decrease market acceptance of our products. We attempt to limit our liability to customers by
contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not
otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly
covered by contract, such as a claim directly by a patient. We also maintain general liability coverage; however,
this coverage may not continue to be available on acceptable terms, may not be available in sufficient amounts to
cover one or more large claims against us and may include larger self-insured retentions or exclusions for certain
products. In addition, the insurer might disclaim coverage as to any future claim. A successful product or
professional liability claim not fully covered by our insurance could have a material adverse impact on our
results of operations.
The acquisition of Celesio exposes us to additional risks related to providing pharmacy services. Pharmacies
are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products,
such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings,
unintentional distribution of counterfeit drugs and expiration of drugs. Although Celesio maintains liability
insurance, the coverage may not be adequate to protect us against future claims. If Celesio’s insurance coverage
proves to be inadequate or unavailable or Celesio suffers reputational harm as a result of an error or omission, it
could have a material adverse impact on our results of operations.
The failure of our healthcare technology businesses to attract and retain customers due to challenges in
software product integration or to keep pace with technological advances may significantly reduce our results
of operations.
Our healthcare technology businesses, the bulk of which resides in our Technology Solutions segment,
deliver enterprise-wide and single entity clinical, patient care, financial, supply chain and strategic management
software solutions to hospitals, physicians, homecare providers, retail and mail order pharmacies and payers.
Challenges integrating software products could impair our ability to attract and retain customers and could have a
material adverse impact on our consolidated results of operations and a disproportionate impact on the results of
operations of our Technology Solutions segment.
Future advances in the healthcare information systems industry could lead to new technologies, products or
services that are competitive with the technology products and services offered by our various businesses. Such
technological advances could also lower the cost of such products and services or otherwise result in competitive
pricing pressure or render our products obsolete.
The success of our technology businesses will depend,
in part, on our ability to be responsive to
technological developments, pricing pressures and changing business models. To remain competitive in the
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McKESSON CORPORATION
evolving healthcare information systems marketplace, our technology businesses must also develop new products
on a timely basis. The failure to develop competitive products and to introduce new products on a timely basis
could curtail the ability of our technology businesses to attract and retain customers, and thereby could have a
material adverse impact on our results of operations.
Proprietary protections may not be adequate and products may be found to infringe the rights of third parties.
We rely on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other
contractual provisions and technical measures to protect our proprietary rights in our products and solutions.
There can be no assurance that these protections will be adequate or that our competitors will not independently
develop products or solutions that are equivalent or superior to ours. In addition, despite protective measures, we
may be subject to unauthorized use of our technology due to copying, reverse-engineering or other infringement.
Although we believe that our products, solutions and services do not infringe the proprietary rights of third
parties, from time to time third parties have asserted infringement claims against us and there can be no
assurance that third parties will not assert infringement claims against us in the future. If we were found to be
infringing others’ rights, we may be required to pay substantial damage awards and forced to develop non-
infringing products or technology, obtain a license or cease selling or using the products that contain the
infringing elements. Additionally, we may find it necessary to initiate litigation to protect our trade secrets, to
enforce our patent, copyright and trademark rights and to determine the scope and validity of the proprietary
rights of others. These types of litigation can be costly and time consuming. These litigation expenses, damage
payments or costs of developing replacement products or technology could have a material adverse impact on our
results of operations.
System errors or failures of our products to conform to specifications could cause unforeseen liabilities or
injury, harm our reputation and have a material adverse impact on our results of operations.
The software and technology services that we sell or operate are complex. As with complex systems offered
by others, our software and technology services may contain errors, especially when first introduced. For
example, our Technology Solutions segment’s systems are intended to provide information to healthcare
professionals in the course of delivering patient care. Therefore, users of our software and technology services
have a greater sensitivity to errors than the general market for software products. If our software and technology
services lead to faulty clinical decisions or injury to patients, we could be subject to claims or litigation by our
clients, clinicians or patients. In addition, such failures could damage our reputation and could negatively affect
future sales.
Failure of a customer’s system to perform in accordance with our documentation could constitute a breach
of warranty and could require us to incur additional expense in order to make the system comply with the
documentation. If such failure is not remedied in a timely manner, it could constitute a material breach under a
contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid or assert claims for
significant damages.
Various risks could interrupt customers’ access to their data residing in our service center, exposing us to
significant costs.
We provide remote hosting services that involve operating both our software and the software of third-party
vendors for our customers. The ability to access the systems and the data that we host and support on demand is
critical to our customers. Our operations and facilities are vulnerable to interruption and/or damage from a
number of sources, many of which are beyond our control, including, without limitation: (1) power loss and
telecommunications failures; (2) fire, flood, hurricane and other natural disasters; (3) software and hardware
errors, failures or crashes; and (4) cyber attacks, computer viruses, hacking and other similar disruptive
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McKESSON CORPORATION
problems. We attempt to mitigate these risks through various means including disaster recovery plans, separate
test systems and change controls, information security procedures, and continued development and enhancement
of our cyber security, but our precautions may not protect against all risks. If customers’ access is interrupted
because of problems in the operation of our facilities, we could be exposed to significant claims, particularly if
the access interruption is associated with problems in the timely delivery of medical care. If customers’ access is
interrupted from failure or breach of our operational or information security systems, or those of our contractors
or third party service providers, we could suffer reputational harm or be exposed to liabilities arising from the
unauthorized and improper use or disclosure of confidential or proprietary information. We must maintain
disaster recovery and business continuity plans that rely upon third-party providers of related services and if
those vendors fail us at a time that our center is not operating correctly, we could incur a loss of revenue and
liability for failure to fulfill our contractual service commitments. Any significant instances of system downtime
could negatively affect our reputation and ability to sell our remote hosting services.
The length of our sales and implementation cycles for our Technology Solutions segment could have a
material adverse impact on our future results of operations.
Many of the solutions offered by our Technology Solutions segment have long sales and implementation
cycles, which could range from a few months to two years or more from initial contact with the customer to
completion of implementation. How and when to implement, replace, or expand an information system, or
modify or add business processes, are major decisions for healthcare organizations. Many of the solutions we
provide typically require significant capital expenditures and time commitments by the customer. Any decision
by our customers to delay or cancel implementation could have a material adverse impact on our results of
operations. Furthermore, delays or failures to meet milestones established in our agreements may result in a
breach of contract, termination of the agreement, damages and/or penalties as well as a reduction in our margins
or a delay in our ability to recognize revenue.
We may be required to record a significant charge to earnings if our goodwill or intangible assets become
impaired.
We are required under U.S. generally accepted accounting principles (“GAAP”) to test our goodwill for
impairment, annually or more frequently if indicators for potential
impairment exist. Indicators that are
considered include significant changes in performance relative to expected operating results, significant changes
in the use of the assets, significant negative industry, or economic trends or a significant decline in the
Company’s stock price and/or market capitalization for a sustained period of time. In addition, we periodically
review our intangible assets for impairment when events or changes in circumstances, such as a divestiture
indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances
indicating that the carrying value of our intangible assets may not be recoverable include slower growth rates the
loss of a significant customer, or divestiture of a business or asset for below its carrying value. We may be
required to record a significant charge to earnings in our consolidated financial statements during the period in
which any impairment of our goodwill or intangible assets is determined. This could have a material adverse
impact on our results of operations. There are inherent uncertainties in management’s estimates, judgments and
assumptions used in assessing recoverability of goodwill and intangible assets. Any changes in key assumptions,
including failure to meet business plans, a further deterioration in the market or other unanticipated events and
circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment
charge.
Tax legislation initiatives or challenges to our tax positions could have a material adverse impact on our
results of operations.
We are a large multinational corporation with operations in the United States and international jurisdictions.
As such, we are subject to the tax laws and regulations of the United States federal, state and local governments
26
McKESSON CORPORATION
and of many international jurisdictions. From time-to-time, legislation may be enacted that could adversely affect
our tax positions. There can be no assurance that our effective tax rate and the resulting cash flow will not be
adversely affected by these changes in legislation. For example, if legislation is passed to repeal the LIFO (last-
in, first-out) method of inventory accounting for income tax purposes, it would adversely impact our cash flow.
Additionally, if legislation is passed to change the current U.S. taxation treatment of income from foreign
operations, or if legislation is passed at the state level to establish or increase taxation on the basis of our gross
revenues, it may adversely impact our tax expense. The tax laws and regulations of the various countries where
we have major operations are extremely complex and subject to varying interpretations. For example, we operate
in various countries which collect value added taxes (“VAT”). The determination of the manner in which a VAT
applies to our foreign operations is subject to varying interpretations arising from the complex nature of the tax
laws and regulations. Although we believe that our historical tax positions are sound and consistent with
applicable laws, regulations and existing precedent, there can be no assurance that these tax positions will not be
challenged by relevant tax authorities or that we would be successful in any such challenge. Even if we are
successful in maintaining our positions, we may incur significant expense in defending challenges to our tax
positions by tax authorities that could have a material impact on our financial position and results of operations.
Volatility and disruption to the global capital and credit markets may adversely affect our ability to access
credit, our cost of credit and the financial soundness of our customers and suppliers.
Volatility and disruption in the global capital and credit markets, including the bankruptcy or restructuring
of certain financial institutions, reduced lending activity by other financial institutions, decreased liquidity and
increased costs in the commercial paper market and the reduced market for securitizations, may adversely affect
the availability and cost of credit already arranged and the availability, terms and cost of credit in the future,
including any arrangements to renew or replace our current credit or financing arrangements. Although we
believe that our operating cash flow, financial assets, current access to capital and credit markets, including our
existing credit and sales facilities, will give us the ability to meet our financing needs for the foreseeable future,
there can be no assurance that volatility and disruption in the global capital and credit markets will not impair our
liquidity or increase our costs of borrowing.
Our business could also be negatively impacted if our customers or suppliers experience disruptions
resulting from tighter capital and credit markets or a slowdown in the general economy. As a result, customers
may modify, delay or cancel plans to purchase or implement our products or services and suppliers may increase
their prices, reduce their output or change their terms of sale. Additionally, if customers’ or suppliers’ operating
and financial performance deteriorates or if they are unable to make scheduled payments or obtain credit,
customers may not be able to pay, or may delay payment of accounts receivable owed to us and suppliers may
restrict credit, impose different payment terms or be unable to make payments due to us for fees, returned
products or incentives. Any inability of customers to pay us for our products and services or any demands by
suppliers for different payment terms may have a material adverse impact on our results of operations and cash
flow.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”), the
International Accounting Standards Board (“IASB”) or other standard-setting bodies may adversely affect
our financial statements.
Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or
expanded. Within our financial statements, we consolidate the results of Celesio, which are subject to the
application of International Financial Reporting Standards or IFRS. From time-to-time we or Celesio are required
to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB,
IASB and the SEC. It is possible that future accounting standards we are required to adopt could change the
current accounting treatment that we apply to our consolidated financial statements and that such changes could
have a material adverse impact on our financial position and results of operations.
27
McKESSON CORPORATION
We could face significant liability if we withdraw from participation in one or more multiemployer pension
plans in which we participate or one or more multiemployer plans in which we participate is reported to have
underfunded liabilities.
We participate in various multiemployer pension plans. In the event that we withdraw from participation in
one of these plans, then applicable law could require us to make additional cash contributions to the plans in
installments. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s
funding of vested benefits. The multiemployer plans could have significant unfunded vested liabilities. Such
underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan
or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such
underfunding may increase as a result of lower than expected returns on pension fund assets or other funding
deficiencies. The occurrence of any of these events could have a material adverse impact on our consolidated
financial position, results of operations or cash flows.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Because of the nature of our principal businesses, our plant, warehousing, retail pharmacies, office and other
facilities are operated in widely dispersed locations, primarily throughout North America and Europe. The
warehouses and retail pharmacies are typically owned or leased on a long-term basis. We consider our operating
properties to be in satisfactory condition and adequate to meet our needs for the next several years without
making capital expenditures materially higher
lease
commitments is included in Financial Note 21, “Lease Obligations,” to the consolidated financial statements
appearing in this Annual Report on Form 10-K.
Information as to material
than historical
levels.
Item 3.
Legal Proceedings.
Certain legal proceedings in which we are involved are discussed in Financial Note 23, “Other
Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual
Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.
28
McKESSON CORPORATION
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of the Company, including their
principal occupations during the past five years. The number of years of service with the Company includes
service with predecessor companies.
There are no family relationships between any of the executive officers or directors of the Company. The
executive officers are elected on an annual basis generally and their term expires at the first meeting of the Board
of Directors (“Board”) following the annual meeting of stockholders, or until their successors are elected and
have qualified, or until death, resignation or removal, whichever is sooner.
Name
Age
Position with Registrant and Business Experience
John H. Hammergren
James A. Beer
Patrick J. Blake
56 Chairman of the Board since July 2002; President and Chief Executive Officer
since April 2001; and a director since July 1999. Service with the Company —
19 years.
54 Executive Vice President and Chief Financial Officer since October 2013;
Executive Vice President and Chief Financial Officer, Symantec Corporation
from 2006 to October 2013; Senior Vice President and Chief Financial Officer,
AMR Corporation and its principal subsidiary, American Airlines, Inc., from
2004 to 2006, Service with the Company — 1 year, 7 months.
51 Executive Vice President and Group President since June 2009; President of
McKesson Specialty Care Solutions (now McKesson Specialty Health) from
April 2006 to June 2009. Service with the Company — 19 years.
Jorge L. Figueredo
54 Executive Vice President, Human Resources since May 2008; Service with the
Company — 7 years.
Paul C. Julian
59 Executive Vice President and Group President since April 2004. Service with
the Company — 19 years.
Bansi Nagji
Lori A. Schechter
50 Executive Vice President, Corporate Strategy and Business Development since
February 2015; Principal, Deloitte Consulting, LLP and Global Leader, Monitor
Deloitte (which was formed by the global merger of Monitor Group with
Deloitte) from January 2013 to February 2015; President, Monitor Group from
July 2012 to January 2013; Partner, Monitor Group from 2001 to January 2013.
Service with the Company — 3 months.
53 Executive Vice President, General Counsel and Chief Compliance Officer since
June 2014; Associate General Counsel from January 2012 to June 2014;
Litigation Partner, Morrison & Foerster LLP from January 1995 to December
2011. Service with the Company — 3 years.
29
McKESSON CORPORATION
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
(a) Market Information: The principal market on which the Company’s common stock is traded is the New
York Stock Exchange (“NYSE”).
The following table sets forth the high and low sales prices for our common stock as reported on NYSE
for each quarterly period of the two most recently completed fiscal years:
First quarter
Second quarter
Third quarter
Fourth quarter
2015
2014
High
Low
High
Low
$192.03
$162.90
$119.32
$102.68
$200.00
$185.66
$133.33
$113.26
$214.37
$178.28
$166.57
$128.84
$232.69
$205.72
$188.02
$159.45
(b) Holders: The number of record holders of the Company’s common stock at March 31, 2015 was
approximately 6,488.
(c) Dividends: In July 2013, the Company’s quarterly dividend was raised from $0.20 to $0.24 per common
share for dividends declared after such date, until further action by the Company’s Board of Directors (the
“Board”). The Company declared regular cash dividends of $0.96 and $0.92 per share in the years ended
March 31, 2015 and 2014.
The Company anticipates that it will continue to pay quarterly cash dividends in the future. However,
the payment and amount of future dividends remain within the discretion of the Board and will depend upon
the Company’s future earnings, financial condition, capital requirements and other factors.
(d) Securities Authorized for Issuance under Equity Compensation Plans: Information relating to this item is
provided under Part III, Item 12, to this Annual Report on Form 10-K.
(e) Share Repurchase Plans: Stock repurchases may be made from time-to-time in open market transactions,
privately negotiated transactions, through accelerated share repurchase programs, or by any combination of
such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a
variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our
debt obligations and other market and economic conditions.
In 2015, we repurchased 1.5 million shares for $340 million at an average price of $226.55 per share.
In 2014, we made no share repurchases. In 2013, we repurchased 13 million shares for $1,159 million at an
average price of $100.82 per share.
The following table provides information on the Company’s share repurchases during the fourth
quarter of 2015:
(In millions, except price per share)
January 1, 2015—January 31, 2015
February 1, 2015—February 28, 2015
March 1, 2015—March 31, 2015
Total
Share Repurchases (1)
Average Price
Paid per Share
$ —
226.55
—
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs
—
1.5
—
1.5
$340
—
—
$—
Total
Number of
Shares
Purchased
—
1.5
—
1.5
30
McKESSON CORPORATION
(1) This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises
of employee stock options or shares tendered to satisfy tax-withholding obligations in connection with
employee equity awards.
In May 2015, the Board authorized the repurchase of up to $500 million of the Company’s common stock.
(f)
Stock Price Performance Graph*: The following graph compares the cumulative total stockholder return on
the Company’s common stock for the periods indicated with the Standard & Poor’s 500 Index, Value Line
Healthcare Sector Index and the S&P 500 Health Care Index. The S&P 500 Health Care Index will replace
the Value Line Healthcare Sector Index in the stock price performance graph below beginning in 2016. The
S&P 500 Health Care Index was selected as a comparator because it is generally available to investors and
broadly used by other companies in our same industry.
$400
$350
$300
$250
$200
$150
$100
$50
$0
D
O
L
L
A
R
S
2010
2011
2012
2013
2014
2015
McKesson Corporation
S&P 500 Index
S&P 500 Health Care Index
Value Line Healthcare Sector Index
McKesson Corporation
S&P 500 Index
03/31/10
03/31/11
03/30/12
03/31/13
03/31/14
03/31/15
$100.00
$121.58
$136.33
$169.13
$278.43
$358.37
$100.00
$115.65
$125.53
$143.05
$174.32
$196.51
S&P 500 Health Care Index
$100.00
$105.14
$122.34
$153.13
$197.88
$249.65
Value Line HealthCare Sector Index
$100.00
$107.07
$122.07
$152.91
$196.59
$243.18
* Assumes $100 invested in McKesson Common Stock and in each index on March 31, 2010 and that all
dividends are reinvested.
31
Item 6.
Selected Financial Data.
McKESSON CORPORATION
FIVE-YEAR HIGHLIGHTS
(In millions, except per share data and ratios)
Operating Results
Revenues
Percent change
Gross profit
Income from continuing operations before income taxes
Income (loss) after income taxes
Continuing operations
Discontinued operations
Net income
Net loss (income) attributable to noncontrolling
interests (1)
Net income attributable to McKesson Corporation
Financial Position
Working capital
Days sales outstanding for: (2)
Customer receivables
Inventories
Drafts and accounts payable
Total assets
Total debt, including capital lease obligations
Total McKesson stockholders’ equity (3)
Property acquisitions
Acquisitions, net of cash and cash equivalents acquired
Common Share Information
Common shares outstanding at year-end
Shares on which earnings per common share were based
Diluted
Basic
Diluted earnings (loss) per common share attributable to
McKesson Corporation (4)
Continuing operations
Discontinued operations
Total
Cash dividends declared
Cash dividends declared per common share
Book value per common share (4) (5)
Market value per common share—year-end
Supplemental Data
Capital employed (6)
Debt to capital ratio (7)
Net debt to net capital employed (8)
Average McKesson stockholders’ equity (9)
Return on McKesson stockholders’ equity (10)
As of and for the Years Ended March 31,
2015
2014
2013
2012
2011
$179,045
$137,392
$122,196
$122,453
$111,804
30.3%
$ 11,411
2,657
$
12.4%
8,352
2,171
(0.2)%
9.5%
3.1%
$
6,881
1,950
$
6,435
1,915
$
5,828
1,600
1,842
(299)
1,543
(67)
1,476
1,414
(156)
1,258
5
1,263
1,363
(25)
1,338
—
1,338
1,394
9
1,403
—
1,403
1,097
105
1,202
—
1,202
$
3,173
$
3,221
$
1,813
$
1,917
$
3,631
26
31
54
$ 53,870
9,844
8,001
376
170
232
235
232
29
33
54
$ 51,759
10,594
8,522
278
4,634
231
233
229
26
33
51
$ 34,786
4,873
7,070
241
1,873
227
239
235
$
$
7.54
(1.27)
6.27
226
0.96
34.49
226.20
$
6.08
(0.67)
5.41
214
0.92
36.89
176.57
$
5.69
(0.10)
5.59
192
0.80
31.15
107.96
24
31
49
$ 33,093
3,980
6,831
221
1,051
25
31
47
$ 30,886
4,004
7,220
233
292
235
251
246
5.56
0.04
5.60
202
0.80
29.07
87.77
$
252
263
258
4.17
0.40
4.57
188
0.72
28.65
79.05
$ 17,845
$ 19,116
$ 11,943
$ 10,811
$ 11,224
55.2%
36.0%
8,703
17.0%
$
55.4%
42.9%
7,803
16.2%
$
40.8%
25.5%
7,294
18.3%
36.8%
10.8%
7,108
19.7%
$
35.7%
5.1%
7,105
16.9%
$
$
32
McKESSON CORPORATION
Footnotes to Five-Year Highlights:
(1) Primarily reflects guaranteed dividends and annual recurring compensation that McKesson became
obligated to pay to the noncontrolling shareholders of Celesio AG upon the effectiveness of the Domination
Agreement in December 2014.
(2) Based on year-end balances and sales or cost of sales for the last 90 days of the year.
(3) Excludes noncontrolling and redeemable noncontrolling interests.
(4) Certain computations may reflect rounding adjustments.
(5) Represents McKesson stockholders’ equity divided by year-end common shares outstanding.
(6) Consists of the sum of total debt and McKesson stockholders’ equity.
(7) Ratio is computed as total debt divided by capital employed.
(8) Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt
and McKesson stockholders’ equity.
(9) Represents a five-quarter average of McKesson stockholders’ equity.
(10) Ratio is computed as net income attributable to McKesson Corporation divided by a five-quarter average of
McKesson stockholders’ equity.
33
McKESSON CORPORATION
FINANCIAL REVIEW
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
GENERAL
Management’s discussion and analysis of financial condition and results of operations, referred to as the
Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and
trends related to the results of operations and financial position of the Company together with its subsidiaries.
This discussion and analysis should be read in conjunction with the consolidated financial statements and
accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K. The Company’s fiscal
year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall
mean the Company’s fiscal year.
Certain statements in this report constitute forward-looking statements. See Item 1—Business—Forward-
Looking Statements in Part I of this Annual Report on Form 10-K for additional factors relating to these
statements; also see Item 1A—Risk Factors in Part I of this Annual Report on Form 10-K for a list of certain risk
factors applicable to our business, financial condition and results of operations.
We conduct our business through two operating segments: McKesson Distribution Solutions and McKesson
Technology Solutions. See Financial Note 26, “Segments of Business,” to the consolidated financial statements
appearing in this Annual Report on Form 10-K for a description of these segments.
RESULTS OF OPERATIONS
Overview:
Years Ended March 31,
Change
(Dollars in millions, except per share data)
2015
2014
2013
Revenues
Gross Profit
Operating Expenses
Income from Continuing Operations Before Income
Taxes
Income Tax Expense
Income from Continuing Operations
Loss from Discontinued Operations, Net of Tax
Net Income
Net Loss (Income) Attributable to Noncontrolling
Interests
$179,045
$137,392
$122,196
$ 11,411
$
$
8,443
2,657
(815)
1,842
(299)
1,543
$
$
$
8,352
5,913
2,171
(757)
1,414
(156)
1,258
$
$
$
6,881
4,534
1,950
(587)
1,363
(25)
1,338
2015
30%
37%
43%
2014
12%
21%
30%
22%
11%
8
30
92
23
29
4
524
(6)
(67)
5
—
—
—
Net Income Attributable to McKesson Corporation
$
1,476
$
1,263
$
1,338
17%
(6)%
Diluted Earnings (Loss) Per Common Share
Attributable to McKesson Corporation
Continuing Operations
Discontinued Operations
Total
Weighted Average Diluted Common Shares
7.54
(1.27)
6.27
235
$
$
6.08
(0.67)
5.41
233
$
$
5.69
(0.10)
5.59
239
24%
90
16%
1%
7%
570
(3)%
(3)%
$
$
34
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues increased over the last two years primarily due to our February 2014 acquisition of Celesio AG
(“Celesio”) and February 2013 acquisition of PSS World Medical, Inc. (“PSSI”), as well as due to market growth
and our mix of business. Market growth reflects growing drug utilization, which includes newly launched drugs
and price increases. Increases in revenues were partially offset by price deflation associated with brand to generic
drug conversions.
Gross profit and gross profit margin increased over the last two years primarily due to our business
acquisitions, higher buy margin and our mix of business, partially offset by a decrease in sell margin.
Additionally, gross profit was impacted by higher LIFO-related inventory charges which were $337 million,
$311 million and $13 million in 2015, 2014 and 2013.
Operating expenses increased over the last two years primarily due to our business acquisitions, including
increases in acquisition-related expenses and higher intangible asset amortization, and higher compensation and
benefit costs. Operating expenses in 2015 also included a pre-tax and after-tax $150 million charge associated
with the settlement of controlled substance distribution claims with the Drug Enforcement Administration
(“DEA”), Department of Justice (“DOJ”) and various U.S. Attorney’s offices, and in 2014 and 2013 operating
expenses included $68 million and $72 million of charges associated with our Average Wholesale Price
(“AWP”) litigation. Additionally, operating expenses for 2013 were favorably impacted by an $81 million non-
cash gain on a business combination related to our purchase of the remaining 50% ownership interest in our
corporate headquarters building.
Income from continuing operations before income taxes increased over the last two years reflecting higher
gross profit, partially offset by higher operating and interest expenses. Interest expense increased in 2015
primarily due to our acquisition of Celesio. Additionally, income from continuing operations in 2013 included a
pre-tax non-cash impairment charge of $191 million associated with the sale of our 49% equity interest in Nadro,
S.A. de C.V (“Nadro”). The impairment reduced the investment’s carrying value to its estimated fair value.
Nadro was sold in 2014 with no material gain or loss on disposition.
Our reported income tax rates were 30.7%, 34.9% and 30.1% in 2015, 2014 and 2013. Income tax expense
for 2014 included a charge of $122 million relating to our litigation with the Canadian Revenue Agency
(“CRA”).
During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution
business which we acquired through our acquisition of Celesio. Financial results for this business have been
reclassified as discontinued operations for all periods presented in our consolidated financial statements. As a
result, loss from discontinued operations, net of tax, for 2015 includes $241 million pre-tax ($235 million after-
tax) non-cash impairment charges to write-off the business’ long-lived assets and reduce the carrying value of
this business to its fair value, less costs to sell.
Loss from discontinued operations, net of tax, for 2014 included a non-cash pre-tax and after-tax impairment
charge of $80 million related to our International Technology business, which was sold in part in 2015.
Net loss attributable to noncontrolling interests for 2015 primarily reflects the $62 million of guaranteed
dividends and recurring compensation that McKesson is obligated to pay the noncontrolling shareholders of
Celesio under the domination and profit and loss transfer agreement (the “Domination Agreement”), which
became effective in December 2014 as further described below.
Net income attributable to McKesson Corporation was $1,476 million, $1,263 million and $1,338 million in
2015, 2014 and 2013. Diluted earnings per common share attributable to McKesson Corporation from continuing
35
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
operations were $7.54, $6.08 and $5.69 and diluted loss per common share attributable to McKesson Corporation
from discontinued operations were $1.27, $0.67 and $0.10 in 2015, 2014 and 2013.
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of
Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the
“Acquisition”). Upon the Acquisition, as required, we consolidated Celesio’s debt with a fair value of
$2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesio’s fully diluted common
shares was 75.6%. We owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares at
March 31, 2014. Financial results for Celesio are included within our International pharmaceutical distribution
and services business, which is part of our Distribution Solutions segment, since the date of Acquisition.
On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary, McKesson Deutschland
GmbH & Co. KGaA (“McKesson Deutschland,” formerly known as Dragonfly GmbH & Co. KGaA), entered
into the Domination Agreement. On July 15, 2014, the Domination Agreement was approved at the general
shareholders’ meeting of Celesio. On December 2, 2014, the Domination Agreement became effective upon its
registration in the commercial register of Celesio at the local court of Stuttgart, Germany. Upon the effectiveness
of the Domination Agreement,
the noncontrolling shareholders of Celesio no longer participate in their
percentage ownership of Celesio’s profits and losses. Instead, McKesson became obligated to pay a one-time
$50 million dividend (“Guaranteed Dividend”) for their fiscal year ended December 31, 2014, and an annual
recurring compensation amount of €0.83 per Celesio share (effective January 1, 2015) to the noncontrolling
shareholders of Celesio. The recurring compensation amount is recognized ratably during the applicable annual
period. For fiscal 2016, the estimated annual recurring compensation is $44 million based on the Euro to U.S.
dollar exchange rate and shares owned by the noncontrolling interests at April 1, 2015.
In addition, upon effectiveness of the Domination Agreement, the noncontrolling interests in Celesio
became redeemable as a result of a put right. Accordingly, the carrying value of noncontrolling interests related
to Celesio of $1.5 billion was reclassified in the third quarter of 2015 from “Total Equity” to “Redeemable
Noncontrolling Interests” on our consolidated balance sheet. The balance of redeemable noncontrolling interests
will be reported at the greater of its carrying value or its maximum redemption value at each reporting date. At
March 31, 2015, the carrying value of redeemable noncontrolling interests amounted to $1.4 billion, which
exceeded the maximum redemption value of $1.2 billion.
Revenues:
(Dollars in millions)
Distribution Solutions
Years Ended March 31,
Change
2015
2014
2013
2015
2014
North America pharmaceutical distribution &
services
$143,711 $123,929 $115,443
16%
7%
International pharmaceutical distribution & services
Medical-Surgical distribution & services
Total Distribution Solutions
26,358
5,907
4,485
5,648
—
3,603
175,976
134,062
119,046
Technology Solutions—products and services
3,069
3,330
3,150
Total Revenues
$179,045 $137,392 $122,196
488
5
31
(8)
30%
—
57
13
6
12%
Revenues for 2015 increased 30% to $179.0 billion from 2014 and revenues for 2014 increased 12% to
$137.4 billion from 2013. Increases in our revenues were primarily driven by our Distribution Solutions segment,
which accounted for approximately 98% of our consolidated revenues.
36
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Distribution Solutions
North America pharmaceutical distribution and services revenues increased over the last two years primarily
due to market growth and our mix of business. Market growth reflects growing drug utilization, which includes
newly launched drugs and price increases. In particular, our 2015 revenues benefited from newly launched drugs
for the treatment of Hepatitis C. These increases were partially offset by price deflation associated with brand to
generic drug conversions.
International pharmaceutical distribution and services revenues were $26.4 billion and $4.5 billion in 2015
and 2014, representing revenues from Celesio, which was acquired in February 2014.
Medical-Surgical distribution and services revenues increased over the last two years primarily due to
market growth. Additionally, revenues increased in 2014 as a result of our February 2013 acquisition of PSSI.
Technology Solutions
Technology Solutions revenues decreased in 2015 compared to 2014 primarily due to a decline in software
products and services revenues, the planned elimination of a product line and lower revenues from the workforce
business within our International Technology business, which we will transition to another service provider
during the first quarter of 2016. These decreases were partially offset by higher volume in our transaction
processing businesses.
Technology Solutions revenues increased in 2014 compared to 2013 primarily due to small business
acquisitions and higher volumes in our transaction processing businesses, partially offset by a decrease in
software products and services revenues.
Gross Profit:
(Dollars in millions)
Gross Profit
Distribution Solutions (1)
Technology Solutions
Total
Gross Profit Margin
Distribution Solutions
Technology Solutions
Total
bp—basis points
Years Ended March 31,
Change
2015
2014
2013
2015
2014
$ 9,937
$ 6,745
$ 5,435
1,474
1,607
1,446
$11,411
$ 8,352
$ 6,881
47%
(8)
37%
24%
11
21%
5.65%
5.03%
4.57%
62bp
46bp
48.03
6.37
48.26
6.08
45.90
5.63
(23)
29
236
45
(1) Gross profit for our Distribution Solutions segment for 2015, 2014 and 2013 includes LIFO-related
inventory charges of $337 million, $311 million and $13 million.
Consolidated gross profit and gross profit margin increased in 2015 and 2014 primarily due to an increase in
our Distribution Solutions segment.
37
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Distribution Solutions
Distribution Solutions gross profit margin increased over the last two years primarily reflecting our business
acquisitions and higher buy margin within our North American distribution business, partially offset by a
decrease in sell margin primarily driven by higher sales volume, and an increase in LIFO-related inventory
charges. Buy margin primarily reflects volume and timing of compensation we receive from pharmaceutical
manufacturers. Gross profit margin for 2015 was also unfavorably affected by the increased sales associated with
newly launched drugs for the treatment of Hepatitis C. Gross profit margin for 2014 was also favorably affected
by growth in sales of higher margin generic drugs.
Our LIFO-related inventory expense was $337 million in 2015, $311 million in 2014 and $13 million in
2013. Our North American distribution business uses the LIFO method of accounting for the majority of its
inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting
methods. The business’ practice is to pass on to customers published price changes from suppliers.
Manufacturers generally provide us with price protection, which limits price-related inventory losses. A LIFO
expense is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products
held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products
that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the
impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our annual
LIFO expense is affected by expected changes in year-end inventory quantities, product mix and manufacturer
pricing practices, which may be influenced by market and other external influences. Changes to any of the above
factors could have a material impact to our annual LIFO expense.
As a result of cumulative net price deflation, at March 31, 2013, pharmaceutical inventories at LIFO were
$60 million more than market and, accordingly, a $60 million lower-of-cost or market (“LCM”) reserve reduced
inventories to market. In 2015 and 2014, we experienced net inflation in our pharmaceutical inventories and
LIFO-related charges were incurred, and in 2014, the $60 million LCM reserve was fully released resulting in an
increase in gross profit. As of March 31, 2015 and 2014, pharmaceutical inventories at LIFO did not exceed
market. Additional
information regarding our LIFO accounting is included under the caption “Critical
Accounting Policies and Estimates,” included in this Financial Review.
Technology Solutions
Technology Solutions gross profit margin decreased in 2015 primarily due to a $34 million pre-tax charge
representing a catch-up in depreciation and amortization expense not recognized in 2014 when certain assets were
classified as held-for-sale and our mix of business. These decreases were partially offset by the planned elimination
of a product line and lower product alignment charges. Gross profit margin increased in 2014 compared to 2013
primarily due to growth in higher margin revenues, partially offset by higher product alignment charges.
In 2014, we committed to a plan to sell our International Technology and Hospital Automation businesses
from our Technology Solutions segment. As required, we classified the results of operations and cash flows of
these businesses as discontinued operations for all periods presented in our consolidated financial statements in
2014 and depreciation and amortization expense was not recognized as the assets were held-for-sale. During the
first quarter of 2015, we decided to retain the workforce business within our International Technology business.
As a result, we reclassified the workforce business, which had been designated as a discontinued operation
during 2014, as a continuing operation for all periods presented. Additionally, we recorded a pre-tax charge of
$34 million as a catch-up of depreciation and amortization expense not recognized in 2014 when the assets were
classified as held-for-sale.
38
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In 2014, the segment recorded pre-tax charges totaling $57 million. These charges primarily consisted of
$35 million of product alignment charges, $15 million of integration-related expenses and $7 million of
reduction-in-workforce severance charges. Included in the total charge was $35 million for severance for
employees primarily in our research and development, customer services and sales functions, and $15 million for
asset impairments which primarily represents the write-off of deferred costs for a product that will no longer be
developed. Charges were recorded in our consolidated statement of operations as follows: $34 million in cost of
sales and $23 million in operating expenses.
In 2013, this segment recorded $46 million of non-cash pre-tax impairment charges. These charges were the
result of a significant decrease in estimated revenues for a software product. The charge included a $36 million
goodwill impairment to reduce the carrying value of goodwill within the applicable reporting unit to its implied
fair value. In addition, the goodwill had a nominal tax basis. This impairment charge was recorded in operating
expenses within our consolidated statement of operations. The balance of the charge represents a $10 million
impairment to reduce the carrying value of the unamortized capitalized software held for sale costs for this
product to its net realizable value. We concluded that the estimated future undiscounted revenues, net of
estimated related costs, were insufficient to recover its carrying value. This impairment charge was recorded in
cost of sales within our consolidated statement of operations.
Operating Expenses:
(Dollars in millions)
Operating Expenses
Distribution Solutions
Technology Solutions
Corporate
Total
Operating Expenses as a Percentage of Revenues
Distribution Solutions
Technology Solutions
Total
Years Ended March 31,
Change
2015
2014
2013
2015
2014
$6,938
$4,301
$3,068
61%
40%
1,039
466
1,161
451
1,120
346
(11)
3
4
30
$8,443
$5,913
$4,534
43%
30%
3.94%
3.21%
2.58%
73bp
63bp
33.85
4.72
34.86
4.30
35.56
3.71
(101)
42
(70)
59
Operating expenses increased over the last two years primarily due to our Distribution Solutions segment,
which includes our Celesio and PSSI business acquisitions.
Distribution Solutions
Distribution Solutions segment’s operating expenses and operating expenses as a percentage of revenues
increased over the last two years primarily due to our business acquisitions, including increases in acquisition-
related expenses and higher intangible asset amortization, and higher compensation and benefit costs. Operating
expenses in 2015 also included a pre-tax and after-tax $150 million charge associated with the settlement of
controlled substance distribution claims with the DEA, DOJ and various U.S. Attorney’s offices, and 2014 and
2013 operating expenses included $68 million and $72 million of charges associated with our AWP litigation.
Additionally, operating expenses for 2013 were negatively impacted by a $40 million charge for a legal dispute
in our Canadian business.
39
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
During the fourth quarter of 2015, the Company reached an agreement in principle with the DEA, DOJ and
various U.S. Attorney’s offices to settle all potential administrative and civil claims relating to investigations
about the Company’s suspicious order reporting practices for controlled substances. The global settlement with
the DEA and DOJ is subject to the execution of final settlement agreements. Under the terms of the agreement in
principle, the Company has agreed to pay the sum of $150 million, implement certain remedial measures and the
suspension of four distribution centers’ DEA registrations for the specified products and time periods.
Accordingly, during the fourth quarter of 2015, we recorded a pre-tax and after-tax charge of $150 million in
operating expenses within our Distribution Solutions segment. Refer to Financial Note 23, “Other Commitments
and Contingent Liabilities,” to the consolidated financial statements in this Annual Report on Form 10-K for
further information on the controlled substance distribution claim and the AWP litigation matter.
Technology Solutions
Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenue in
2015 decreased compared to 2014 primarily due to lower research and development expenses, and integration-
related expenses and severance charges recorded in 2014.
The segment’s operating expenses increased in 2014 compared to 2013 primarily due to small business
acquisitions, integration-related expenses, reduction-in-workforce severance charges, and continued investment
in research and development activities. These increases were partially offset by a $36 million goodwill
impairment charge incurred in 2013. The segment’s operating expenses as a percentage of revenues decreased in
2014 compared to 2013 primarily reflecting an increase in revenue.
Corporate
Corporate expenses increased in 2015 compared to 2014 primarily due to higher compensation and benefit
costs and asset impairments, partially offset by lower acquisition-related expenses and lower costs associated
with corporate initiatives. Corporate expenses increased in 2014 primarily due to higher compensation and
benefit costs and higher acquisition-related expenses. Additionally, 2013 corporate expenses include a non-cash
pre-tax gain of $81 million gain ($51 million after-tax) related to our purchase of the remaining 50% ownership
interest in our corporate headquarters building located in San Francisco, California.
40
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Acquisition Expenses and Related Adjustments
Acquisition expenses and related adjustments, which include transaction and integration expenses that are
directly related to acquisitions by the Company and gains and losses related to business combinations were
$224 million, $218 million and $1 million in 2015, 2014 and 2013. Expenses for 2015 and 2014 primarily related
to our acquisitions and integrations of Celesio and PSSI. Additionally, expenses for 2013 include an $81 million
pre-tax gain on business combination resulting from our acquisition of the remaining 50% ownership interest in
our corporate headquarters building.
(Dollars in millions)
Cost of Sales
Operating Expenses
Transaction closing expenses
Restructuring, severance and relocation
Outside service fees
Other
Gain on business combination
Total
Other Income, Net
Interest Expense—bridge loan fees
Years Ended March 31,
2015
$
1
2014
$
3
2013
$—
6
57
66
94
—
223
—
—
39
43
27
46
—
155
14
46
16
30
1
24
(81)
(10)
—
11
Total Acquisition Expenses and Related Adjustments
$224
$218
$ 1
Acquisition expenses and related adjustments by segment were as follows:
(Dollars in millions)
Cost of Sales
Operating Expenses
Distribution Solutions
Technology Solutions
Corporate
Total
Corporate—Other Income, Net
Corporate—Interest Expense
Years Ended March 31,
2015
2014
$
1
$
3
2013
$—
211
—
12
223
—
—
120
15
20
155
14
46
47
7
(64)
(10)
—
11
Total Acquisition Expenses and Related Adjustments
$224
$218
$ 1
During 2015 and 2014, we incurred $109 million and $129 million of acquisition-related expenses for our
acquisition of Celesio. During 2015, 2014 and 2013, we incurred $110 million, $68 million and $55 million in
acquisition-related expenses for our acquisition of PSSI. These expenses primarily include restructuring,
severance and relocation expenses, employee retention incentives, outside service fees and other costs to
integrate the business, and bridge loan fees. Additionally, our acquisition-related expenses for our PSSI
acquisition include amounts associated with distribution center rationalization and information technology
conversions to common platforms.
41
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Amortization Expenses of Acquired Intangible Assets
Amortization expenses of acquired intangible assets purchased in connection with acquisitions recorded in
operating expenses were $483 million, $308 million and $196 million in 2015, 2014 and 2013. The increases in
amortization expense primarily reflect our business acquisitions.
Amortization expense by segment was as follows:
(Dollars in millions)
Distribution Solutions
Technology Solutions
Corporate
Total
Other Income, Net:
(Dollars in millions)
Distribution Solutions
Technology Solutions
Corporate
Total
Years Ended March 31,
2015
$442
40
1
2014
$255
52
1
2013
$146
49
1
$483
$308
$196
Years Ended March 31,
Change
2015
$48
3
12
2014
$28
2
2
2013
$19
4
11
2015
2014
71% 47%
50
500
(50)
(82)
$63
$32
$34
97% (6)%
Other income, net increased for 2015 from 2014 primarily due to our Celesio acquisition including higher
equity investment income. Additionally, 2014 other income, net included a loss on a foreign exchange option
relating to our acquisition of Celesio.
Impairment of an Equity Investment:
In 2013, we committed to a plan to sell our 49% equity interest in Nadro, S.A. de C.V. (“Nadro”) and in the
fourth quarter of 2013 recorded a pre-tax impairment charge of $191 million reducing the investment’s carrying
value to its estimated fair value. The charge was recorded in impairment of an equity investment in the
consolidated statements of operations within our Distribution Solutions segment. In September 2013, we
completed the sale of our equity interest in Nadro. Under the terms of the agreement, we received $41 million in
total cash consideration resulting in no material gain or loss.
42
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Segment Operating Profit, Corporate Expenses, Net and Interest Expense:
(Dollars in millions)
Segment Operating Profit (1)
Distribution Solutions
Technology Solutions
Subtotal
Corporate Expenses, Net
Interest Expense
Income From Continuing Operations Before
Income Taxes
Segment Operating Profit Margin
Years Ended March 31,
Change
2015
2014
2013
2015
2014
$3,047
$2,472
$2,195
438
448
330
3,485
2,920
2,525
(454)
(374)
(449)
(300)
(335)
(240)
23%
(2)
19
1
25
13%
36
16
34
25
$2,657
$2,171
$1,950
22%
11%
Distribution Solutions
Technology Solutions
1.73%
1.84%
1.84%
(11)bp
14.27
13.45
10.48
82
— bp
297
(1) Segment operating profit includes gross profit, net of operating expenses, plus other income (loss), net, for
our two operating segments.
Segment Operating Profit:
Distribution Solutions: Operating profit increased over the last two years primarily reflecting growth in our
business and our business acquisitions. Operating profit margin for 2015 decreased from 2014 primarily due to
our acquisition of Celesio and the unfavorable impact from the newly launched drugs for Hepatitis C, partially
offset by our other mix of business. Operating profit margin in 2014 was flat compared to 2013 primarily
reflecting an increase in gross profit margin and the $191 million impairment charge on an equity investment
incurred in 2013, partially offset by higher operating expenses as a percentage of revenues, which included the
effects of our acquisitions. In 2015, 2014 and 2013, operating profit and operating profit margin were also
impacted by $150 million, $68 million and $72 million of reserve adjustments for estimated probable losses
related to our controlled substance distribution claims and Average Wholesale Price litigation.
Technology Solutions: Operating profit decreased slightly in 2015 and increased in 2014 compared to the
prior years. Operating profit margin increased in 2015 primarily due to lower operating expenses as a percentage
of revenues, partially offset by a decline in gross profit margin. Operating profit margin increased in 2014
primarily due to an increase in gross profit margin and a decrease in operating expenses as a percentage of
revenues. In 2015, 2014 and 2013, operating profit and operating profit margin were impacted by $34 million,
$57 million and $46 million of charges associated with a depreciation and amortization catch-up related to the
prior year, and product alignment and impairment charges.
Corporate: Corporate expenses, net, increased in 2015 and 2014 primarily due to higher operating expenses,
partially offset by higher other income. Corporate expenses, net, for 2013 also included the $81 million gain on
business combination.
Interest Expense: Interest expense increased over the last two years primarily due to the March 2014
issuance of $4.1 billion of new debt to fund the acquisition of Celesio and due to interest on Celesio’s debt.
Interest expense for 2014 also included $46 million of bridge loan fees associated with the initial funding of the
43
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
acquisition of Celesio. Partially offsetting these increases, interest expense benefited from the repayment of term
debt in the fourth quarters of 2014 and 2013. Interest expense fluctuates based on timing, amounts and interest
rates of term debt that is repaid and new term debt issued, as well as amounts incurred for bridge loan fees. Refer
to our discussion under the caption “Credit Resources” within this Financial Review for additional information
regarding our financing activities.
Income Taxes
Our reported income tax rates were 30.7%, 34.9% and 30.1% in 2015, 2014 and 2013. Fluctuations in our
reported income tax rates are primarily due to changes within our business mix, including varying proportions of
income attributable to foreign countries that have lower income tax rates and discrete items. Income tax expense
included net discrete tax benefits of $33 million in 2015, net discrete tax expenses of $94 million in 2014 and net
discrete tax benefits of $29 million in 2013. Discrete tax expense for 2014 primarily related to a $122 million
charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues.
We have received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing
matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all
of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment
and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of
2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003
through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential
settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter
and do not expect it to have a material impact to income tax expense.
During 2015, we reached an agreement with the Internal Revenue Service (“IRS”) to settle all outstanding
issues relating to years 2003 through 2006 and recognized discrete tax benefits of $55 million to record
previously unrecognized tax benefits and related interest.
Loss from Discontinued Operations, Net of Tax
Losses from discontinued operations, net of tax, were $299 million, $156 million and $25 million in 2015,
2014 and 2013.
During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution
business and a small business from our Distribution Solutions segment, as well as a small business from our
Technology Solutions segment. As a result, we recorded $241 million pre-tax ($235 million after-tax) non-cash
impairment charges to write off the business’ long-lived assets and reduce the carrying value of the Brazilian
business to its estimated fair value, less cost to sell. The ultimate loss from the sale of the business may be higher
or lower than our current assessment of the business’ fair value.
In 2014, we committed to a plan to sell our International Technology and our Hospital Automation
businesses from our Technology Solutions segment and certain businesses from our Distribution Solutions
segment. As a result, we recorded a pre-tax and after-tax $80 million non-cash impairment charge to reduce the
carrying value of the International Technology business to its estimated fair value, less cost to sell. A portion of
this business was sold in 2015 for nominal proceeds. Our Hospital Automation business was sold in 2014 for net
cash proceeds of $55 million which approximated the business’ net book value.
As required, we classified the results of operations and cash flows of these businesses as discontinued
operations for all periods presented in our consolidated financial statements.
44
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Net Income (Loss) Attributable to Noncontrolling Interests: Net income attributable to noncontrolling
interests for 2015 primarily represents the $50 million guaranteed dividend and $12 million associated with the
quarterly accrual of the annual recurring compensation that we are obligated to pay to the noncontrolling
shareholders of Celesio under the Domination Agreement. Net loss attributable to noncontrolling interests for
2014 primarily represents the portion of Celesio’s net loss that was not allocable to McKesson Corporation.
Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was
$1,476 million, $1,263 million and $1,338 million in 2015, 2014 and 2013 and diluted earnings per common
share were $6.27, $5.41 and $5.59.
Weighted Average Diluted Common Shares Outstanding: Diluted earnings per common share was
calculated based on a weighted average number of shares outstanding of 235 million, 233 million and
239 million for 2015, 2014 and 2013. Weighted average diluted common shares outstanding is impacted by the
exercise and settlement of share-based awards and in 2014 the cumulative effect of share repurchases.
Foreign Operations
Foreign operations accounted for approximately 20%, 11% and 8% of 2015, 2014 and 2013 consolidated
revenues. Foreign operations are subject to certain risks, including currency fluctuations. We monitor our
operations and adopt strategies responsive to changes in the economic and political environment in each of the
countries in which we operate. Additional information regarding our foreign operations is also included in
Financial Note 26, “Segments of Business,” to the consolidated financial statements appearing in this Annual
Report on Form 10-K.
Business Combinations
Fiscal 2014
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of
Celesio AG (“Celesio”) and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of
cash acquired (the “Acquisition”). Upon the Acquisition, our ownership of Celesio’s fully diluted common shares
was 75.6% and, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our
consolidated balance sheet. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and
fully diluted common shares. The Acquisition was funded by utilizing a senior bridge loan, our existing accounts
receivable sales facility and cash on hand. Celesio is an international wholesale and retail company and a
provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in
Stuttgart, Germany and it operates in 14 countries around the world. The Acquisition of Celesio expands our
global geographic area; the combined company will be one of the largest pharmaceutical wholesalers and
providers of logistics and services in the healthcare sector worldwide. Financial results for Celesio are included
within our International pharmaceutical distribution and services business, which is part of our Distribution
Solutions segment, since the date of the Acquisition.
Fiscal 2013
In addition to our April 2012 acquisition of the remaining 50% ownership interest in our corporate
headquarters building located in San Francisco, California, on February 22, 2013, we acquired all of the
outstanding shares of PSSI for $29.00 per share plus the assumption of PSSI’s debt, or approximately $1.9 billion
in aggregate, consisting of cash consideration of $1.3 billion, net of cash acquired, and the assumption of
long-term debt with a fair value of $0.6 billion. The cash paid at acquisition was funded from cash on hand and
45
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
the issuance of long-term debt. PSSI markets and distributes medical products and services throughout the United
States. The acquisition of PSSI expanded our existing Medical-Surgical business. Financial results for PSSI since
the acquisition date are included in the results of operations within our Medical-Surgical distribution and services
business, which is part of our Distribution Solutions segment.
During the last three years, we also completed a number of other smaller acquisitions within both of our
operating segments. Financial results for our business acquisitions have been included in our consolidated
financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have
been allocated based on estimated fair values at the date of acquisition.
Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax
purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. The
pro forma results of operations for our business acquisitions and the results of operations for these acquisitions
since the acquisition date have not been presented because the effects were not material to the consolidated
financial statements on either an individual or an aggregate basis.
Refer to Financial Notes 2 and 15, “Business Combinations” and “Debt and Financing Activities,” to the
consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
2016 Outlook
Information regarding the Company’s 2016 outlook is contained in our Form 8-K dated May 12, 2015. This
Form 8-K should be read in conjunction with the sections Item 1—Business—Forward-Looking Statements and
Item 1A—Risk Factors in Part 1 of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to make assumptions about
matters that were uncertain at the time the accounting estimate was made and if different estimates that we
reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely
to occur from period to period, could have a material impact on our financial condition or results from
operations. Below are the estimates that we believe are critical to the understanding of our operating results and
financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting
Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the
uncertainty inherent in such estimates, actual results may differ from these estimates.
Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements
to customers who purchase our products and services. Other customer financing primarily relates to guarantees
provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing
to certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate
the receivables for which we do not expect full collection based on historical collection rates and specific
knowledge regarding the current creditworthiness of our customers and record an allowance in our consolidated
financial statements for these amounts.
In determining the appropriate allowance for doubtful accounts, which includes portfolio and specific
reserves, the Company reviews accounts receivable aging, industry trends, customer financial strength, credit
standing, historical write-off trends and payment history to assess the probability of collection. If the frequency
and severity of customer defaults due to our customers’ financial condition or general economic conditions
change, our allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor
46
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
outstanding receivables and other customer financing and adjust allowances for accounts where collection may be
in doubt. During 2015, sales to our ten largest customers accounted for approximately 44% of our total
consolidated revenues. Sales to our largest customer, CVS Caremark Corporation (“CVS”), accounted for
approximately 15% of our total consolidated revenues. At March 31, 2015, trade accounts receivable from our ten
largest customers were approximately 36% of total trade accounts receivable. Accounts receivable from CVS were
approximately 14% of total trade accounts receivable. As a result, our sales and credit concentration is significant.
A default in payments, a material reduction in purchases from these, or any other large customer or the loss of a
large customer could have a material adverse impact on our financial condition, results of operations and liquidity.
Reserve methodologies are assessed annually based on historical losses and economic, business and market
trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present.
We believe the reserves maintained and expenses recorded in 2015 are appropriate and consistent with historical
methodologies employed. At this time, we are not aware of any internal process or customer issues that might
lead to a significant increase in the foreseeable future in our allowance for doubtful accounts as a percentage of
net revenue.
At March 31, 2015, trade and notes receivables were $13,275 million prior to allowances of $141 million. In
2015, 2014 and 2013, our provision for bad debts was $67 million, $36 million and $28 million. At March 31,
2015 and 2014, the allowance as a percentage of trade and notes receivables was 1.1% and 0.9%. An increase or
decrease of a hypothetical 0.1% in the 2015 allowance as a percentage of trade and notes receivables would result
in an increase or decrease in the provision for bad debts of approximately $13 million. The selected 0.1%
hypothetical change does not reflect what could be considered the best or worst case scenarios. Additional
information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual
Report on Form 10-K.
Inventories: We report inventories at the lower of cost or market (“LCM”). Inventories for our Distribution
Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment, the majority of
the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories
held in foreign locations is based on weighted average purchase price using the first-in, first-out method
(“FIFO”). Technology Solutions segment
inventories consist of computer hardware with cost generally
determined by the standard cost method, which approximates average cost. Rebates, cash discounts and other
incentives received from vendors relating to the purchase or distribution of inventory are considered as product
discounts and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is
sold. Total inventories were $14.3 billion and $13.0 billion at March 31, 2015 and 2014.
The LIFO method was used to value approximately 73% and 67% of our inventories at March 31, 2015 and
2014. If we had used the FIFO method of inventory valuation, which approximates current replacement costs,
inventories would have been approximately $768 million and $431 million higher than the amounts reported at
March 31, 2015 and 2014. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount
includes both pharmaceutical and non-pharmaceutical products. In 2015, 2014, and 2013, we recognized net LIFO
expense of $337 million, $311 million and $13 million within our consolidated statements of operations. A LIFO
expense is recognized when the net effect of price increases on branded pharmaceuticals and non-pharmaceutical
products held in inventory exceeds the impact of price declines and shifts towards generic pharmaceuticals,
including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is
recognized when the net effect of price declines and shifts towards generic pharmaceuticals exceeds the impact of
price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of
replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Due
47
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
to cumulative net price deflation from 2005 to 2013, we had a lower-of-cost or market (“LCM”) reserve of
$60 million at March 31, 2013 which reduced pharmaceutical inventories at LIFO to market. During 2014, the
LCM reserve of $60 million was released, resulting in an increase in gross profit. As of March 31, 2014 and
2015, inventories at LIFO did not exceed market.
In determining whether inventory valuation issues exist, we consider various factors including estimated
quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and
forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction
of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that
could affect the value of our inventories. We write down inventories which are considered excess and obsolete as
a result of these reviews. These factors could make our estimates of inventory valuation differ from actual
results.
Business Combinations: We account for acquired businesses using the acquisition method of accounting,
which requires that once control is obtained of a business, 100% of the assets acquired and liabilities assumed,
including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities
assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of
the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying
an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more
significant estimates and assumptions inherent in the income method or other methods include the amount and
timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash
flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an
intangible asset also requires judgment as different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives. Refer to Financial Note 2, “Business
Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for
additional information regarding our acquisitions.
Goodwill and Intangible Assets: As a result of acquiring businesses, we have $9,817 million and
$9,927 million of goodwill at March 31, 2015 and 2014 and $3,441 million and $4,871 million of intangible
assets, net at March 31, 2015 and 2014. We maintain goodwill assets on our books unless the assets are
considered to be impaired. We perform an impairment test on goodwill balances annually in the fourth quarter or
more frequently if indicators for potential impairment exist. Indicators that are considered include significant
changes in performance relative to expected operating results, significant changes in the use of the assets,
significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or
market capitalization for a sustained period of time.
Impairment testing is conducted at the reporting unit level, which is generally defined as a component —
one level below our Distribution Solutions and Technology Solutions operating segments, for which discrete
financial information is available and segment management regularly reviews the operating results of that
reporting unit.
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
48
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
carrying value of the reporting unit is higher than its estimated fair value, the second step must be performed to
measure the amount of impairment loss. Under the second step, the implied fair value of goodwill is calculated in
a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any
unrecognized intangibles assets, from the fair value of the reporting unit calculated in the first step of the
impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of
goodwill, an impairment charge is recorded for that excess.
To estimate the fair value of our reporting units, we use a combination of the market approach and the
income approach. Under the market approach, we estimate fair value by comparing the business to similar
businesses, or guideline companies whose securities are actively traded in public markets. Under the income
approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a
terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected
rate of return. In addition, we compare the aggregate of the reporting units’ fair values to our market
capitalization as further corroboration of the fair values.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation
process using the market approach include the selection of appropriate guideline companies, the determination of
market value multiples for both the guideline companies and the reporting unit, the determination of applicable
premiums and discounts based on any differences in marketability between the business and the guideline
companies and for the income approach, the required rate of return used in the discounted cash flow method,
which reflects capital market conditions and the specific risks associated with the business. Other estimates
inherent in both the market and income approaches include long-term growth rates, projected revenues and
earnings and cash flow forecasts for the reporting units.
Estimates of fair value result from a complex series of judgments about future events and uncertainties and
rely heavily on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair
value may materially impact our results of operations. The valuations are based on information available as of the
impairment review date and are based on expectations and assumptions that have been deemed reasonable by
management. Any changes in key assumptions, including failure to meet business plans, a further deterioration in
the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates
and could potentially result in an impairment charge. In 2015 and 2014, we concluded that there were no
impairments of goodwill as the fair value of each reporting unit exceeded its carrying value. In 2013, we
recorded a goodwill impairment charge of $36 million in our Technology Solutions segment.
Currently, all of our intangible assets are subject to amortization and are amortized based on the pattern of
their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to
thirty-eight years. We review intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on
the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its
eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the
asset over its fair value. Assumptions and estimates about future values and remaining useful lives of our
purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors such as changes in our business
strategy and our internal forecasts. There were no material impairments of intangibles in 2015, 2014 or 2013. Our
ongoing consideration of all the factors described previously could result in impairment charges in the future,
which could adversely affect our net income.
Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve
49
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
estimates are established based on judgment after considering the status of current outstanding claims, historical
experience with the suppliers, the specific incentive programs and any other pertinent information available. We
evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate
based on changes in factual circumstances. As of March 31, 2015 and 2014, supplier reserves were $167 million
and $181 million. The ultimate outcome of any outstanding claims may be different from our estimate. All of the
supplier reserves at March 31, 2015 and 2014 pertain to our Distribution Solutions segment. An increase or
decrease in the supplier reserve as a hypothetical 0.1% of trade payables at March 31, 2015 would result in an
increase or decrease in the cost of sales of approximately $25 million in 2015. The selected 0.1% hypothetical
change does not reflect what could be considered the best or worst case scenarios.
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best
assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and
numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated
income tax provision and in evaluating income tax uncertainties. We review our tax positions at the end of each
quarter and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition
of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available
positive and negative evidence including our past operating results, the existence of cumulative net operating
losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we
develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the
reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment about the forecasts of future taxable income and are consistent with the
plans and estimates we use to manage the underlying businesses. We had deferred income tax assets (net of
valuation allowances) of $1,189 million and $1,286 million at March 31, 2015 and 2014 and deferred tax
liabilities of $3,791 million and $4,075 million. Deferred tax assets primarily consist of timing differences on our
compensation and benefit related accruals and net operating loss and credit carryforwards. Deferred tax liabilities
primarily consist of basis differences for inventory valuation (including inventory valued at LIFO) and intangible
assets. We established valuation allowances of $229 million and $200 million for 2015 and 2014 against certain
deferred tax assets, which primarily relate to state and foreign net operating loss carryforwards for which the
ultimate realization of future benefits is uncertain. Changes in tax laws and rates could also affect recorded
deferred tax assets and liabilities in the future. Should tax laws change, including those laws pertaining to LIFO,
our cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of
complex tax regulations across multiple global jurisdictions where we conduct our operations. We recognize
liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related
interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be
applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual
settlement with the tax authorities. These estimates may change due to changing facts and circumstances;
however, due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that
differs from our current estimate of tax liabilities and related interest. If our current estimate of tax and interest
liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our
current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax
expense may be recognized.
50
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
If our assumptions and estimates described above were to change, an increase/decrease of 1% in our
effective tax rate as applied to income from continuing operations would have increased/decreased tax expense
by approximately $27 million, or $0.11 per diluted share, for 2015.
Loss Contingencies: We are subject to various claims, pending and potential legal actions for damages,
investigations relating to governmental laws and regulations and other matters arising out of the normal conduct
of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount
of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular
contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may
not be practicable based on the information available and the potential effect of future events and decisions by
third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for
such matters to be resolved over many years, during which time relevant developments and new information
must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible
to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be
made, disclosure of the proceeding is provided.
Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is
reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at
least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable
estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate
of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or
decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors
bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and
low estimate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations and our short-term investment portfolio, together
with our existing sources of liquidity from our accounts receivable sales facilities, revolving credit facilities and
commercial paper issuance, will be sufficient to fund our long-term and short-term capital expenditures, working
capital and other cash requirements. In addition, we may access the long-term debt capital markets from time-to-
time.
Net cash flow from operating activities was $3,112 million in 2015 compared to $3,136 million in 2014 and
$2,483 million in 2013. Operating activities for 2015 were affected by an increase in drafts and accounts payable
reflecting longer payment terms for certain purchases and increases in receivables and inventories primarily
associated with our revenue growth. Cash flows from operations can be significantly impacted by factors such as
the timing of receipts from customers and payments to vendors. Additionally, working capital is primarily a
function of sales and purchase volumes, inventory requirements and vendor payment terms.
Operating activities for 2014 were primarily affected by an increase in drafts and accounts payable
reflecting longer payment terms for certain purchases and increases in receivables and inventories primarily
associated with our revenue growth. Operating activities for 2013 were primarily affected by $483 million of
payments for litigation settlements.
Net cash used in investing activities was $677 million in 2015 compared to $5,046 million in 2014 and
$2,209 million in 2013. Investing activities for 2015 include $170 million of net cash payments for acquisitions,
$376 million and $169 million in capital expenditures for property acquisitions and capitalized software, and
$15 million of net cash proceeds from sales of businesses.
51
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Investing activities for 2014 included $4,634 million of net cash payments for acquisitions, including
$4,497 million for our acquisition of Celesio. Investing activities in 2014 also included $278 million and $141
million in capital expenditures for property acquisitions and capitalized software, and $97 million of cash
proceeds from sales of our automation business and an equity investment.
Investing activities for 2013 included $1,873 million of net cash payments for acquisitions, including
$1,299 million for our acquisition of PSSI. Investing activities in 2013 also included $241 million and
$159 million in capital expenditures for property acquisitions and capitalized software.
Financing activities utilized $968 million of cash in 2015, generated net cash of $3,619 million in 2014 and
utilized $956 million of cash in 2013. Financing activities for 2015 include cash receipts of $3,100 million and
payments of $3,152 million from short-term borrowings. Long-term debt repayments in 2015 were primarily
cash paid on promissory notes. Financing activities in 2015 also reflect a cash payment of $32 million to acquire
approximately 1 million additional common shares of Celesio through the tender offers we completed in 2015.
Additionally, financing activities for 2015 include $340 million of cash paid for stock repurchases and
$227 million of dividends paid.
Financing activities for 2014 include cash receipts of $6,080 million and cash paid of $6,132 million from
short-term borrowings, which includes $4,957 million in borrowings under a senior bridge loan facility in
connection with our acquisition of Celesio and $400 million under our accounts receivable sales facility in
February 2014. These borrowings were fully repaid in March 2014. Financing activities for 2014 also include
in March 2014 and cash paid of
cash receipts of $4,124 million from the issuance of long-term debt
$348 million for repayments of long-term debt, primarily consisting of $350 million paid on the maturity of our
6.50% Notes due in February 2014. Additionally, financing activities for 2014 included $130 million of cash
payments for stock repurchases and $214 million of dividends paid.
Financing activities for 2013 included cash receipts of $1,325 million and cash paid of $1,725 million from
short-term borrowings. In addition, in connection with our acquisition of PSSI, we borrowed $900 million for
bridge financing in February 2013, which was fully repaid in March 2013. Financing activities for 2013 also
include cash receipts of $1,798 million for the issuance of long-term debt and cash paid of $1,143 million for
repayments of long-term debt. In December 2012, we issued $500 million of 0.95% Notes due 2015 and
$400 million of 2.70% Notes due 2022. In March 2013, we issued $500 million of 1.40% Notes due 2018 and
$400 million of 2.85% Notes due 2023. Long-term debt repayments include $500 million paid on the maturity of
our 5.25% Notes due in March 2013 and $635 million paid to redeem the debt acquired on the acquisition of
PSSI. Additionally, financing activities for 2013 included $1,214 million of cash paid for stock repurchases and
$194 million of dividends paid.
The Company’s Board has authorized the repurchase of McKesson’s common stock from time-to-time in
open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or
by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased
will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions
under our debt obligations and other market and economic conditions.
52
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The Board authorized the repurchase of up to $500 million of the Company’s common stock in
January 2013. In 2015 and 2013, we repurchased 1.5 million and 13 million of our shares through an ASR
program and open market repurchases:
(In millions, except per share data)
Number of shares repurchased (1)
Average price paid per share
Total value of shares repurchased (1)
(1) Excludes shares surrendered for tax withholding.
Years Ended March 31,
2015
2014
2013
1.5
—
13
$226.55
$ — $100.82
$
340
$ — $ 1,159
At March 31, 2015, no authorized amounts remain available for future repurchases of the Company’s
common stock under the January 2013 Board approved share purchase plan.
In May 2015, the Board authorized the repurchase of up to $500 million of the Company’s common stock.
During the fourth quarter of 2013, we retired approximately 2 million shares repurchased for $217 million
by the Company. The retired shares constitute authorized but unissued shares. We elected to allocate any excess
of share repurchase price over par value between additional paid-in capital and retained earnings. As such,
$195 million was recorded as a decrease to retained earnings.
We believe that our operating cash flow, financial assets and current access to capital and credit markets,
including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable
future. However, there can be no assurance that continued or increased volatility and disruption in the global
capital and credit markets will not impair our liquidity or increase our costs of borrowing.
Selected Measures of Liquidity and Capital Resources:
(Dollars in millions)
Cash and cash equivalents
Working capital
Debt, net of cash and cash equivalents
Debt to capital ratio (1)
Net debt to net capital employed (2)
Return on McKesson stockholders’ equity (3)
March 31,
2015
2014
2013
$5,341
$4,193
$2,456
3,173
4,503
3,221
6,401
1,813
2,417
55.2%
55.4%
40.8%
36.0
17.0
42.9
16.2
25.5
18.3
(1) Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity, which
excludes noncontrolling and redeemable noncontrolling interests.
(2) Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt
and McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests
(“net capital employed”).
(3) Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by
a five-quarter average of McKesson stockholders’ equity, which excludes noncontrolling and redeemable
noncontrolling interests.
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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily
invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated
prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S.
government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the
U.S. government and an AAA rated prime money market fund denominated in British pound sterling.
The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the
institutions and
risk of our short-term investment portfolio by depositing funds with reputable financial
monitoring risk profiles and investment strategies of money market funds.
Our cash and equivalents balance as of March 31, 2015 included approximately $2.3 billion of cash held by
our subsidiaries outside of the United States. Our primary intent is to utilize this cash in foreign operations as
well as to fund certain research and development activities for an indefinite period of time. Although the vast
majority of cash held outside the United States is available for repatriation, doing so could subject us to U.S.
federal, state and local income tax.
Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and
accounts payable, short-term borrowings, current portion of long-term debt, deferred revenue and other current
liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is
susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of sales activity and other requirements.
Consolidated working capital decreased at March 31, 2015 compared to March 31, 2014 primarily due to
increases in drafts and accounts payable, partially offset by increases in receivables and inventories. Consolidated
working capital increased at March 31, 2014 compared to March 31, 2013 primarily due to increases in cash and
cash equivalents and increases in receivables and inventories partially offset by increases in current portion of
long-term debt associated with our acquisition of Celesio.
Our ratio of net debt to net capital employed decreased at March 31, 2015 compared to March 31, 2014
primarily due to a decrease in total debt, partially offset by the decrease in total McKesson stockholders’ equity.
Our ratio of net debt to net capital employed increased at March 31, 2014 compared to March 31, 2013 primarily
due to the increase in debt associated with our Celesio acquisition.
In July 2013, the quarterly dividend was raised from $0.20 to $0.24 per common share for dividends
declared after such date, until further action by the Board. Dividends were $0.96 per share in 2015, $0.92 per
share in 2014 and $0.80 per share in 2013. The Company anticipates that it will continue to pay quarterly cash
dividends in the future. However, the payment and amount of future dividends remain within the discretion of the
Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other
factors. In 2015, 2014 and 2013, we paid total cash dividends of $227 million, $214 million and $194 million.
Additionally, as required under the Domination Agreement, we are obligated to pay an annual recurring
compensation amount of €0.83 per Celesio share (effective January 1, 2015) to the noncontrolling shareholders
of Celesio.
54
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Contractual Obligations:
The table and information below presents our significant financial obligations and commitments at
March 31, 2015:
(In millions)
On balance sheet
Long-term debt (1)
Other (2)
Off balance sheet
Interest on borrowings (3)
Purchase obligations (4)
Operating lease obligations (5)
Other (6)
Total
Total
Within 1
Over 1 to 3 Over 3 to 5
After 5
Years
$ 9,709
$1,529
$2,705
$1,493
$3,982
535
60
3,179
3,726
1,766
551
335
3,676
316
253
180
568
50
490
72
117
375
—
310
60
178
1,901
—
650
166
$19,466
$6,169
$4,065
$2,355
$6,877
(1) Represents maturities of the Company’s long-term obligations including an immaterial amount of capital
lease obligations.
(2) Represents our estimated benefit payments, including assumed executive lump sum payments, for the
unfunded benefit plans and minimum funding requirements for the pension plans. Actual lump sum
payments could significantly differ from the estimated amounts depending on the timing of executive
retirements and the lump sum interest rate in effect upon retirement.
(3) Primarily represents interest that will become due on our fixed rate long-term debt obligations.
(4) A purchase obligation is defined as an arrangement to purchase goods or services that is enforceable and
legally binding on the Company. These obligations primarily relate to inventory purchases, capital
commitments and service agreements.
(5) Represents minimum rental payments for operating leases.
(6)
Includes agreements under which we have guaranteed the repurchase of our customers’ inventory and our
customers’ debt in the event these customers are unable to meet their obligations to those financial institutions.
The contractual obligations table above excludes the following liabilities:
At March 31, 2015, the liability recorded for uncertain tax positions, excluding associated interest and
penalties, was approximately $616 million. The ultimate amount and timing of any related future cash
settlements cannot be predicted with reasonable certainty.
At March 31, 2015, our banks and insurance companies have issued $142 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.
At March 31, 2015, the carrying value of redeemable noncontrolling interests related to Celesio was
$1.4 billion, which exceeded the maximum redemption value of $1.2 billion. The balance of redeemable
noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each
reporting date. Upon the effectiveness of the Domination Agreement on December 2, 2014, the noncontrolling
shareholders of Celesio received a put right that enables them to put their Celesio shares to McKesson at
55
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
€22.99 per share, which price is 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 (“Put Amount”). The redemption value is the Put Amount adjusted for exchange rate fluctuations
each period. The ultimate amount and timing of any future cash payments related to the Put Amount are
uncertain. Refer to Financial Notes 2 and 3, “Business Combinations” and “Noncontrolling Interests,” to the
consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Credit Resources:
We fund our working capital requirements primarily with cash and cash equivalents as well as short-term
borrowings under the accounts receivable sales facilities, revolving credit facilities and from commercial paper
issuances. Funds necessary for future debt maturities and our other cash requirements are expected to be met by
existing cash balances, cash flow from operations, existing credit sources and other capital market transactions.
Detailed information regarding our debt and financing activities is included in Financial Note 15, “Debt and
Financing Activities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in Financial Note 25, “Related
Party Balances and Transactions,” to the consolidated financial statements appearing in this Annual Report on
Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements that we have recently adopted, as well as those that have been recently
issued but not yet adopted by us, are included in Financial Note 1, “Significant Accounting Policies,” to the
consolidated financial statements appearing in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk: Our long-term debt bears interest predominately at fixed rates, whereas our short-term
borrowings are at variable interest rates. At March 31, 2015, we had $0.7 billion in outstanding debt with
variable interest rates.
Our cash and cash equivalents balances earn interest at variable rates. At March 31, 2015, we had $5.3
billion in cash and cash equivalents. The effect of a hypothetical 50 bp increase in the underlying interest rate on
our cash and cash equivalents, net of short-term borrowings and variable rate debt, would have resulted in a
favorable impact to earnings in 2015 and 2014 of approximately $19 million and $12 million.
Foreign exchange risk: The majority of our operations are conducted in U. S. dollars; however, certain
assets and liabilities, revenues and expense and purchasing activities are incurred in and exposed to other
currencies. We seek to manage our foreign exchange risk in part through operational means, including managing
same currency revenues in relation to same currency costs, and same currency assets in relation to same currency
liabilities. Foreign exchange risk is also managed through the use of foreign currency forward-exchange
contracts. These contracts are used to offset the potential earnings effects from mostly intercompany foreign
currency loans. These contracts reduce but do not entirely eliminate foreign currency rate risk.
As of March 31, 2015 and 2014, the effect of a hypothetical adverse 10% change in the underlying foreign
currency exchange rates would have impacted the fair value of our foreign exchange contracts by approximately
56
McKESSON CORPORATION
FINANCIAL REVIEW (Concluded)
$223 million and $134 million. However, our risk management programs are designed such that the potential loss
in value of these risk management portfolios described above would be largely offset by changes in the value of
the underlying exposure. Refer to Financial Note 19, “Hedging Activities,” for more information on our foreign
currency forward-exchange contracts.
The selected hypothetical change in interest rates and foreign currency exchange rates does not reflect what
could be considered the best or worst case scenarios.
57
McKESSON CORPORATION
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended March 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended March 31, 2015, 2014 and
2013
Consolidated Balance Sheets as of March 31, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended March 31, 2015, 2014 and 2013
Financial Notes
Page
59
60
62
63
64
65
66
67
58
McKESSON CORPORATION
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of McKesson Corporation is responsible for establishing and maintaining an adequate
system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). With the participation of the Chief Executive Officer and the Chief Financial Officer, our management
conducted an assessment of the effectiveness of our internal control over financial reporting based on the
framework and criteria established in Internal Control—Integrated Framework (1992), issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has
concluded that our internal control over financial reporting was effective as of March 31, 2015.
Deloitte & Touche LLP, an independent registered public accounting firm, audited the financial statements
included in this Annual Report on Form 10-K and has also audited the effectiveness of the Company’s internal
control over financial reporting as of March 31, 2015. This audit report appears on page 53 of this Annual Report
on Form 10-K.
May 12, 2015
/s/ John H. Hammergren
John H. Hammergren
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ James A. Beer
James A. Beer
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
59
McKESSON CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McKesson Corporation:
We have audited the accompanying consolidated balance sheets of McKesson Corporation and subsidiaries
(the “Company”) as of March 31, 2015 and 2014, 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, 2015. Our audits also included the consolidated financial statement schedule (“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, 2015, based on criteria established in Internal Control—Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A 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 the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
60
McKESSON CORPORATION
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, 2015 and 2014, and the results
of their operations and their cash flows for each of the three fiscal years in the period ended March 31, 2015, 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, 2015, based on the criteria established in Internal Control—Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
May 12, 2015
61
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Years Ended March 31,
2015
2014
2013
$ 179,045
$ 137,392
$ 122,196
(167,634)
(129,040)
(115,315)
11,411
8,352
6,881
Revenues
Cost of Sales
Gross Profit
Operating Expenses
Selling, distribution and administrative expenses
(7,901)
(5,388)
Research and development
Claim and litigation charges
Gain on business combination
Total Operating Expenses
Operating Income
Other Income, Net
Impairment of an Equity Investment
Interest Expense
Income from Continuing Operations Before Income Taxes
Income Tax Expense
Income from Continuing Operations
Loss from Discontinued Operations, Net of Tax
Net Income
Net Loss (Income) Attributable to Noncontrolling Interests
(392)
(150)
—
(8,443)
2,968
63
—
(374)
2,657
(815)
1,842
(299)
1,543
(67)
(457)
(68)
—
(5,913)
2,439
32
—
(300)
2,171
(757)
1,414
(156)
1,258
5
(4,110)
(433)
(72)
81
(4,534)
2,347
34
(191)
(240)
1,950
(587)
1,363
(25)
1,338
—
Net Income Attributable to McKesson Corporation
$
1,476
$
1,263
$
1,338
Earnings (Loss) Per Common Share Attributable to McKesson
Corporation
Diluted
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
Weighted Average Common Shares
Diluted
Basic
$
$
$
$
$
$
$
$
7.54
(1.27)
6.27
7.66
(1.29)
6.37
235
232
$
$
$
$
6.08
(0.67)
5.41
6.19
(0.68)
5.51
233
229
5.69
(0.10)
5.59
5.81
(0.10)
5.71
239
235
See Financial Notes
62
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Net Income
Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments arising during the period
Unrealized losses on cash flow hedges arising during the period
Retirement-related benefit plans
Other Comprehensive Income (Loss), Net of Tax
Comprehensive Income (Loss)
Years Ended March 31,
2015
2014
2013
$ 1,543
$1,258
$1,338
(1,855)
(10)
(124)
(1,989)
53
(6)
36
83
(52)
—
(18)
(70)
(446)
1,341
1,268
Comprehensive Loss (Income) Attributable to Noncontrolling Interests
212
(16)
—
Comprehensive Income (Loss) Attributable to McKesson Corporation
$ (234)
$1,325
$1,268
See Financial Notes
63
McKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
ASSETS
Current Assets
Cash and cash equivalents
Receivables, net
Inventories, net
Prepaid expenses and other
Total Current Assets
Property, Plant and Equipment, Net
Goodwill
Intangible Assets, Net
Other Assets
Total Assets
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS’ EQUITY
Current Liabilities
Drafts and accounts payable
Short-term borrowings
Deferred revenue
Deferred tax liabilities
Current portion of long-term debt
Other accrued liabilities
Total Current Liabilities
Long-Term Debt
Other Noncurrent Liabilities
Other Commitments and Contingent Liabilities (Note 23)
Redeemable Noncontrolling Interests
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, 2015 and
2014, 384 and 381 shares issued at March 31, 2015 and 2014
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Other
Treasury Shares, at Cost, 152 and 150 at March 31, 2015 and 2014
Total McKesson Corporation Stockholders’ Equity
Noncontrolling Interests
Total Equity
Total Liabilities, Redeemable Noncontrolling Interests and Equity
See Financial Notes
64
March 31,
2015
2014
$ 5,341
15,914
14,296
1,119
36,670
2,045
9,817
3,441
1,897
$53,870
$25,166
135
1,078
1,820
1,529
3,769
33,497
8,180
2,722
1,386
—
4
6,968
12,705
(1,713)
(7)
(9,956)
8,001
84
8,085
$53,870
$ 4,193
13,780
12,986
1,877
32,836
2,196
9,927
4,871
1,929
$51,759
$21,128
248
1,236
1,588
1,417
3,998
29,615
8,929
2,897
—
—
4
6,552
11,453
(3)
23
(9,507)
8,522
1,796
10,318
$51,759
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended March 31, 2015, 2014 and 2013
(In millions, except per share amounts)
Common
Stock
Shares Amount
373
5
$
4
—
(2)
—
376
5
$
4
—
381
3
$
4
—
Balances, March 31, 2012
Issuance of shares under employee plans
Share-based compensation
Tax benefit related to issuance of shares
under employee plans
Other comprehensive loss
Net income
Repurchase of common stock
Repurchase and retirement of treasury
stock
Cash dividends declared, $0.80 per
common share
Other
Balances, March 31, 2013
Issuance of shares under employee plans
Share-based compensation
Tax benefit related to issuance of shares
under employee plans
Acquisition of Celesio
Conversion of Celesio convertible bonds
Other comprehensive income
Net income (loss)
Repurchase of common stock
Cash dividends declared, $0.92 per
common share
Other
Balances, March 31, 2014
Issuance of shares under employee plans
Share-based compensation
Tax benefit related to issuance of shares
under employee plans
Purchase of noncontrolling interests
Reclassification of noncontrolling
interests to redeemable noncontrolling
interests
Other comprehensive income
Net income
Repurchase of common stock
Cash dividends declared, $0.96 per
common share
Other
McKesson Corporation Stockholders’ Equity
Additional
Paid-in
Capital
Other
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Common
Shares Amount
Non-
controlling
Interests
Total
Equity
$5,571
$ 4
$ 9,451
$
5
(138)
$(8,204)
$ —
$ 6,831
166
167
34
162
(22)
1,338
(195)
(192)
10
(70)
—
(55)
(13)
(1,321)
2
217
111
167
34
(70)
1,338
(1,159)
—
(192)
10
$ 6,078
$ 14
$ 10,402
$
(65)
(149)
$(9,363)
$ —
$ 7,070
177
160
92
33
14
(2)
9
1,263
(214)
2
(1)
(130)
62
—
(14)
1,500
280
21
(5)
47
160
92
1,500
313
83
1,258
—
(214)
9
$ 6,552
$ 23
$ 11,453
$
(3)
(150)
$(9,507)
$ 1,796
$ 10,318
152
165
105
(2)
—
(109)
(1,710)
(2)
(340)
1,476
(226)
2
(4)
(30)
43
165
105
(62)
(1,500)
(1,884)
1,481
(340)
(60)
(1,500)
(174)
5
(226)
(15)
$ 8,085
17
84
Balances, March 31, 2015
384
$
4
$6,968
$ (7)
$12,705
$(1,713)
(152)
$(9,956)
$
See Financial Notes
65
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended March 31,
2014
2013
2015
Operating Activities
Net income
Adjustments to reconcile to net cash provided by operating activities:
Depreciation
Amortization
Deferred taxes
Share-based compensation expense
Gain on business combination
Impairment charges and impairment of equity investment
Charges associated with last-in-first-out inventory method
Other non-cash items
Changes in operating assets and liabilities, net of acquisitions:
Receivables
Inventories
Drafts and accounts payable
Deferred revenue
Taxes
Claim and litigation charges
Litigation settlement payments
Other
Net cash provided by operating activities
Investing Activities
Property acquisitions
Capitalized software expenditures
Acquisitions, net of cash and cash equivalents acquired
Proceeds from sale of businesses and equity investment
Other
Net cash used in investing activities
Financing Activities
Proceeds from short-term borrowings
Repayments of short-term borrowings
Proceeds from issuances of long-term debt
Repayments of long-term debt
Common stock transactions:
Issuances
Share repurchases, including shares surrendered for tax withholding
Dividends paid
Other
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Cash Flow Information
Cash paid for:
Interest
Income taxes, net of refunds
Non-cash item:
Fair value of debt assumed on acquisitions
Conversion of Celesio’s convertible bonds to equity
See Financial Notes
66
$ 1,543
$ 1,258
$ 1,338
306
711
171
174
—
241
337
47
(2,821)
(2,144)
4,718
(141)
(222)
150
—
42
3,112
(376)
(169)
(170)
15
23
(677)
3,100
(3,152)
3
(353)
152
(450)
(227)
(41)
(968)
(319)
1,148
4,193
$ 5,341
185
550
17
160
—
80
311
130
(868)
(1,182)
2,412
(81)
218
68
(105)
(17)
3,136
(278)
(141)
(4,634)
97
(90)
(5,046)
6,080
(6,132)
4,124
(348)
143
438
615
167
(81)
191
13
90
318
(60)
(125)
(44)
(98)
72
(483)
(11)
2,483
(241)
(159)
(1,873)
—
64
(2,209)
2,225
(2,625)
1,798
(1,143)
177
(130)
(214)
62
3,619
28
1,737
2,456
$ 4,193
166
(1,214)
(194)
31
(956)
(11)
(693)
3,149
$ 2,456
$
$
359
866
$
$
255
508
$
$
207
55
$ —
$ —
$(2,312)
313
$
$ (635)
$ —
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 pharmaceuticals, medical supplies and healthcare information technology that
make healthcare safer while reducing costs. We conduct our business through two operating segments,
McKesson Distribution Solutions and McKesson Technology Solutions, as further described in Financial Note
26, “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. We also 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. Refer to Financial Note 16, “Variable Interest Entities” for more information on VIEs.
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 and our proportionate
share of income or loss is recorded in other income, net. Equity investments in non-publicly traded entities are
primarily accounted for using the cost method. Intercompany transactions and balances have been eliminated.
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 instruments purchased with original maturity of three
months or less at the date of acquisition are included in cash and cash equivalents.
Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily
invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated
prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S.
government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the
U.S. government and an AAA rated prime money market fund denominated in British pound sterling.
The remaining cash and cash equivalents are deposited with several financial institutions. Deposits at U.S.
banks exceed the amount insured by the Federal Deposit Insurance Corporation. 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 for current balances and other
assets for non-current balances in the consolidated balance sheets. At March 31, 2015 and 2014, restricted cash
was not material.
67
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, 2015 and 2014, 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.
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 2015, sales to our ten largest
customers accounted for approximately 44% of our total consolidated revenues. Sales to our largest customer,
CVS Caremark Corporation (“CVS”), accounted for approximately 15% of our total consolidated revenues. At
March 31, 2015, trade accounts receivable from our ten largest customers were approximately 36% of total trade
accounts receivable. Accounts receivable from CVS were approximately 14% of total trade accounts receivable.
As a result, our sales and credit concentration is significant. We also have agreements with group purchasing
organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals,
pharmacies and other healthcare providers. The accounts receivables balances are with individual members of the
GPOs. 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, namely
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, 2015 and 2014, 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. 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 accounted for as a reduction in the cost of inventory and are recognized
when the inventory is sold.
68
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The LIFO method was used to value approximately 73% and 67% of our inventories at March 31, 2015 and
2014. If we had used the FIFO method of inventory valuation, which approximates current replacement costs,
inventories would have been approximately $768 million and $431 million higher than the amounts reported at
March 31, 2015 and 2014, respectively. These amounts are equivalent to our LIFO reserves. Our LIFO valuation
amount includes both pharmaceutical and non-pharmaceutical products. In 2015, 2014 and 2013, we recognized
LIFO related expenses of $337 million, $311 million and $13 million in cost of sales within our consolidated
statements of operations. A LIFO expense is recognized when the net effect of price increases on branded
pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines and
shifts towards generic pharmaceuticals, including the effect of branded pharmaceutical products that have lost
market exclusivity. A LIFO credit is recognized when the net effect of price declines and shifts towards generic
pharmaceuticals exceeds the impact of price increases on branded pharmaceuticals and non-pharmaceutical
products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of
replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Due
to cumulative net price deflation from 2005 to 2013, we had a lower-of-cost or market (“LCM”) reserve of $60
million at March 31, 2013 which reduced pharmaceutical inventories at LIFO to market. During 2014, the LCM
reserve of $60 million was released, resulting in an increase in gross profit. As of March 31, 2014 and 2015,
inventories at LIFO did not exceed market.
Shipping and Handling Costs: We include costs to warehouse, pick, pack and deliver inventory to our
customers in selling, distribution and administrative expenses.
Property, Plant and Equipment: We state our property, plant and equipment at cost and depreciate them
under the straight-line method at rates designed to distribute the cost of properties over estimated service lives
ranging from one to thirty years.
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 discount rate used for cash flows reflects capital market conditions and the specific risks
69
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
associated with the business. 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.
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 thirty-eight years. We review intangible assets for impairment whenever events or changes in
the carrying value of the assets may not be recoverable. Determination of
circumstances indicate that
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, 2015 and 2014, capitalized software held for internal use was $435
million and $508 million, net of accumulated amortization of $1,112 million and $1,004 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 product is delivered and title passes
to the customer or when services have been rendered and there are no further obligations to the customer.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy
generally allows customers to return products only if they can be resold for value or returned to suppliers for full
credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from
customers were approximately $2.7 billion in 2015 and $1.9 billion in 2014 and 2013. Taxes collected from
customers and remitted to governmental authorities are presented on a net basis; that is, they are excluded from
revenues.
70
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarily to
a limited number of large customers who warehouse their own product. 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 from most of these same customers. Direct store
deliveries are shipments from the manufacturer to our customers of a limited category of products that require
special handling. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and
possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of
loss for collection from customers as well as delivery or return of the product, are responsible for fulfillment and
other customer service requirements, or the transactions have several but not all of these indicators.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a
combination of various products and services. Revenue from a multiple-element arrangement is allocated to the
separate elements based on 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.
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 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
71
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 goods sold. We consider these fees and
other incentives to represent product discounts and as a result, the amounts are recorded as a reduction of product
cost and are recognized through cost of goods sold upon the sale of the related inventory.
Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve
estimates are established based on judgment after considering the status of current outstanding claims, historical
experience with the suppliers, the specific incentive programs and any other pertinent information available. We
evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate
based on changes in factual circumstances. As of March 31, 2015 and 2014 supplier reserves were $167 million
and $181 million. The ultimate outcome of any outstanding claims may be different than our estimate. All of the
supplier reserves at March 31, 2015 and 2014 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. Under this method, deferred tax assets and liabilities are determined based
on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax
positions are recognized when it is more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based on the technical merits. The amount
recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized
upon effective settlements. Deferred taxes are not provided on undistributed earnings of our foreign operations
that are considered to be permanently reinvested.
72
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Foreign Currency Translation: Our international subsidiaries generally consider their local currency to be
their functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars
at year-end exchange rates and revenues and expenses are translated at average exchange rates during the year.
Currency translation adjustments for the year 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. When we sell all or substantially all of an international entity,
the related share of the cumulative currency translation adjustment is removed from stockholders’ equity and is
included in the gain or loss on sale in the consolidated statements of operations. 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 2015, 2014 or 2013.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management
of foreign currency and interest rate exposures and are recorded on the consolidated balance sheets at fair value.
If a derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized as a charge or credit to earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the derivative are 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 reclassed 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 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 shareholders’ equity but are excluded from net income. Our other
comprehensive income 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, as well as unrealized
gains and losses on retirement-related benefit plans.
Noncontrolling 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 2015, net
income attributable to noncontrolling interests primarily represents guaranteed dividends and recurring
compensation that McKesson is obligated to pay to the noncontrolling shareholders of Celesio. 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 3, “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, other pending and potential legal actions for
damages, investigations relating to governmental laws and regulations and other matters arising out of the normal
conduct of our business. 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
73
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 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 is obtained of a business, 100% of the assets acquired and liabilities assumed,
including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities
assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of
the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying
an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more
significant estimates and assumptions inherent in the income method or other methods include the amount and
timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash
flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an
intangible asset also requires judgment as different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives.
Recently Adopted Accounting Pronouncements
Business Combinations: In November 2014, amended guidance related to pushdown accounting was issued
and became effective immediately. This guidance provides an acquired entity with an option to use the acquirer’s
accounting and reporting basis in the preparation of its separate financial statements when an acquirer obtains
control of the acquired entity. The option to apply pushdown accounting can be elected for each individual
change-of-control event. The adoption of this amended guidance did not have a material effect on our
consolidated financial statements.
Cumulative Translation Adjustment: In the first quarter of 2015, we adopted amended guidance for 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
74
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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
Fees Paid in a Cloud Computing Arrangement: In April 2015, amended guidance was issued 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 amended
guidance will become effective for us commencing in the first quarter of 2017. Early adoption is permitted. We
are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Debt Issuance Costs: In April 2015, amended guidance was issued for the balance sheet presentation of debt
issuance costs and will become effective for us commencing in the first quarter of 2017. Early adoption is
permitted. The amended guidance requires debt issuance costs related to a recognized debt liability be reported in
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. We do not expect the
adoption of this guidance to have a material effect on our consolidated financial statements.
Consolidation: In February 2015, amended guidance was issued 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 amended guidance will
become effective for us commencing in the first quarter of 2017. Early adoption is permitted. We are currently
evaluating the impact of this amended guidance on our consolidated financial statements.
Discontinued Operations: In April 2014, amended guidance was issued 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. The amended guidance is effective for us prospectively commencing in
the first quarter of 2016. Early adoption is permitted. We are currently evaluating the impact of this amended
guidance on our consolidated financial statements.
Revenue Recognition: In May 2014, amended guidance was issued for recognizing revenue from contracts
to all
with customers. The amended guidance eliminated industry specific guidance and applies
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. The amended guidance is
effective for us commencing in the first quarter of 2018. The amended guidance allows for either full
retrospective adoption or modified retrospective adoption. Early adoption is not permitted. We are currently
evaluating the impact of this amended guidance on our consolidated financial statements.
75
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
2. Business Combinations
Fiscal 2014
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of
Celesio AG (“Celesio”) and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of
cash acquired (the “Acquisition”). Upon the acquisition, our ownership of Celesio’s fully diluted common shares
was 75.6% and, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our
consolidated balance sheet. The Acquisition was initially funded by utilizing a senior bridge loan, our existing
accounts receivable sales facility and cash on hand. Celesio is an international wholesale and retail company and
a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in
Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of Celesio expanded our
global geographic area. Financial results for Celesio are included within our International pharmaceutical
distribution and services business, which is part of our Distribution Solutions segment, since the date of
Acquisition.
From February 7, 2014 through March 31, 2014, substantially all of the convertible bonds issued by Celesio
(held by both third parties and us) were converted into an additional 20.9 million common shares of Celesio and
approximately $30 million in cash. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding
and fully diluted common shares.
The fair value measurements of the assets acquired and liabilities assumed of Celesio as of the acquisition
date were finalized upon completion of the measurement period. The following table summarizes the final
amounts of the fair value recognized for the assets acquired and liabilities assumed as of the acquisition date as
well as adjustments made during the measurement period. Among the adjustments recorded, the fair value of the
acquired intangible assets decreased by $709 million. The fair value was primarily determined by applying the
income approach using unobservable inputs for projected cash flows, which were refined during the
measurement period and are considered Level 3 inputs under the fair value measurements and disclosure
guidance. These refinements did not have a significant impact on our consolidated statements of operations,
balance sheets or cash flows in any period and, therefore, we have not retrospectively adjusted our financial
statements.
(In millions)
Receivables
Other current assets, net of cash and cash equivalents acquired
Goodwill
Intangible assets
Other long-term assets
Current liabilities
Short-term borrowings and current portion of long-term debt
Long-term debt
Other long-term liabilities
Fair value of net assets, less cash and cash equivalents
Less: Noncontrolling Interests
Net assets acquired, net of cash and cash equivalents
76
Amounts
Previously
Recognized as of
Acquisition Date
(Provisional)
Measurement
Period
Adjustments
Amounts
Recognized as of
Acquisition Date
(Final as
Adjusted)
$ 3,425
2,413
3,570
3,018
1,272
(4,096)
(1,990)
(322)
(1,293)
5,997
(1,500)
$ 4,497
$ (49)
17
655
(709)
(39)
(28)
—
—
158
5
(5)
$ —
$ 3,376
2,430
4,225
2,309
1,233
(4,124)
(1,990)
(322)
(1,135)
6,002
(1,505)
$ 4,497
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The excess of the purchase price and the noncontrolling interests over the fair value of the acquired net
assets has been allocated to goodwill, which primarily reflects the expected future benefits to be realized upon
integrating the business. Most of the goodwill is not expected to be deductible for tax purposes.
Domination and Profit and Loss Transfer Agreement
On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary, McKesson Deutschland
GmbH & Co. KGaA (“McKesson Deutschland,” formerly known as Dragonfly GmbH & Co. KGaA), entered
into the domination and profit and loss transfer agreement (the “Domination Agreement”) subject to Celesio
shareholder approval and German registration requirements. Under the Domination Agreement, Celesio
subordinates its management to McKesson and undertakes to transfer all of its annual profits to McKesson, and
McKesson undertakes 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. The
Domination Agreement was approved at the general shareholders’ meeting of Celesio on July 15, 2014, approved
by the Stuttgart Higher Regional Court for registration on December 2, 2014, and was registered in the
commercial register of Celesio at the local court of Stuttgart on December 2, 2014. As a result, McKesson
obtained the ability to pursue integration of the two companies on December 2, 2014.
Under the Domination Agreement, the noncontrolling shareholders of Celesio no longer participate in their
percentage ownership of Celesio’s profits and losses, but instead have the right to receive the one-time
Guaranteed Dividend and prospectively the Compensation Amount.
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of Celesio
initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Higher Regional Court to challenge
the Compensation Amount, Guaranteed Dividend and/or 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, McKesson Deutschland 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. In addition, if the Domination Agreement is terminated, the Put Right may be exercised for a two-
month period after the date of termination.
On August 14, 2014, Magnetar Capital filed a lawsuit against Celesio with the Stuttgart Regional Court
claiming that the shareholders’ approval of the Domination Agreement was void under the German Stock
Corporation Act (“Main Proceedings”). As the Domination Agreement was registered in the commercial register
of Celesio at the local court of Stuttgart, Germany on December 2, 2014 following the approval for registration
by the Stuttgart Higher Regional Court, the outcome of the Main Proceedings will not impact the effectiveness of
the Domination Agreement and thus will not impact McKesson’s ability to direct the activities of Celesio. The
court is scheduled to issue a decision on the Main Proceedings on June 16, 2015.
77
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2013
On February 22, 2013, we acquired all of the outstanding shares of PSS World Medical, Inc. (“PSSI”) of
Jacksonville, Florida for $29.00 per share plus the assumption of PSSI’s debt, or approximately $1.9 billion in
aggregate, consisting of cash consideration of $1.3 billion, net of cash acquired, and the assumption of long-term
debt with a fair value of $0.6 billion. The cash paid at acquisition was funded from cash on hand and the issuance
of long-term debt. PSSI markets and distributes medical products and services throughout the United States. The
acquisition of PSSI expanded our existing Medical-Surgical business.
Included in the purchase price allocation are acquired identifiable intangibles of $568 million, the fair value
of which 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. The excess of the purchase price over the net tangible and
intangible assets of approximately $1,149 million was recorded as goodwill, which primarily reflects the
expected future benefits to be realized upon integrating the business. Most of the goodwill is not expected to be
deductible for tax purposes.
Financial results for PSSI since the acquisition date are included in the results of operations within our
Medical-Surgical distributions and services business, which is part of our Distribution Solutions segment
beginning in the fourth quarter of 2013.
for $90 million, which was
On April 6, 2012, we purchased the remaining 50% ownership interest in our corporate headquarters
funded from cash on
building located in San Francisco, California,
hand. We previously held a 50% ownership interest and were the primary tenant in this building. This transaction
was accounted for as a step acquisition, which required that we re-measure our previously held 50% ownership
interest to fair value and record the difference between the fair value and carrying value as a gain in the
consolidated statements of operations. The re-measurement to fair value resulted in a non-cash pre-tax gain of
$81 million ($51 million after-tax), which was recorded as a gain on business combination within Corporate in
the consolidated statements of operations during the first quarter of 2013. The total fair value of the net assets
acquired was $180 million, which was allocated as follows: building and improvements of $113 million and land
of $58 million with the remainder allocated for settlement of our pre-existing lease and lease intangible assets.
Other Acquisitions
During the last three years, we also completed a number of other smaller acquisitions within both of our
operating segments. Financial results for our business acquisitions have been included in our consolidated
financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have
been allocated based on estimated fair values at the date of acquisition.
Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax
purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes.
3. Noncontrolling Interests
At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and fully diluted common
shares and the noncontrolling interests in Celesio were presented within the permanent equity section of our
consolidated balance sheet. In April 2014, we completed a tender offer and paid $32 million in cash to acquire
approximately 1 million additional common shares of Celesio at €23.50 per share, which increased our
ownership share by 0.5% and decreased noncontrolling interests by $35 million.
78
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On December 2, 2014, the Domination Agreement between Celesio and McKesson, through its wholly-
owned subsidiary, McKesson Deutschland, became effective as previously discussed in Financial Note 2,
“Business Combinations”. Prior to the effectiveness of the Domination Agreement, the net income or loss from
Celesio was attributed to the noncontrolling shareholders of Celesio based on their proportionate ownership
interest in Celesio. Upon the effectiveness of the Domination Agreement, McKesson became obligated to pay the
$50 million Guaranteed Dividend to the noncontrolling shareholders of Celesio in relation to Celesio’s fiscal year
ended December 31, 2014. Under the Domination Agreement, McKesson also became obligated to pay the
annual recurring Compensation Amount of €0.83 per Celesio share effective January 1, 2015. The Compensation
Amount is recognized ratably during the applicable annual period. As a result, during 2015, we recorded a total
attribution of net income to the noncontrolling shareholders of Celesio of $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.
In addition, upon effectiveness of the Domination Agreement, the noncontrolling interests in Celesio
became redeemable as a result of a put right. Accordingly, the carrying value of noncontrolling interests related
to Celesio of $1.5 billion was reclassified from “Total Equity” to “Redeemable Noncontrolling Interests” on our
consolidated balance sheet. During the fourth quarter of 2015, we paid $8 million to purchase 0.3 million shares
of Celesio through the exercise of the put right by the noncontrolling shareholders, which decreased the carrying
value of redeemable noncontrolling interests by $9 million. 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, 2015, the
carrying value of redeemable noncontrolling interests of $1.4 billion exceeded the maximum redemption value of
$1.2 billion. At March 31, 2015, we owned approximately 76.0% of Celesio’s outstanding common shares.
Changes in noncontrolling interests and redeemable noncontrolling interests were as follows:
(In millions)
Balance, March 31, 2014
Net income attributable to noncontrolling interests (1)
Other comprehensive loss
Purchase of noncontrolling interests
Noncontrolling
Interests
Redeemable
Noncontrolling
Interests
$ 1,796
$ —
5
(174)
(60)
62
(105)
(9)
Reclassification from Total Equity to Redeemable Noncontrolling Interests (2)
(1,500)
1,500
Reclassification of guaranteed dividends and recurring compensation to other
accrued liabilities
Other
Balance, March 31, 2015
—
17
84
$
(62)
—
$1,386
(1)
(2)
Includes the Guaranteed Dividend of $50 million for Celesio’s fiscal year ended December 31, 2014 and the
Compensation Amount of $12 million for the fourth quarter of 2015
Includes net foreign currency losses of $138 million attributable to noncontrolling interests
The effect of changes in our ownership interests with noncontrolling interests on our equity of $2 million
was recorded as a net decrease to McKesson’s stockholders’ paid-in capital during 2015. Net income attributable
to McKesson and transfers from noncontrolling interests amounted to $1,474 million during 2015.
79
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
4. Discontinued Operations
During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution
business and a small business from our Distribution Solutions segment, as well as a small business from our
Technology Solutions segment. We acquired the Brazilian distribution business through our February 2014
acquisition of Celesio.
In 2014, we committed to a plan to sell our International Technology and our Hospital Automation
businesses from our Technology Solutions segment and certain businesses from our Distribution Solutions
segment. 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, which we will transition to another service provider during the first quarter of 2016. As a
result, the workforce business, which had been designated as a discontinued operation since the first quarter of
2014, was reclassified to continuing operations in the first quarter of 2015. During the first quarter of 2015, we
also recorded a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation
and amortization expense for the period in 2014 while 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.
As required, we classified the results of operations and cash flows of these businesses as discontinued
operations for all applicable periods presented in our consolidated financial statements. Depreciation and
amortization expense is not recognized from the date the businesses are classified as held for sale.
A summary of results of discontinued operations is as follows:
(In millions)
Revenues
Loss from discontinued operations
Loss on sale
Loss from discontinued operations before income tax
Income tax benefit
Loss from discontinued operations, net of tax
Fiscal 2015
Years Ended March 31,
2015
2014
2013
$2,196
$ 637
$ 259
$ (321)
$ (177)
$ (32)
(6)
(5)
(327)
(182)
28
26
—
(32)
7
$ (299)
$ (156)
$ (25)
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.
During the fourth quarter of 2015, we recorded $241 million pre-tax ($235 million after-tax) non-cash
impairment charges to reduce the carrying value of our Brazilian distribution business to its estimated fair value,
less cost to sell. The impairment charge reduced the carrying value of property, plant and equipment, other long-
lived assets and goodwill by $31 million. The remaining difference between the business’ fair value and carrying
value of $210 million was recorded as a liability and was included in other accrued liabilities in our consolidated
balance sheet. Cumulative foreign currency translation losses of $17 million were included in the assessment of
this business’ carrying value for purposes of calculating the impairment charge. Cumulative foreign currency
translation losses (net of tax) are included in Accumulated Other Comprehensive Income on our consolidated
balance sheet at March 31, 2015. The ultimate loss from the sale may be higher or lower than our current
assessment of the business’ fair value.
80
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2014
During the third quarter of 2014, we sold our Hospital Automation business for net cash proceeds of $55
million and recorded a pre-tax and after-tax loss of $5 million and $7 million.
During the third quarter of 2014, we recorded an $80 million non-cash pre-tax and after-tax impairment
charge to reduce the carrying value of our International Technology business to its estimated fair value less costs
to sell. The impairment charge was primarily attributed to goodwill and other long-lived assets and as a result,
there was no tax benefit associated with this charge.
The assets and liabilities of our discontinued operations were classified as held-for-sale effective in 2014.
All applicable assets of the businesses to be sold are included under the caption “Prepaid expenses and other” and
all applicable liabilities under the caption “Other accrued liabilities” within our consolidated balance sheet at
March 31, 2015 and 2014. The carrying values of the assets and liabilities classified as held-for-sale were $660
million and $663 million at March 31, 2015.
5. Asset Impairments and Product Alignment Charges
In 2014 and 2013, we recorded asset impairments and product alignment charges of $57 million and
$46 million in our Technology Solutions segment.
Fiscal 2014
During the third quarter of 2014, our Technology Solutions segment recorded pre-tax charges totaling
$57 million. These charges primarily consist of $35 million of product alignment charges, $15 million of
integration-related expenses and $7 million of reduction-in-workforce severance charges. Included in the total
charge was $35 million for severance for employees primarily in our research and development, customer
services and sales functions, and $15 million for asset impairments which primarily represents the write-off of
deferred costs related to a product that will no longer be developed. Charges were recorded in our consolidated
statement of operations as follows: $34 million in cost of sales and $23 million in operating expenses.
Fiscal 2013
During the fourth quarter of 2013, we recorded $46 million of non-cash pre-tax impairment charges. These
charges were the result of a significant decrease in estimated revenues for a software product. The charge
included a $36 million goodwill impairment to reduce the carrying value of goodwill within the applicable
reporting unit to its implied fair value. In addition, the goodwill had a nominal tax basis. This impairment charge
was recorded in operating expenses within our consolidated statement of operations. Refer to Financial Note 20,
“Fair Value Measurements,” for more information on this nonrecurring fair value measurement. The balance of
the charge also represents a $10 million impairment to reduce the carrying value of the unamortized capitalized
software held for sale costs for this product to its net realizable value. We concluded that the estimated future
undiscounted revenues, net of estimated related costs, were insufficient to recover its carrying value. This
impairment charge was recorded in cost of sales within our consolidated statement of operations.
6. Equity Investments
We own a 45% interest in Brocacef Holding N.V. (“Brocacef”), which provides, through its subsidiaries,
wholesale distribution services and supplies pharmaceutical and other healthcare products to pharmacies,
retailers and hospitals in the Netherlands. During the third quarter of 2015, we announced that Brocacef intends
81
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
to purchase Mediq Apotheken Beheer B.V., which owns and operates pharmacies in the Netherlands. This
acquisition is subject to customary closing conditions including regulatory clearances and approval of the
relevant competition authorities but is expected to close during the first half of 2016.
During 2013, we committed to a plan to sell our 49% equity interest in Nadro, S.A. de C.V. (“Nadro”) and
in the fourth quarter of 2013 we recorded a pre-tax impairment charge of $191 million reducing the investment’s
carrying value to its estimated fair value. Cumulative foreign currency translation losses of $69 million were
included in the assessment of the investment’s carrying value for purposes of calculating the impairment charge.
The impairment charge was recorded in impairment of an equity investment in the consolidated statements of
operations within our Distribution Solutions segment.
In September 2013, we completed the sale of our 49% equity interest in Nadro. Under the terms of the
agreement, we received $41 million in total cash consideration. There was no material gain or loss on the
disposition based on the adjusted fair value of the investment at the time of the sale. Prior to the sale, our
investment in Nadro was accounted for under the equity method of accounting within our Distribution Solutions
segment.
7. 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 2015, 2014
and 2013.
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
(In millions)
Restricted stock unit awards (1)
Stock options
Employee stock purchase plan
Share-based compensation expense
Tax benefit for share-based compensation expense (2)
Share-based compensation expense, net of tax
82
Years Ended March 31,
2015
$137
2014
$126
2013
$132
24
13
174
(61)
22
12
160
(55)
24
11
167
(59)
$113
$105
$108
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(1)
(2)
Includes compensation expense recognized for RSUs, PeRSUs and TSRUs. Our TSRUs were awarded
beginning in 2015.
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.
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, 2015, 30 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.
Weighted-average assumptions used to estimate the fair value of employee stock options were as follows:
Expected stock price volatility
Expected dividend yield
Risk-free interest rate
Expected life (in years)
83
Years Ended March 31,
2015
2014
2013
22% 22% 27%
0.6% 0.7% 0.9%
1.3% 0.7% 0.8%
4
4
5
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following is a summary of stock options outstanding at March 31, 2015:
Range of Exercise
Prices
$40.46 – $133.27
133.28 – 226.05
Options Outstanding
Options Exercisable
Number of Options
Outstanding
at Year End
(In millions)
Weighted-Average
Remaining
Contractual
Life (Years)
4
1
5
3
6
Weighted-
Average
Exercise Price
$ 79.38
182.38
Number of Options
Exercisable at
Year End
(In millions)
2
—
2
Weighted-
Average
Exercise Price
$ 68.80
155.87
The following table summarizes stock option activity during 2015:
(In millions, except per share data)
Shares
Outstanding, March 31, 2014
Granted
Exercised
Outstanding, March 31, 2015
Vested and expected to vest (1)
Vested and exercisable, March 31, 2015
6
1
(2)
5
5
2
Weighted-
Average
Exercise
Price
$ 78.07
184.84
67.64
$ 95.01
$ 95.01
69.27
Weighted-Average
Remaining
Contractual
Term (Years)
4
4
4
3
Aggregate
Intrinsic
Value (2)
$473
$539
$538
363
(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:
(In millions, except per share data)
Weighted-average grant date fair value per stock option
Aggregate intrinsic value on exercise
Cash received upon exercise
Tax benefits realized related to exercise
Total fair value of stock options vested
Total compensation cost, net of estimated forfeitures, related to unvested stock
options not yet recognized, pre-tax
Weighted-average period in years over which stock option compensation cost is
expected to be recognized
Years Ended March 31,
2015
2014
2013
$35.49
$ 153
76
$
60
$
20
$
$21.45
$ 144
$ 111
55
$
24
$
$19.63
$ 107
$ 106
41
$
24
$
$
22
$
29
$
37
2
1
1
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.
84
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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, 2015, approximately 158,000 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 replace 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 3 years. For TSRUs that are
designated as equity awards, the fair value is measured at the grant date and expense is attributed to the requisite
service period on a straight-line basis. For TSRUs that are eligible for cash settlement and designated as liability
awards, we measure the fair value at the end of each reporting period and expense is recognized for services
rendered based on the adjusted fair value of the awards. The weighted-average assumptions used to estimate the
fair value of TSRUs included expected dividend yield of 0.5%, risk-free interest rate of 0.7%, expected stock
volatility of 21.3% and contractual term of 3 years.
The following table summarizes restricted stock unit award activity during 2015:
(In millions, except per share data)
Nonvested, March 31, 2014
Granted
Vested
Nonvested, March 31, 2015
Weighted-
Average
Grant Date Fair
Value Per Share
$ 93.25
187.03
84.28
$129.57
Shares
4
1
(1)
4
The following table provides data related to restricted stock unit award activity:
(In millions)
Total fair value of shares vested
Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock
unit awards not yet recognized, pre-tax
Weighted-average period in years over which restricted stock unit award cost is expected
to be recognized
Years Ended March 31,
2015
2014
2013
$126
$184
$ 66
$206
$236 $210
2
2
2
85
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 2015 and 2014 and 1 million in 2013. At March 31, 2015,
5 million shares remain available for issuance.
8. Other Income, Net
(In millions)
Interest income
Equity in earnings (loss), net (1)
Other, net (1)
Total
(1) Primarily recorded within our Distribution Solutions segment.
9. Income Taxes
(In millions)
Income from continuing operations before income taxes
U.S.
Foreign
Total income from continuing operations before income taxes
Income tax expense related to continuing operations consists of the following:
(In millions)
Current
Federal
State
Foreign
Total current
Deferred
Federal
State
Foreign
Total deferred
Income tax expense
86
Years Ended March 31,
2015
2014
2013
$ 20
$ 16
12 —
16
31
$ 32
$ 63
$ 22
3
9
$ 34
Years Ended March 31,
2015
2014
2013
$1,893
764
$2,657
$1,554
617
$2,171
$1,562
388
$1,950
Years Ended March 31,
2015
2014
2013
$453
90
101
644
195
53
(77)
171
$815
$484
64
193
741
24
10
(18)
16
$757
$ (84)
14
46
(24)
538
80
(7)
611
$587
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
During 2015, 2014 and 2013, income tax expense related to continuing operations was $815 million, $757
million and $587 million and included net discrete tax benefit of $33 million, net discrete tax expense of $94
million and net discrete tax benefit of $29 million. Our discrete tax expense for 2014 is primarily related to a
$122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer
pricing issues. The 2013 federal and state current income tax expense reflects the utilization of alternative
minimum tax credit carryforwards.
We have received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing
matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all
of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment
and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of
2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003
through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential
settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter
and do not expect it to have a material impact to income tax expense.
During 2015, we reached an agreement with the Internal Revenue Service (“IRS”) to settle all outstanding
issues relating to years 2003 through 2006 and recognized discrete tax benefits of $55 million to record
previously unrecognized tax benefits and related interest.
The IRS has been examining our U.S. corporation income tax returns for 2007 through 2009. We anticipate
that they will issue a Revenue Agent Report in 2016 to disclose the results of their audit and any proposed
assessments. The CRA is currently examining our Canadian income tax returns for years 2011 through 2013. In
nearly all jurisdictions, the tax years prior to 2003 are no longer subject to examination.
Significant judgments and estimates are required in determining the consolidated income tax provision and
evaluating income tax uncertainties. Although our major taxing jurisdictions are the U.S. and Canada, we are
subject to income taxes in numerous foreign jurisdictions. Our income tax expense, deferred tax assets and
liabilities and uncertain tax liabilities reflect management’s best assessment of estimated current and future taxes
to be paid. We believe that we have made adequate provision for all income tax uncertainties.
The reconciliation between our effective tax rate on income from continuing operations and statutory tax
rate is as follows:
(In millions)
Income tax expense at federal statutory rate
State income taxes net of federal tax benefit
Foreign income taxed at various rates
Canadian litigation
Controlled substance distribution reserve
Unrecognized tax benefits and settlements
Tax credits
Other, net
Income tax expense
87
Years Ended March 31,
2015
2014
2013
$ 930
$ 760
$ 683
81
57
58
(247)
(177)
(143)
—
58
10
(10)
(7)
122
—
(6)
(6)
7
—
—
1
(13)
1
$ 815
$ 757
$ 587
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
At March 31, 2015, undistributed earnings of our foreign operations totaling $4,916 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 in the foreign operations as well as to fund certain
research and development activities for an indefinite period of time. The determination of the amount of deferred
taxes on these earnings is not practicable because the computation would depend on a number of factors that
cannot be known until a decision to repatriate the earnings is made.
Deferred tax balances consisted of the following:
(In millions)
Assets
Receivable allowances
Deferred revenue
Compensation and benefit related accruals
Net operating loss and credit carryforwards
Other
Subtotal
Less: valuation allowance
Total assets
Liabilities
Inventory valuation and other assets
Fixed assets and systems development costs
Intangibles
Other
Total liabilities
Net deferred tax liability
Current net deferred tax asset
Current net deferred tax liability
Long-term deferred tax asset
Long-term deferred tax liability
Net deferred tax liability
March 31,
2015
2014
$
83
72
681
316
266
$
94
136
632
337
287
1,418
(229)
1,189
1,486
(200)
1,286
(2,333)
(2,161)
(324)
(320)
(1,073)
(1,477)
(61)
(117)
(3,791)
(4,075)
$(2,602)
$(2,789)
$
26
$
42
(1,819)
(1,588)
50
19
(859)
(1,262)
$(2,602)
$(2,789)
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 increase in valuation allowances in the current year relate
primarily to net operating losses incurred in certain tax jurisdictions for which no tax benefit was recognized.
We have federal, state and foreign net operating loss carryforwards of $44 million, $1,930 million and
$711 million. The federal and state net operating losses will expire at various dates from 2016 through 2035.
Substantially all of our foreign net operating losses have indefinite lives.
88
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to our gross unrecognized tax benefits for the last three
years:
(In millions)
Unrecognized tax benefits at beginning of period
Additions based on tax positions related to prior years
Reductions based on tax positions related to prior years
Additions based on tax positions related to current year
Reductions based on settlements
Reductions based on the lapse of the applicable statutes of limitations
Exchange rate fluctuations
Years Ended March 31,
2015
$647
62
(18)
27
(65)
(12)
(25)
2014
$560
106
(23)
23
(4)
(7)
(8)
2013
$ 595
46
(106)
31
(2)
(2)
(2)
Unrecognized tax benefits at end of period
$616
$647
$ 560
Of the total $616 million in unrecognized tax benefits at March 31, 2015, $457 million would reduce
income tax expense and the effective tax rate if recognized. During the next twelve months, it is reasonably
possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our
unrecognized tax benefits by up to $137 million. However, this amount may change because we continue to have
ongoing negotiations with various taxing authorities throughout the year.
We report interest and penalties on unrecognized tax benefits as income tax expense. In 2015 and 2014, we
recognized an income tax benefit of $24 million and income tax expense of $48 million related to interest and
penalties in our consolidated statements of operations. The income tax benefit for interest and penalties
recognized in 2015 was primarily due to the lapses of statutes of limitations. The income tax expense for interest
and penalties recognized in 2014 was primarily due to the additional interest resulting from the increase of our
Canadian gross unrecognized tax benefits. At March 31, 2015 and 2014, we had $122 million and $179 million
accrued for the payment of interest and penalties on unrecognized tax benefits.
10. Earnings Per Common Share
Basic earnings per common share attributable to McKesson are computed by dividing net
income
attributable to McKesson 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.
89
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The computations for basic and diluted earnings per common share are as follows:
(In millions, except per share amounts)
Income from continuing operations
Net loss (income) attributable to noncontrolling interests
Income from continuing operations attributable to McKesson
Loss from discontinued operations, net of tax
Net income attributable to McKesson
Weighted average common shares outstanding:
Basic
Effect of dilutive securities:
Options to purchase common stock
Restricted stock units
Diluted
Earnings (loss) per common share attributable to McKesson: (1)
Diluted
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
Years Ended March 31,
2015
2014
2013
$1,842
(67)
1,775
(299)
$1,476
$1,414
5
1,419
(156)
$1,263
$1,363
—
1,363
(25)
$1,338
232
229
235
1
2
235
1
3
233
1
3
239
$ 7.54
(1.27)
$ 6.27
$ 6.08
(0.67)
$ 5.41
$ 5.69
(0.10)
$ 5.59
$ 7.66
(1.29)
$ 6.37
$ 6.19
(0.68)
$ 5.51
$ 5.81
(0.10)
$ 5.71
(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 1 million, 2 million and 2 million of potentially dilutive
securities were excluded from the computations of diluted net earnings per common share in 2015, 2014 and
2013, as they were anti-dilutive.
11. Receivables, Net
(In millions)
Customer accounts
Other
Total
Allowances
Net
March 31,
2015
2014
$13,117
2,965
16,082
(168)
$15,914
$12,169
1,740
13,909
(129)
$13,780
Other receivables primarily include amounts due from suppliers and customer unbilled receivables. The
allowances are primarily for estimated uncollectible accounts.
90
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
12. Property, Plant and Equipment, Net
(In millions)
Land
Building, machinery, equipment and other
Total property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net
March 31,
2015
2014
$
207
3,237
3,444
(1,399)
$ 2,045
$
221
3,155
3,376
(1,180)
$ 2,196
13. Goodwill and Intangible Assets, Net
Changes in the carrying amount of goodwill were as follows:
(In millions)
Balance, March 31, 2013
Goodwill acquired
Amount reclassified to assets held-for-sale
Acquisition accounting, transfers and other adjustments
Foreign currency translation adjustments, net
Balance, March 31, 2014
Goodwill acquired
Amount reclassified to assets held-for-sale
Acquisition accounting, transfers and other adjustments
Foreign currency translation adjustments, net
Balance, March 31, 2015
Distribution
Solutions
Technology
Solutions
$4,413
3,649
(1)
13
4
$8,078
93
(14)
625
(788)
$7,994
$1,992
—
(127)
(12)
(4)
$1,849
—
(1)
—
(25)
$1,823
Total
$6,405
3,649
(128)
1
—
$9,927
93
(15)
625
(813)
$9,817
As of March 31, 2015 and 2014, the accumulated goodwill impairment losses were $36 million in our
Technology Solutions segment.
Information regarding intangible assets is as follows:
March 31, 2015
March 31, 2014
Weighted
Average
Remaining
Amortization
Period
(Years)
8
15
26
15
3
4
(Dollars in millions)
Customer lists
Service agreements
Pharmacy licenses
Trademarks and trade names
Technology
Other
Total
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$2,683
$(1,116)
$1,567
$3,235
$ (863)
$2,372
957
874
315
213
162
(215)
(65)
(82)
(184)
(101)
742
809
233
29
61
995
1,219
367
219
166
(173)
(11)
(59)
(173)
(51)
822
1,208
308
46
115
$5,204
$(1,763)
$3,441
$6,201
$(1,330)
$4,871
91
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amortization expense of intangible assets was $494 million, $319 million and $215 million for 2015, 2014
and 2013. Estimated annual amortization expense of intangible assets is as follows: $419 million, $389 million,
$360 million, $332 million and $303 million for 2016 through 2020, and $1,638 million thereafter. All intangible
assets were subject to amortization as of March 31, 2015 and 2014.
14. 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:
(In millions)
Balance, at beginning of period
Amounts capitalized
Amortization expense
Impairment charges
Foreign currency translations adjustments, net
Balance, at end of period
Years Ended March 31,
2015
2014
2013
$103
34
(40)
—
(6)
$126
40
(50)
(12)
(1)
$144
49
(56)
(10)
(1)
$ 91
$103
$126
Additionally, third party royalty fees paid were $91 million, $91 million and $88 million during 2015, 2014
and 2013.
15. Debt and Financing Activities
Information regarding long-term debt is as follows:
(In millions)
Denominated in U.S. Dollars
Floating Rate Notes due September 10, 2015
0.95% Notes due December 4, 2015
3.25% Notes due March 1, 2016
5.70% Notes due March 1, 2017
1.29% Notes due March 10, 2017
1.40% Notes due March 15, 2018
7.50% Notes due February 15, 2019
2.28% Notes due March 15, 2019
4.75% Notes due March 1, 2021
2.70% Notes due December 15, 2022
2.85% Notes due March 15, 2023
3.80% Notes due March 15, 2024
7.65% Debentures due March 1, 2027
6.00% Notes due March 1, 2041
4.88% Notes due March 15, 2044
Other
92
March 31,
2015
2014
$ 400
500
600
500
700
499
349
1,100
599
400
400
1,100
175
493
800
26
$ 400
499
599
500
700
499
349
1,100
598
400
400
1,100
175
493
800
27
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(In millions)
Denominated in Euro and other foreign currencies
4.00% Bonds due October 18, 2016
4.50% Bonds due April 26, 2017
Promissory Notes
Bank liabilities and other
Total debt
Less current portion
Total long-term debt
Long-Term Debt
March 31,
2015
2014
388
563
—
117
507
737
297
166
9,709
(1,529)
10,346
(1,417)
$ 8,180
$ 8,929
On March 5, 2014, we issued floating rate notes due September 10, 2015 in an aggregate principal amount
of $400 million (“Floating Rate Notes”), 1.29% notes due March 10, 2017 in an aggregate principal amount of
$700 million (“2017 Notes”), 2.28% notes due March 15, 2019 in an aggregate principal amount of
$1,100 million (“2019 Notes”), 3.80% notes due March 15, 2024 in an aggregate principal amount of
$1,100 million (“2024 Notes”) and 4.88% notes due March 15, 2044 in an aggregate principal amount of
$800 million (“2044 Notes”). The Floating Rate Notes bear interest at a floating rate equal to the three-month
London Interbank Offered Rate plus 0.40% (0.66% at March 31, 2015) with interest payable quarterly on
March 10, June 10, September 10 and December 10 of each year. Interest on the 2017 Notes is payable on
March 10 and September 10 of each year. Interest on the 2019 Notes, the 2024 Notes and the 2044 Notes is
payable on March 15 and September 15 of each year. We utilized the net proceeds from the issuance of these
notes (each note constitutes a “Series”) of $4,068 million, net of discounts and offering expenses, to repay the
borrowings under our 2014 Bridge Loan, as further described below.
On March 8, 2013, we issued 1.40% notes due March 15, 2018 in an aggregate principal amount of
$500 million and 2.85% notes due March 15, 2023 in an aggregate principal amount of $400 million. Interest on
these notes is payable on March 15 and September 15 of each year. We utilized the net proceeds from the
issuance of these notes (each note constitutes a “Series”) of $891 million, net of discounts and offering expenses,
to repay the borrowings under our 2013 Bridge Loan, as further described below.
On December 4, 2012, we issued 0.95% notes due December 4, 2015 in an aggregate principal amount of
$500 million (“2015 Notes”) and 2.70% notes due December 15, 2022 in an aggregate principal amount of
$400 million (“2022 Notes”). Interest on the 2015 Notes is payable on June 4 and December 4 of each year and
interest on the 2022 Notes is payable on June 15 and December 15 of each year. We utilized the net proceeds
from the issuance of these notes (each note constitutes a “Series”) of $892 million, net of discounts and offering
expenses, for general corporate purposes and replenishing working capital that was used to repay long-term debt
that matured.
Each Series constitutes 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’ certificate specifying certain
terms of each Series. With the exception of the Floating Rate Notes, upon 30 days notice to holders of a Series,
we may redeem that Series at any time prior to maturity, in whole or in part, for cash at redemption prices that
include accrued and unpaid interest and a make-whole premium, as specified in the indenture and officers’
certificate relating to that Series. In the event of the occurrence of both (1) a change of control of the Company
93
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 in cash equal to 101% of the then outstanding principal amount of
that Series, plus accrued and unpaid interest to, but not including, the date of repurchase. The indenture and the
related officers’ certificate for each Series, subject to the exceptions and in compliance with the conditions as
applicable, specify that we may not incur liens, enter into sale and leaseback transactions or consolidate, merge
or sell all or substantially all of our assets. The indentures also contain customary events of default provisions.
We also have Euro-denominated corporate bonds consisting of 4.00% bonds due October 18, 2016 and
4.50% bonds due April 26, 2017. Interest on these bonds is due annually each year. At March 31, 2015 and 2014,
$388 million and $507 million of the 4.00% bonds and $563 million and $737 million of the 4.50% bonds, for a
total of $951 million and $1,244 million, were outstanding. At March 31, 2014, these bonds were classified
within current liabilities as bondholders had the option to redeem the bonds at par value plus accrued interest.
This redemption option expired during the first quarter of 2015 and the remaining bonds outstanding will mature
according to their respective maturity dates. Accordingly, these bonds were reclassified as long-term debt
effective in the first quarter of 2015.
We also have a Euro-denominated term loan due December 15, 2019 with a current variable interest rate of
1.93%. At March 31, 2015 and 2014, the outstanding balance of the term loan was $89 million and $100 million.
At March 31, 2014, we also had $297 million in Euro-denominated promissory notes outstanding which were all
repaid during 2015.
In 2014, we repaid our $350 million 6.50% Notes due February 15, 2014 and in 2013, we repaid our
$500 million 5.25% Notes due March 1, 2013. In 2013, we also repaid the debt we assumed in connection with
our acquisition of PSSI comprised of 6.375% Senior Notes due 2022 and 3.125% Senior Convertible Notes due
2014 for $643 million including accrued interest using cash on hand and borrowings under our 2013 Bridge
Loan, as further described below.
Scheduled future payments of long-term debt are $1,529 million in 2016, $1,619 million in 2017,
$1,086 million in 2018, $1,474 million in 2019, $19 million in 2020 and $3,982 million thereafter.
Senior Bridge Term Loan Facilities
In connection with our acquisition of Celesio, in January 2014, we entered into a $5.5 billion 364-day
unsecured Senior Bridge Term Loan Agreement (the “2014 Bridge Loan”) under terms substantially similar to
those in our existing revolving credit facility. On February 4, 2014, we borrowed $4,957 million under this
facility with such proceeds and cash on hand used to fund the acquisition of Celesio. On March 10, 2014, we
repaid $4,076 million of the 2014 Bridge Loan borrowings with funds obtained from the issuance of long-term
debt. On March 11, 2014, we repaid the remaining balance of the 2014 Bridge Loan borrowings using funds
drawn on our Accounts Receivable Sales Facility and cash on hand. On April 30, 2014, the commitments under
the 2014 Bridge Loan automatically terminated upon the settlement of the tender offers for the remaining
common shares of Celesio. During the time it was outstanding, the 2014 Bridge Loan borrowings bore interest at
1.39% per annum, based on the London Interbank Offered Rate plus a margin based on the Company’s credit
rating. Interest expense for 2014 included a total of $46 million of fees related to the 2014 Bridge Loan and a
bridge loan agreement entered into during the third quarter of 2014 in anticipation of an earlier acquisition of
Celesio.
In connection with our acquisition of PSSI, in December 2012, we entered into a $2.1 billion unsecured
Senior Bridge Term Loan Agreement (“2013 Bridge Loan”). In February 2013, we reduced the 2013 Bridge
94
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Loan commitment to $900 million. On February 22, 2013, we borrowed $900 million under the 2013 Bridge
Loan with such proceeds and cash on hand used to redeem the assumed debt from PSSI and pay the equity
shareholders of PSSI. On March 8, 2013, we repaid the 2013 Bridge Loan borrowings with funds obtained from
the issuance of long-term debt and the bridge loan agreement was subsequently terminated. During the time it
was outstanding, the 2013 Bridge Loan borrowings bore interest at 1.20% per annum, based on the London
Interbank Offered Rate plus a margin based on the Company’s credit rating. Interest expense for 2013 included
$11 million of fees related to the 2013 Bridge Loan.
Accounts Receivable Facilities
In November 2014, we extended our existing Accounts Receivable Sales Facility (the “Facility”) for a
two-year period under terms substantially similar to those previously in place. The committed balance of the
Facility is $1.35 billion, although from time-to-time, the available amount of the Facility may be less than
$1.35 billion based on accounts receivable concentration limits and other eligibility requirements. The Facility
will expire in November 2016.
In 2015, 2014 and 2013, we borrowed nil, $550 million and $1,325 million under the Facility and we repaid
nil, $550 million and $1,725 million. At March 31, 2015 and 2014, there were no secured borrowings and related
securitized accounts receivable outstanding under the Facility.
The Facility contains requirements relating to the performance of the accounts receivable and covenants
relating to the Company. If we do not comply with these covenants, our ability to use the Facility may be
suspended and repayment of any outstanding balances under the Facility may be required. At March 31, 2015
and 2014, we were in compliance with all financial covenants.
We also have Accounts Receivable Factoring Facilities (the “Factoring Facilities”) denominated in foreign
currencies with a total committed balance of $169 million. Transactions under these facilities are accounted for
as secured borrowings and have interest rates ranging from 0.85% to 1.26%. These facilities will expire through
January 2016 and we may renew certain facilities before their expiration. During the 2015 and 2014, we
borrowed $2,875 million and $570 million and repaid $2,908 million and $575 million in short-term borrowings
under these facilities. At March 31, 2015 and 2014, there were $135 million and $246 million in secured
borrowings and related accounts receivable outstanding under these facilities, which are included in short-term
borrowings and receivables in our consolidated balance sheet.
Revolving Credit Facilities and Lines of Credit
We have a syndicated $1.3 billion five-year senior unsecured revolving credit facility, which expires in
September 2016. Borrowings under this credit facility bear interest based upon either the London Interbank
Offered Rate or a prime rate. There were no borrowings under this credit facility during 2015, 2014 and 2013. As
of March 31, 2015 and 2014, there were no borrowings outstanding under this credit facility.
We also have a syndicated €500 million five-year senior unsecured revolving credit facility, which expires
in February 2018. Borrowings under this facility bear interest based upon the Euro Interbank Offered Rate plus
an agreed margin. During 2015 and 2014, there were no borrowings under this facility and no amounts
outstanding as of March 31, 2015 and 2014.
We also maintain bilateral credit
lines primarily denominated in Euros with a total committed and
uncommitted balance of $1.4 billion. These credit lines have interest rates ranging from 0.20% to 6.00% with
95
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
interest payable monthly. During 2015, we borrowed $225 million and repaid $267 million under these credit
lines primarily related to short-term borrowings. Borrowings and repayments during 2014 were not material. As
of March 31, 2015 and 2014, there were $29 million and $65 million outstanding under these credit lines.
Commercial Paper: There were no commercial paper issuances during 2015, 2014 and 2013 and no
amounts outstanding at March 31, 2015 and 2014.
Debt Covenants: Our various borrowing facilities and long-term debt are subject to certain covenants. Our
principal debt covenant is our debt to capital ratio under our $1.3 billion unsecured revolving credit facility,
which cannot exceed 65%. For the purpose of calculating this ratio, borrowings under the $1.35 billion Accounts
Receivable Sales Facility are excluded. If we exceed this ratio, repayment of debt outstanding under the
revolving credit facility could be accelerated. As of March 31, 2015, we were in compliance with our financial
covenants.
16. 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 have an immaterial impact on our consolidated statements of operations and cash
flows. Total assets and liabilities included in our consolidated balance sheet for these VIEs were $144 million
and $51 million at March 31, 2015 and $160 million and $75 million at March 31, 2014.
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 $1.2 billion at March 31, 2015 and 2014, which primarily
represents the value of intangible assets related to service agreements and lease and loan receivables. These
amounts exclude the customer loan guarantees discussed in Financial Note 22, “Financial Guarantees and
Warranties.” We believe that there is no material loss exposure on these assets or from these relationships.
96
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
17. Pension Benefits
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 and Germany. 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, which includes net pension expense of Celesio beginning
February 2014, is as follows:
(In millions)
Service cost—benefits earned during the year
Interest cost on projected benefit obligation
Expected return on assets
Amortization of unrecognized actuarial loss, prior service
costs and net transitional obligation
Curtailment/settlement loss (gain)
Net periodic pension expense
U.S. Plans
Years Ended March 31,
Non-U.S. Plans
Years Ended March 31,
2015
2014
2013
2015
2014
2013
$
1
19
(21)
19
—
$ 18
$
4
19
(20)
32
—
$ 35
$
4
21
(20)
28
—
$ 33
$ 16
34
(30)
3
6
$ 29
$
6
11
(12)
$
3
7
(8)
4
4
(1) —
6
8
$
$
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.
97
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations and plan assets for our pension plans is as follows:
(In millions)
Change in benefit obligations
U.S. Plans
Years Ended March 31,
Non-U.S. Plans
Years Ended March 31,
2015
2014
2015
2014
Benefit obligation at beginning of period (1)
$ 540
$ 580
$ 934
$ 156
Service cost
Interest cost
Actuarial loss (gain)
Benefit payments
Amendments
Acquisitions
Foreign exchange impact and other
1
19
53
(30)
—
—
—
4
19
(24)
(30)
(9)
—
—
Benefit obligation at end of period (1)
$ 583
$ 540
Change in plan assets
16
34
194
(49)
(6)
—
(160)
$ 963
6
11
15
(12)
—
740
18
$ 934
Fair value of plan assets at beginning of period
$ 300
$ 290
$ 590
$ 135
Actual return on plan assets
Employer and participant contributions
Benefits paid
Acquisitions
Foreign exchange impact and other
16
12
(30)
—
—
28
12
(30)
—
—
88
73
(49)
—
(90)
11
12
(10)
426
16
Fair value of plan assets at end of period
$ 298
$ 300
$ 612
$ 590
Funded status at end of period
$(285)
$(240)
$(351)
$(344)
Amounts recognized on the balance sheet
Current liabilities
Long-term liabilities
Total
(1) The benefit obligation is the projected benefit obligation.
$ (17)
(268)
$(285)
$ (13)
(227)
$(240)
$
(6)
(345)
$(351)
$ (9)
(335)
$(344)
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.
(In millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
U.S. Plans
March 31,
Non-U.S. Plans
March 31,
2015
$583
583
298
2014
$540
540
300
2015
$963
897
612
2014
$934
894
590
98
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amounts recognized in accumulated other comprehensive income (pre-tax) consist of:
(In millions)
Net actuarial loss
Prior service credit
Total
U.S. Plans
March 31,
Non-U.S. Plans
March 31,
2015
$220
—
$220
2014
2015
$188
(7)
$181
$175
(6)
$169
2014
$ 71
—
$ 71
Other changes in accumulated other comprehensive income (pre-tax) were as follows:
(In millions)
Net actuarial loss (gain)
Prior service credit
Amortization of:
Net actuarial loss
Prior service credit (cost)
Foreign exchange impact and other
U.S. Plans
Years Ended March 31,
Non-U.S. Plans
Years Ended March 31,
2015
$ 58
—
2014
2013
$ (31)
$ 59
2015
$117
2014
$ 12
(8) —
(8) —
2013
$ 11
—
(27)
8
—
(32)
—
(27)
(1)
(1) —
(5)
2
(8)
(4)
2
4
(4)
—
(4)
Total recognized in other comprehensive loss
(income)
$ 39
$ (72)
$ 31
$ 98
$ 14
$
3
We expect to amortize $1 million of prior service credit and $47 million of actuarial loss for the pension
plans from stockholders’ equity to pension expense in 2016. Comparable 2015 amounts were $7 million of prior
service credit and $31 million of actuarial loss.
Projected benefit obligations related to our unfunded U.S. plans were $189 million and $188 million at
March 31, 2015 and 2014. 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 $222 million
and $260 million at March 31, 2015 and 2014. 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: $74 million, $172 million, $75 million, $94 million and $66 million for 2016 to 2020 and $333 million
for 2021 through 2025. 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 $54 million for 2016.
99
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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
Years Ended March 31,
Non-U.S. Plans
Years Ended March 31,
2015
2014
2013
2015
2014
2013
Net periodic pension expense
Discount rates
Rate of increase in compensation
Expected long-term rate of return on plan assets
Benefit obligation
Discount rates
Rate of increase in compensation
3.74% 3.39% 4.11% 3.85% 3.95% 4.50%
4.00
7.25
4.00
7.25
3.11
5.39
2.66
5.71
4.00
7.25
3.10
6.13
3.18% 3.58% 3.40% 2.50% 3.92% 4.10%
4.00
3.24
3.27
4.00
3.05
4.00
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, 2015, our U.S. defined benefit liabilities are valued
using a weighted average discount rate of 3.18%, which represents a decrease of 40 basis points from our 2014
weighted-average discount rate of 3.58%. Our non-U.S defined benefit pension plan liabilities are valued using a
weighted-average discount rate of 2.50%, which represents a decrease of 142 basis points from our 2014
weighted-average discount rate of 3.92%.
Sensitivity to changes in the weighted-average discount rate for our pension plans is as follows:
(In millions)
Increase (decrease) on projected benefit
obligation
Increase (decrease) on net periodic pension cost
Plan Assets
U.S. Plans
Non-U.S. Plans
One Percentage
Point Increase
One Percentage
Point Decrease
One Percentage
Point Increase
One Percentage
Point Decrease
$(41)
(3)
$48
4
$(149)
(2)
$180
5
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, 2015 and 2014 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
100
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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, 2015 and
2014, 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.
(In millions)
Level 1 Level 2 Level 3
Total
Level 1 Level 2 Level 3
Total
Cash and cash equivalents
$ 55
$
1
$— $ 56
$
8
$— $— $
8
U.S. Plans
March 31, 2015
Non-U.S. Plans
March 31, 2015
Equity securities:
Common and preferred stock
18 —
—
18 —
—
—
Equity commingled funds
Fixed income securities:
Government securities
Corporate bonds
Mortgage-backed securities
Asset-backed securities and other
Fixed income commingled funds
Other:
Real estate funds
Other commingled funds
Other
Total
—
—
—
—
—
—
—
—
—
—
156
79
13
—
—
191
26
13
138 —
138
7
149 —
14 —
14 —
14 —
26 —
14
26
14 —
14 —
26 —
53 —
13 —
—
—
—
—
—
—
—
—
—
—
64
127 —
18
18 —
—
26
—
—
—
—
—
13 —
7
115
4
126
$ 73
$207
$ 18
$298
$112
$470
$ 30
$612
101
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(In millions)
Level 1 Level 2 Level 3
Total
Level 1 Level 2 Level 3
Total
Cash and cash equivalents
$
8
$— $— $
8
$
7
$— $— $
7
U.S. Plans
March 31, 2014
Non-U.S. Plans
March 31, 2014
Equity securities:
Common and preferred stock
19 —
—
19 —
—
—
Equity commingled funds
Fixed income securities:
Government securities
Corporate bonds
Mortgage-backed securities
Asset-backed securities and other
Fixed income commingled funds
Other:
Real estate funds
Other commingled funds
Other
Total
Receivables (1)
Total
—
—
—
—
—
—
—
—
—
132 —
132
6
157 —
7 —
22 —
10 —
22 —
63 —
7
22
4 —
—
6
236 —
10 —
22 —
63 —
—
—
—
—
45 —
—
—
—
16
16 —
19
7
—
—
—
—
3
—
49 —
46
5
$ 27
$256
$ 16
299
$ 26
$552
$ 12
1
$300
—
163
4
242
—
—
45
26
52
51
590
—
$590
(1) Represents pending trades at March 31, 2014.
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. Preferred shares are classified as Level 2 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
102
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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 3 investments.
Other commingled funds—The other commingled funds are invested in equities, bonds, commodities, other
alternative investments and cash and cash equivalents. These funds are valued based on the weekly net asset
values derived from the quoted prices for the underlying securities in active markets and, for alternative
investments, based on other valuation techniques. Other commingled funds are classified as Level 1 or Level 2
investments.
Other—At March 31, 2015, this includes $39 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 following table represents a reconciliation of Level 3 plan assets held during the years ended March 31,
2015 and 2014:
(In millions)
Balance at March 31, 2013
Acquisitions
Unrealized gain on plan assets still held
Purchases, sales and settlements
Balance at March 31, 2014
Acquisitions
Unrealized gain on plan assets still held
Purchases, sales and settlements
Balance at March 31, 2015
U.S. Plans
Non-U.S. Plans
Other
Total
Real
Estate
Funds
Other
Total
$—
$ 14
$
—
—
—
—
—
2
5
1
1
—
$ — $
5
—
—
5
6
1
—
Real
Estate
Funds
$ 14
—
—
2
$ 16
$—
$ 16
$
7
$
5
$ 12
—
2
—
—
—
—
—
2
—
—
1
18
—
—
(1)
—
1
17
$ 18
$ — $ 18
$ 26
$
4
$ 30
103
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 2015, 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, 2015,
2014, and 2013. Contributions to the POA for non-U.S. Plans exceeding 5% of total plan contributions were $24
million and $5 million in 2015 and 2014. Based on actuarial calculations, we estimate the funded status for our
non-U.S. Plans to be approximately 65% as of March 31, 2015. 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 $103 million, $83 million and $65 million
for the years ended March 31, 2015, 2014, and 2013.
18. 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:
(In millions)
Service cost—benefits earned during the year
Interest cost on accumulated benefit obligation
Amortization of unrecognized actuarial gain and prior service credit
Curtailment gain
Net periodic postretirement expense
104
Years Ended March 31,
2015
2014
2013
$
1
5
(4)
—
$
2
$
$
2
6
(2)
$
2
5
(1)
(2) —
4
$
6
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations for our postretirement welfare plans is as follows:
(In millions)
Benefit obligation at beginning of period
Service cost
Interest cost
Actuarial loss (gain)
Benefit payments
Curtailment gain
Benefit obligation at end of period
Years Ended March 31,
2015
2014
$119
$131
1
5
5
(12)
—
2
5
(2)
(15)
(2)
$118
$119
The components of the amount recognized in accumulated other comprehensive income for the Company’s
other postretirement benefits at March 31, 2015 and 2014 were net actuarial losses of $1 million and gains of $8
million and net prior service credits of $1 million and $1 million. Other changes in benefit obligations recognized
in other comprehensive income were net actuarial losses of $9 million in 2015 and gains of $2 million and $7
million in 2014 and 2013.
We estimate that the amortization of the actuarial gain from stockholders’ equity to other postretirement
expense in 2016 will be $1 million. Comparable 2015 amount was $4 million.
Other postretirement benefits are funded as claims are paid. Expected benefit payments for our
postretirement welfare benefit plans are as follows: $10 million annually for 2016 to 2020 and $44 million
cumulatively for 2021 through 2025. 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 $10 million for 2016.
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were 4.07%,
3.84% and 4.44% for 2015, 2014 and 2013. Weighted-average discount rates for the actuarial present value of
benefit obligations were 3.61%, 4.08% and 3.84% for 2015, 2014 and 2013.
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 6.75% and 7.00% for prescription drugs, 7.25/6.75% and 7.50/7.00% for ages pre-65/post-65
medical and 5.00% for dental in 2015 and 2014. For 2015, 2014 and 2013, 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.
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, 2015, 2014, and 2013.
105
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
19. Hedging Activities
In the normal course of business, we are exposed to interest rate changes and foreign currency fluctuations.
At times, we limit these risks through the use of derivatives such as interest rate swaps and forward foreign
exchange contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use
derivatives for trading or speculative purposes.
Foreign currency rate risk
The majority of our operations are conducted in U.S. dollars; however, certain assets and liabilities,
revenues and expense and purchasing activities are incurred in and exposed to other currencies. We have certain
foreign currency rate risk programs that manage the impact of foreign currency fluctuation. These programs are
utilized on a transactional basis when we consider there to be a risk in fair value or volatility in cash flows. These
programs reduce but do not entirely eliminate foreign currency rate risk.
At March 31, 2015 and 2014, forward contracts to hedge the U.S. dollar against cash flows denominated in
Canadian dollars with total notional values of $399 million and $463 million were designated for hedge
accounting. These contracts will mature between March 2016 and March 2020. Changes in the fair values for
contracts designated for hedge accounting are recorded to accumulated other comprehensive income and
reclassified into earnings in the same period in which the hedged transaction affects earnings; losses reclassified
into earnings for contracts designated for hedge accounting were not material in 2015, 2014 and 2013.
We also have a number of forward contracts to primarily hedge the Euro against cash flows denominated in
British pounds and other European currencies. At March 31, 2015 and 2014, the total notional value of these
contracts was $1,755 million and $1,091 million. These contracts will mature from April 2015 to February 2016
and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not
designated for hedge accounting are recorded directly to earnings and accordingly, net losses from the changes in
the fair value of these contracts of $189 million were recorded within operating expenses in 2015 and were not
material in 2014. However, the losses from these contracts are largely offset by changes in the value of the
underlying intercompany foreign currency loans.
Interest rate risk
From time to time, we have entered into interest rate swaps to hedge the interest rate risk associated with
variable rate debt. Interest rate swaps are used to modify the market risk exposures in connection with the
variable rate debt to achieve primarily fixed rate interest expense. The interest rate swap transactions generally
involve the exchange of floating or fixed interest payments. Our interest rate swaps that were outstanding at
March 31, 2014 all matured during the first half of 2015. These contracts were not designated for hedge
accounting and, accordingly, changes in the fair value of these swaps were recorded directly in earnings. At
March 31, 2014, the total gross notional value of these contracts was $96 million. Amounts recorded to earnings
were not material for 2015 and 2014.
106
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the fair value of derivatives on a gross basis is as follows:
March 31, 2015
March 31, 2014
Balance
Sheet
Caption
Fair Value of
Derivative
Asset
Liability
U.S.
Dollar
Notional
Fair Value of
Derivative
Asset
Liability
U.S
Dollar
Notional
(In millions)
Derivatives designated for hedge
accounting
Foreign exchange contracts
(current)
Prepaid expenses
and other
$ 14
$—
$
76
$
4
$—
$ 64
Foreign exchange contracts
(non-current)
Total
Derivatives not designated for
hedge accounting
Foreign exchange contracts
(current)
Foreign exchange contracts
(current)
Interest rate swap contracts
(current)
Total
Other assets
53
$ 67
—
$ —
323
27
$ 31
—
$—
399
Prepaid expenses
and other
Other accrued
liabilities
Other accrued
liabilities
$
7
$—
$ 493
$
2
$—
$255
—
79
1,262
—
13
836
—
7
$
—
$ 79
—
—
2
$
1
$ 14
96
Refer to Financial Note 20, “Fair Value Measurements,” for more information on these recurring fair value
measurements.
20. 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. The analysis of fair value is conducted
by our accounting and finance personnel who organizationally report to the Chief Financial Officer. 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, 2015 and 2014, the carrying amounts of cash, certain cash equivalents, restricted cash,
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.
Our long-term debt and other financing arrangements are carried at amortized cost. The carrying amounts
and estimated fair values of these liabilities were $9.7 billion and $10.4 billion at March 31, 2015 and $10.3
107
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
billion and $10.7 billion at March 31, 2014. The estimated fair values of our long-term debt and other financing
were 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 consist of the following:
(In millions)
Cash Equivalents
March 31, 2015
March 31, 2014
Level 1
Level 2 Level 3
Total
Level 1
Level 2 Level 3
Total
Money market funds (1)
$2,880
$— $— $2,880
$2,284
$— $— $2,284
Time deposits (2)
—
94 —
94
—
12 —
Repurchase agreements (2)
1,243 —
—
1,243
569 —
—
12
569
Total cash equivalents
$4,123
$ 94
$— $4,217
$2,853
$ 12
$— $2,865
(1) Gross unrealized gain and losses were not material for the years ended March 31, 2015 and 2014 based on
quoted prices of identical investments.
(2) The carrying amounts of these cash equivalents approximated their estimated fair values because of their
short maturities.
Fair values of our marketable securities were determined using quoted prices in active markets for identical
assets, which are considered Level 1 inputs under the fair value measurements and disclosure guidance. Fair
values for our marketable securities were not material at March 31, 2015 and 2014.
Fair values of our forward foreign currency derivatives were determined using quoted market prices of
similar instruments in an active market 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 19, “Hedging Activities,” for more information on our forward foreign currency derivatives.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years
ended March 31, 2015 and 2014.
Assets Measured at Fair Value on a Nonrecurring Basis
We measure certain long-lived assets 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.
Fiscal 2015
As discussed in Financial Note 4, “Discontinued Operations,” during the fourth quarter of 2015, we recorded
a $241 million pre-tax ($235 million after-tax) non-cash impairment charge to reduce the carrying value of our
108
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Brazilian distribution business to its estimated fair value, less cost to sell. The fair value of this business was
determined using income and market valuation approaches. Under the income approach, we used a discounted
cash flow (“DCF”) analysis based on the estimated future results. This valuation approach is considered a Level 3
fair value measurement due to the use of significant unobservable inputs related to the timing and amount of future
cash flows based on projections of revenues and operating costs and discounting those cash flows to their present
value. The key inputs and assumptions of the DCF method are the projected cash flows, the terminal value of the
business and the discount rate. Under the market approach, we apply valuation multiples of reasonably similar
publicly traded companies to the operating data of the subject business to derive the estimated fair value. This
valuation approach is also considered a Level 3 fair value measurement. The key inputs for the market valuation
approach were revenues and a selection of market multiples. The ultimate loss from the sale of the business may
be higher or lower than our current assessment of the business’ fair value.
Fiscal 2014
As discussed in Financial Note 4, “Discontinued Operations,” during 2014, we recorded an $80 million non-
cash pre-tax and after-tax impairment charge to reduce the carrying value of our International Technology
business to its estimated fair value, less costs to sell. The impairment charge was primarily the result of the terms
the fair value
of the preliminary purchase offers received for this business during 2014. Accordingly,
measurement is classified as Level 3 in the fair value hierarchy.
Fiscal 2013
As discussed in Financial Note 6, “Equity Investments,” during 2013, we committed to a plan to sell our
investment in Nadro and, in the fourth quarter of 2013, recorded an impairment charge of $191 million to reduce
the carrying value to fair value. The fair value of our investment in Nadro was determined using income and
market valuation approaches. Under the income approach, we used a discounted cash flow (“DCF”) analysis
based on estimated future results. This valuation approach is considered a Level 3 fair value measurement. The
key inputs for the market valuation approach were Nadro’s fiscal 2012 unaudited earnings before interest,
depreciation and amortization (“EBITDA”) and an EBITDA multiple based on similar guideline U.S.
pharmaceutical companies whose securities are actively traded in public markets. This valuation approach is
considered a Level 3 fair value measurement. Finally, we evaluated the fair values under both valuation methods
and concluded on an average of the two methods. In September 2013, we completed the sale of our 49% interest
in Nadro which resulted in no material gain or loss.
As discussed in Financial Note 5, “Asset Impairments and Product Alignment Charges,” in 2013, we
recorded a goodwill impairment charge of $36 million in one of Technology Solutions segment’s reporting units.
The impairment charge was primarily the result of a significant decrease in estimated revenues for a software
product. As required under step two of goodwill impairment testing, we determined the fair value of the reporting
unit and the fair value of the reporting units’ net assets, excluding goodwill but including any unrecognized
intangible assets. The implied fair value of goodwill was then calculated on a residual basis – that is, by
subtracting the sum of the fair value of the net assets from the fair value of the reporting unit. The impairment
was equal to the carrying amount of goodwill.
Fair value assessment of the reporting unit as well as 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
used the market approach and income approach (DCF model) to determine the fair value of the reporting unit and
a DCF model to determine the fair value of the reporting unit’s most significant assets – intangibles.
109
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
21. Lease Obligations
We lease facilities and equipment almost solely under operating leases. At March 31, 2015, 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)
2016
2017
2018
2019
2020
Thereafter
Total minimum lease payments (1)
Noncancelable
Operating
Leases
$ 316
271
219
170
140
650
$1,766
(1) Minimum lease payments have not been reduced by minimum sublease rentals of $46 million due under
future noncancelable subleases.
Rental expense under operating leases was $440 million, $298 million and $232 million in 2015, 2014 and
2013. 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 twelve years, while remaining terms for equipment leases range
from one to five 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 2015, 2014 and 2013.
22. 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 fifteen 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, 2015, the maximum amounts of inventory repurchase guarantees
and customers’ debt guarantees were $185 million and $183 million, of which $1 million had been accrued. The
expirations of these financial guarantees are as follows: $137 million, $42 million, $16 million, $21 million and
$25 million from 2016 through 2020 and $127 million thereafter.
At March 31, 2015, our banks and insurance companies have issued $142 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
110
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
the security requirements for statutory licenses and permits, court and fiduciary obligations and our workers’
compensation and automotive liability programs. Additionally, at March 31, 2015, we have a commitment to
contribute up to $16 million to a non-consolidated investment for building and equipment construction.
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
the overall maximum amount of these commitments cannot be reasonably estimated. Other than
stated,
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.
23. Other Commitments and Contingent Liabilities
In addition to commitments and obligations in the ordinary course of business, we are subject to various
claims, other pending and potential legal actions for damages, investigations relating to governmental laws and
regulations and other matters arising out of the normal conduct of our business. As described below, many of
these proceedings are at preliminary stages and many seek an indeterminate amount of damages.
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
111
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 August 29, 2007, PSKW, LLC filed a lawsuit against McKesson Specialty Arizona Inc. in the New York
Supreme Court, New York County, 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. Plaintiff later amended its complaint twice to add additional, but related claims. On
August 31, 2011, McKesson Specialty Arizona moved for summary judgment on all claims. On December 23,
2013, the court dismissed PSKW’s cause of action for misappropriation of ideas. PSKW appealed this decision
and on October 21, 2014, the Appellate Division reversed. On January 30, 2015, the trial court granted
McKesson Specialty Arizona’s motion to strike the jury and later set trial for June 15, 2015.
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, twenty-one 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 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-Kickbacks 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
112
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 May 21, 2014, four hedge funds managed by Magnetar Capital filed a complaint against McKesson
Deutschland GmbH & Co. KGaA (formerly known as “Dragonfly GmbH & Co. KGaA”) (“Dragonfly”), a
wholly-owned subsidiary of the Company, in a German court in Frankfurt, Germany, alleging that Dragonfly
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
fully dismissed Magnetar’s lawsuit in Dragonfly’s favor and ruled that the plaintiffs must bear the court costs and
Dragonfly’s taxable lawyers’ fees. Magnetar filed a notice of appeal on January 5, 2015.
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. 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. An example is the subpoena from the office of the Attorney General of West Virginia in the fourth
quarter of 2015 seeking information about the Company’s distribution of controlled substances in West Virginia.
The Company has provided the requested documents.
In addition, in the fourth quarter of 2015, the Company reached an agreement in principle with the Drug
Enforcement Administration (“DEA”), Department of Justice (“DOJ”) and various U.S. Attorney’s offices to
settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order
reporting practices for controlled substances. The global settlement with the DEA and DOJ is subject to the
execution of final settlement agreements. Under the terms of the agreement in principle, the Company has agreed
to pay the sum of $150 million, implement certain remedial measures and have the following distribution
centers’ DEA registrations suspended for the specified products and time periods: Aurora, Colorado: all
controlled substances for three years; Livonia, Michigan: all controlled substances for two years; Washington
Courthouse, Ohio: all controlled substances for the two-year period following completion of the Livonia
suspension; and Lakeland, Florida: hydromorphone products for one year. Throughout the terms of these
suspensions,
the Company will be permitted to continue to ship controlled substances from its Livonia,
Washington Courthouse and Lakeland distribution centers to customers that purchase products under its
pharmaceutical prime vendor contract with the Department of Veterans Affairs. The Company expects that the
suspensions will not result in a supply disruption to any customer. Customers located in the distribution center
service areas described above will receive controlled substances from a different distribution center during the
applicable suspension periods. As a result of our agreement in principle, during the fourth quarter of 2015, we
recorded a $150 million pre-tax and after-tax charge relating to these claims.
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 six sites where it, or
entities acquired by it, formerly conducted operations and the Company, by administrative order or otherwise,
has agreed to take certain actions at those sites, including soil and groundwater remediation. In addition, the
113
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Company is one of multiple recipients of a New Jersey Department of Environmental Protection Agency
directive and a separate United States Environmental Protection Agency directive relating to potential natural
resources damages (“NRD”) associated with one of these six sites. Although the Company’s potential allocation
under either directive cannot be determined at this time, it has agreed to participate with a potentially responsible
party (“PRP”) group in the funding of certain tasks to support an NRD assessment, the costs of which are
reflected in the aggregate estimates set forth below.
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 six sites is $7 million, net of amounts anticipated from third parties. The $7 million is expected to
be paid out between April 2015 and March 2035. The Company’s estimated probable loss for these
environmental matters has been entirely accrued for in the accompanying consolidated balance sheets.
In addition, the Company has been designated as a PRP under the Superfund law for environmental
assessment and cleanup costs as the result of its alleged disposal of hazardous substances at 14 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 $70 million. It is not certain at this point in time what
proportion of this estimated liability will be borne by the Company or by the other PRPs. Accordingly, the
Company’s estimated probable loss at those 14 sites is approximately $22 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. Average Wholesale Price (“AWP”) Litigation
The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and
whenever events or circumstances indicate changes. We recorded nil, $68 million and $72 million of pre-tax
charges relating to changes in the Company’s AWP litigation reserve, including accrued interest, in 2015, 2014
and 2013. All charges were recorded in operating expenses within our Distribution Solutions segment. Cash
payments of nil, $105 million and $483 million were made in 2015, 2014 and 2013. At March 31, 2015, the
reserve for this matter was not material; at March 31, 2014, the reserve was $42 million.
VI. Other Matters
The Company is involved in various other litigation and governmental proceedings, not described above,
that arise in the normal course of business. While it is not possible to determine the ultimate outcome or the
duration of any such litigation or governmental proceedings, the Company believes, based on current knowledge
114
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
and the advice of counsel, that such litigation and proceedings will not have a material impact on the Company’s
financial position or results of operations.
24. Stockholders’ Equity
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 2013, the quarterly dividend was raised from $0.20 to $0.24 per common share for dividends declared
after such date, until further action by the Board. Dividends were $0.96 per share in 2015, $0.92 per share in 2014
and $0.80 per share in 2013. The Company anticipates that it will continue to pay quarterly cash dividends in the
future. However, the payment and amount of future dividends remain within the discretion of the Board and will
depend upon the Company’s future earnings, financial condition, capital requirements and other factors.
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.
Information regarding the share repurchase activity over the last three years is as follows:
(In millions, except price per share data)
Balance, March 31, 2012
Share repurchase plans approved:
April 2012
January 2013
Shares repurchased
Balance, March 31, 2013
Shares repurchased
Balance, March 31, 2014
Shares repurchased
Balance, March 31, 2015
Share Repurchases (1)
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
$
299
700
500
(1,159)
$
340
—
$
340
(340)
$ —
13
—
1.5
$100.82
$ —
$226.55
(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.
115
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In May 2015, the Board authorized the repurchase of up to $500 million of the Company’s common stock.
During the fourth quarter of 2013, we retired approximately 2 million shares that were repurchased for $217
million by the Company. The retired shares constitute authorized but unissued shares. We elected to allocate any
excess of share repurchase price over par value between additional paid-in capital and retained earnings. As such,
$195 million was recorded as a decrease to retained earnings.
Other Comprehensive Income (Loss)
Information regarding other comprehensive income (loss) including noncontrolling and redeemable
noncontrolling interests, net of tax, by component is as follows:
(In millions)
Foreign currency translation adjustments
Years Ended March 31,
2015
2014
2013
Foreign currency translation adjustments arising during period, net of
income tax expense (benefit) of nil, nil and ($2) (1)
$(1,845)
$
9
$
(52)
Reclassified to income statement, net of income tax expense of nil, $24 and
nil (2)
Unrealized losses on cash flow hedges
Unrealized losses on cash flow hedges arising during period, net of income
tax benefit of nil, nil and nil
Reclassified to income statement, net of income tax expense of nil, nil and
nil
Changes in retirement-related benefit plans
Net actuarial gain (loss) and prior service credit (cost) arising during
period, net of income tax (benefit) of ($66), $16 and ($22)
(140)
Amortization of actuarial loss, prior service cost and transition obligation,
net of income tax expense of $6, $12 and $12 (3)
Foreign currency translation adjustments and other, net of income tax
expense of nil, nil and nil
Reclassified to income statement, net of income tax expense of nil, $1 and
nil
Other Comprehensive Income (Loss), net of tax
11
4
1
(124)
$(1,989)
$
(10)
(1,855)
44
53
—
(52)
(13)
3
(10)
(6)
—
(6)
17
22
(4)
1
36
83
$
—
—
—
(40)
18
4
—
(18)
(70)
(1) 2015 includes net foreign currency translation losses of $267 million and 2014 includes net foreign currency
translations gains of $21 million attributable to noncontrolling and redeemable noncontrolling interests.
(2) 2014 includes net foreign currency translation losses of $44 million reclassified from accumulated other
comprehensive income to other income (loss), net, within our consolidated statement of operations due to
the sale of our 49% equity interest in Nadro. Such losses were previously considered in our impairment
evaluation of the investment when we committed to a plan to sell the investment during the fourth quarter of
2013 and, accordingly, did not impact earnings in 2014.
116
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(3) 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.
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 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, 2013
$
136
$
(5)
$ (196)
$
(65)
Other comprehensive income (loss) before
reclassifications
Amounts reclassified to earnings
Other comprehensive income (loss)
Less: other comprehensive income attributable
to noncontrolling interests
Other comprehensive income (loss) attributable to
McKesson
Balance at March 31, 2014
Other comprehensive income (loss) before
reclassifications
Amounts reclassified to earnings
9
44
53
21
32
168
$
$
$
(1,845)
(10)
(6)
—
$
(6)
$
35
1
36
—
—
$
36
$ (160)
$
$
(6)
(11)
(13)
3
38
45
83
21
62
(3)
$
$
$
(136)
12
(1,994)
5
Other comprehensive income (loss)
$(1,855)
$
(10)
$ (124)
$(1,989)
Less: other comprehensive loss attributable to
noncontrolling interests
(267)
—
(12)
(279)
Other comprehensive income (loss) attributable to
McKesson
Balance at March 31, 2015
$(1,588)
$(1,420)
$
$
(10)
(21)
$ (112)
$ (272)
$(1,710)
$(1,713)
25. 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 $114 million are included in our consolidated statement of operations in 2015
and receivables of $9 million are included in our consolidated balance sheet for the year ended March 31, 2015.
26. Segments of Business
We report our operations in two operating segments: McKesson Distribution Solutions and McKesson
Technology Solutions. The factors for determining the reportable segments included the manner in which
117
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
The McKesson Distribution Solutions segment distributes ethical and proprietary drugs and equipment and
health and beauty care products throughout North America and internationally. This segment includes our
International pharmaceutical distribution and services business which reflects the results of operations of Celesio,
which we acquired in February 2014. This segment also provides specialty pharmaceutical solutions for biotech
and pharmaceutical manufacturers, and practice management, technology, clinical support and business solutions
to oncology and other specialty practices operating in the community setting. This segment also provides
medical-surgical supply distribution, equipment, logistics and other services to healthcare providers through a
network of distribution centers within the U.S. In addition, this segment sells financial, operational and clinical
solutions for pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing and other services.
In September 2013, we sold our 49% interest in Nadro, S.A. de C.V. (“Nadro”), a pharmaceutical distributor in
Mexico. Prior to the sale, financial results for Nadro were included in this segment.
The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care, financial,
supply chain, strategic management software solutions, as well as connectivity, outsourcing and other services,
including remote hosting and managed services, to healthcare organizations. This segment’s customers include
hospitals, physicians, homecare providers, retail pharmacies and payers primarily from North America.
Corporate includes expenses associated with Corporate functions and projects and the results of certain
equity investments. Corporate expenses are allocated to the operating segments to the extent that these items can
be directly attributable to the segment.
Financial information relating to our reportable operating segments and reconciliations to the consolidated
totals is as follows:
(In millions)
Revenues
Distribution Solutions (1)
North America pharmaceutical distribution and services
International pharmaceutical distribution and services
Medical-Surgical distribution & services
Total Distribution Solutions
Technology Solutions - products and services
Total Revenues
Operating profit
Distribution Solutions
Technology Solutions
Total
Corporate Expenses, Net
Interest Expense
Income From Continuing Operations Before Income Taxes
118
Years Ended March 31,
2015
2014
2013
$143,711
26,358
5,907
175,976
3,069
$179,045
$123,929
4,485
5,648
134,062
3,330
$137,392
$115,443
—
3,603
119,046
3,150
$122,196
$
3,047
438
3,485
(454)
(374)
$ 2,657
$
$
2,472
448
2,920
(449)
(300)
2,171
$ 2,195
330
2,525
(335)
(240)
1,950
$
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(In millions)
Depreciation and amortization (2)
Distribution Solutions
Technology Solutions
Corporate
Total
Expenditures for long-lived assets (3)
Distribution Solutions
Technology Solutions
Corporate
Total
Revenues, net by geographic area (4)
United States
Foreign
Total
Years Ended March 31,
2015
2014
2013
$
$
$
$
750
156
111
1,017
301
27
48
376
$
$
$
$
446
169
120
735
179
47
52
278
$
$
$
$
267
194
120
581
163
37
41
241
$142,810
36,235
$179,045
$122,426
14,966
$137,392
$112,102
10,094
$122,196
(1) Revenues derived from services represent less than 2% of this segment’s total revenues.
(2) Amounts primarily include amortization of acquired intangible assets purchased in connection with
acquisitions, capitalized software held for sale and capitalized software for internal use.
(3) Long-lived assets consist of property, plant and equipment.
(4) 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:
(In millions)
Segment assets
Distribution Solutions
Technology Solutions
Total
Corporate
Cash and cash equivalents
Other
Total
Property, plant and equipment, net
United States
Foreign
Total
119
March 31,
2015
2014
$43,982
$42,496
3,281
3,573
47,263
46,069
5,341
1,266
4,193
1,497
$53,870
$51,759
$ 1,273
$ 1,246
772
950
$ 2,045
$ 2,196
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
27. 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 2015
Revenues
Gross profit (1)
Income after income taxes
Continuing operations (1) (2)
Discontinued operations (3)
Net income
Net income attributable to noncontrolling interests (4)
$43,476
$44,160
$46,484
$44,925
2,732
2,864
2,898
2,917
$
419
$
491
$
521
$
411
(8)
411
(8)
(14)
477
(8)
(10)
511
(39)
(267)
144
(12)
Net income attributable to McKesson
$
403
$
469
$
472
$
132
Earnings (loss) per common share attributable to McKesson (5)
Diluted
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
$
1.76
$
2.05
$
2.04
$
1.69
(0.04)
(0.06)
(0.04)
(1.13)
$
1.72
$
1.99
$
2.00
$
0.56
$
1.79
$
2.08
$
2.07
$
1.72
(0.04)
(0.06)
(0.04)
(1.15)
$
1.75
$
2.02
$
2.03
$
0.57
(1) Financial results for the first, second, third and fourth quarters of 2015 include pre-tax charges in our
Distribution Solutions segment related to our last-in-first-out (“LIFO”) method of accounting for inventories
of $98 million, $94 million, $95 million and $50 million, which were recorded in cost of sales.
(2) Fourth quarter of 2015 includes a non-cash after-tax charge of $150 million related to the settlement of
controlled substance distribution claims.
(3) Fourth quarter of 2015 includes $235 million non-cash after-tax impairment charges related to our Brazilian
pharmaceutical distribution business.
(4) Primarily reflects the guaranteed dividends of $50 million for the first nine months of 2015 and the
recurring compensation of $12 million for the fourth quarter of 2015. McKesson is obligated to pay these
amounts to the noncontrolling shareholders of Celesio under the Domination Agreement which became
effective in December 2014.
(5) Certain computations may reflect rounding adjustments.
120
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
(In millions, except per share amounts)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2014
Revenues
Gross profit (1)
Income after income taxes
Continuing operations (1) (2)
Discontinued operations (3)
Net income
Net loss attributable to noncontrolling interests (4)
$32,239
$32,985
$34,336
$37,832
1,930
2,021
1,850
2,551
$
428
$
423
$
164
$
399
(4)
424
—
(19)
404
—
(99)
65
—
(34)
365
5
Net income attributable to McKesson
$
424
$
404
$
65
$
370
Earnings per common share attributable to McKesson (5)
Diluted
Continued operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
$
1.84
$
1.82
$
0.70
$
1.72
(0.01)
(0.08)
(0.42)
(0.14)
$
1.83
$
1.74
$
0.28
$
1.58
$
1.88
$
1.85
$
0.71
(0.02)
(0.09)
(0.43)
1.76
(0.15)
$
1.86
$
1.76
$
0.28
$
1.61
(1) Financial results for the second, third and fourth quarters of 2014 include pre-tax charges in our Distribution
Solutions segment related to our LIFO method of accounting for inventories of $44 million, $142 million
and $125 million, which were recorded in cost of sales. The fourth quarter of 2014 also includes a $40
million pre-tax charge to cost of sales within our Distribution Solutions segment representing the reversal of
a step-up to fair value of Celesio’s inventory at the date of acquisition. Our after-tax portion of this charge
from continuing operations (after allocation to noncontrolling interests) was $21 million.
(2) Financial results for the third quarter of 2014 include an income tax charge of $122 million relating to our
litigation with the Canadian Revenue Agency.
(3) Financial results for the third quarter of 2014 include an $80 million after-tax impairment charge related to
our International Technology Business, which was sold in part during the second quarter of 2015.
(4) Primarily represents the noncontrolling shareholders’ portion of net loss from Celesio.
(5) Certain computations may reflect rounding adjustments.
121
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
McKESSON CORPORATION
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the
Company’s management, have evaluated the effectiveness of
the Company’s “disclosure controls and
procedures” (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this report and have concluded that our disclosure controls and procedures are effective based on their
evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or
15d-15.
Internal Control over Financial Reporting
Management’s report on the Company’s internal control over financial reporting (as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) and the related report of our independent registered public
accounting firm are included in this Annual Report on Form 10-K, under the headings, “Management’s Annual
Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting
Firm” and are incorporated herein by reference.
Changes in Internal Controls
There were no changes in our internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our fourth
quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
None.
122
McKESSON CORPORATION
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information about our Directors is incorporated by reference from the discussion under Item 1 of our Proxy
Statement for the 2015 Annual Meeting of Stockholders (the “Proxy Statement”) under the heading “Election of
Directors.” Information about compliance with Section 16(a) of the Exchange Act is incorporated by reference
from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy
Statement. Information about our Audit Committee, including the members of the committee and our Audit
Committee Financial Expert, is incorporated by reference from the discussion under the headings “Audit
Committee,” “Audit Committee Report” and “Audit Committee Financial Expert” in our Proxy Statement.
Information about the Code of Conduct applicable to all employees, officers and directors can be found on
our website, www.mckesson.com, under the caption “Investors—Corporate Governance.” The Company’s
Corporate Governance Guidelines and Charters for the Audit, Compensation and Governance Committees can
also be found on our website under the same caption.
The Company intends to post on its website required information regarding any amendment to, or waiver
from, the Code of Conduct that applies to our Chief Executive Officer, Chief Financial Officer, Controller and
persons performing similar functions within four business days after any such amendment or waiver.
Item 11. Executive Compensation.
Information with respect to this item is incorporated by reference from the discussion under the heading
“Executive Compensation” in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information about security ownership of certain beneficial owners and management is incorporated by
reference from the discussion under the heading “Principal Shareholders” in our Proxy Statement.
The following table sets forth information as of March 31, 2015 with respect to the plans under which the
Company’s common stock is authorized for issuance:
Plan Category
(In millions, except per share amounts)
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights (1)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)
7.6(2)
—
$95.01
$ —
34.9(3)
—
(1) The weighted-average exercise price set forth in this column is calculated excluding outstanding restricted
stock unit (“RSU”) awards, since recipients are not required to pay an exercise price to receive the shares
subject to these awards.
(2) Represents option and RSU awards outstanding under the following plans: (i) 1997 Non-Employee
Directors’ Equity Compensation and Deferral Plan; (ii) the 2005 Stock Plan; and (iii) the 2013 Stock Plan.
(3) Represents 4,829,508 shares available for purchase under the 2000 Employee Stock Purchase Plan and
30,105,875 shares available for grant under the 2013 Stock Plan.
123
McKESSON CORPORATION
The following are descriptions of equity plans that have been approved by the Company’s stockholders. The
plans are administered by the Compensation Committee of the Board of Directors, except for the portion of the
2013 Stock Plan and 2005 Stock Plan related to non-employee directors, which is administered by the Board of
Directors or its Governance Committee.
2013 Stock Plan: The 2013 Stock Plan was adopted by the Board of Directors on May 22, 2013 and
approved by the Company’s stockholders on July 31, 2013. The 2013 Stock Plan permits the grant of awards in
the form of stock options, stock appreciation rights, restricted stock (“RS”), restricted stock units (“RSUs”),
performance-based restricted stock units (“PeRSUs”), performance shares and other share-based awards. The
number of shares reserved for issuance under the 2013 Stock Plan equals the sum of (i) 30,000,000 shares,
(ii) the number of shares reserved but unissued under the 2005 Stock Plan as of the effective date of the 2013
Stock Plan, and (iii) the number of shares that become available for reuse under the 2005 Stock Plan following
the effective date of the 2013 Stock Plan. For any one share of common stock issued in connection with an RS,
RSU, performance share or other full share award, three and one-half shares shall be deducted from the shares
available for future grants. Shares of common stock not issued or delivered as a result of the net exercise of a
stock option, including in respect of the payment of applicable taxes, or shares repurchased on the open market
with proceeds from the exercise of options shall not be returned to the reserve of shares available for issuance
under the 2013 Stock Plan. Shares withheld to satisfy tax obligations relating to the vesting of a full-share award
shall be returned to the reserve of shares available for issuance under the 2013 Stock Plan.
Stock options are granted at no less than fair market value and those options granted under the 2013 Stock
Plan generally have a contractual term of seven years. Options generally become exercisable in four equal annual
installments beginning one year after the grant date. The vesting of RS or RSUs is determined by the
Compensation Committee at the time of grant. RS and RSUs generally vest over four years. PeRSUs vest three
years following the end of the performance period. Beginning in May 2014, the Company’s executive officers
are annually granted performance awards called Total Shareholder Return Units (“TSRUs”), which have a three-
year performance period and are payable in shares without an additional vesting period.
Non-employee directors may be granted an award on the date of each annual meeting of the stockholders for
up to 5,000 RSUs, as determined by the Board. Such non-employee director award is fully vested on the date of
the grant.
2005 Stock Plan: The 2005 Stock Plan was adopted by the Board of Directors on May 25, 2005 and approved
by the Company’s stockholders on July 27, 2005. The 2005 Stock Plan permits the granting of up to 42.5 million
shares in the form of stock options, RS, RSUs, PeRSUs, performance shares and other share-based awards. For
any one share of common stock issued in connection with an RS, RSU, performance share or other full-share
award, two shares shall be deducted from the shares available for future grants. Shares of common stock not
issued or delivered as a result of the net exercise of a stock option, shares withheld to satisfy tax obligations
relating to the vesting of a full-share award or shares repurchased on the open market with proceeds from the
exercise of options shall not be returned to the reserve of shares available for issuance under the 2005 Stock Plan.
Following the effectiveness of the 2013 Stock Plan, no further shares were made subject to award under the
2005 Stock Plan. Shares reserved but unissued under the 2005 Stock Plan as of the effective date of the 2013
Stock Plan, and shares that become available for reuse under the 2005 Stock Plan following the effectiveness of
the 2013 Stock Plan, will be available for awards under the 2013 Stock Plan.
Stock options are granted at no less than fair market value and those options granted under the 2005 Stock
Plan generally have a contractual term of seven years. Options generally become exercisable in four equal annual
installments beginning one year after the grant date. The vesting of RS or RSUs is determined by the
Compensation Committee at the time of grant. RS and RSUs generally vest over four years. PeRSUs vest three
years following the end of the performance period.
124
McKESSON CORPORATION
Non-employee directors may be granted an award on the date of each annual meeting of the stockholders for
up to 5,000 RSUs, as determined by the Board. Such non-employee director award is fully vested on the date of
the grant.
1997 Non-Employee Directors’ Equity Compensation and Deferral Plan: The 1997 Non-Employee
Directors’ Equity Compensation and Deferral Plan was approved by the Company’s stockholders on July 30,
1997; however, stockholder approval of the 2005 Stock Plan on July 27, 2005 had the effect of terminating the
1997 Non-Employee Directors’ Equity Compensation and Deferral Plan such that no new awards would be
granted under the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan.
2000 Employee Stock Purchase Plan (the “ESPP”): The ESPP is intended to qualify as an “employee stock
purchase plan” within the meaning of Section 423 of the Internal Revenue Code. In March 2002, the Board
amended the ESPP to allow for participation in the plan by employees of certain of the Company’s international
and other subsidiaries. As to those employees, the ESPP does not qualify under Section 423 of the Internal
Revenue Code. Currently, 21.1 million shares have been approved by stockholders for issuance under the ESPP.
The ESPP is implemented through a continuous series of three-month purchase periods (“Purchase
Periods”) during which contributions can be made toward the purchase of common stock under the plan.
Each eligible employee may elect to authorize regular payroll deductions during the next succeeding
Purchase Period, the amount of which may not exceed 15% of a participant’s compensation. At the end of each
Purchase Period, the funds withheld by each participant will be used to purchase shares of the Company’s
common stock. The purchase price of each share of the Company’s common stock is 85% of the fair market
value of each share on the last day of the applicable Purchase Period. In general, the maximum number of shares
of common stock that may be purchased by a participant for each calendar year is determined by dividing
$25,000 by the fair market value of one share of common stock on the offering date.
There currently are no equity awards outstanding that were granted under equity plans that were not
submitted for approval by the Company’s stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to certain transactions with management is incorporated by reference from the
Proxy Statement under the heading “Certain Relationships and Related Transactions.” Additional information
regarding certain related party balances and transactions is included in the Financial Review section of this
Annual Report on Form 10-K and Financial Note 25, “Related Party Balances and Transactions,” to the
consolidated financial statements appearing in this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services.
Information regarding principal accounting fees and services is set forth under the heading “Ratification of
Appointment of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for
Fiscal 2016” in our Proxy Statement and all such information is incorporated herein by reference.
125
McKESSON CORPORATION
PART IV
Item 15. Exhibits and Financial Statement Schedule.
(a)(1) Consolidated Financial Statements
Report of Deloitte & Touche, LLP, Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended March 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended March 31, 2015, 2014 and 2013
Consolidated Balance Sheets as of March 31, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended March 31, 2015, 2014 and 2013
Financial Notes
(a)(2) Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts
All other schedules not included have been omitted because of the absence of conditions under which they
are required or because the required information, where material, is shown in the financial statements,
financial notes or supplementary financial information.
(a)(3) Exhibits submitted with this Annual Report on Form 10-K as filed with the SEC and those
incorporated by reference to other filings are listed on the Exhibit Index
Page
60
62
63
64
65
66
67
128
129
126
McKESSON CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 12, 2015
MCKESSON CORPORATION
/s/ James A. Beer
James A. Beer
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
*
John H. Hammergren
Chairman of
Executive Officer (Principal Executive Officer)
the Board, President and Chief
*
James A. Beer
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
*
Nigel A. Rees
Senior Vice President and Controller (Principal
Accounting Officer)
M. Christine Jacobs, Director
*
*
Donald R. Knauss, Director
*
Marie L. Knowles, Director
*
Andy D. Bryant, Director
*
Wayne A. Budd, Director
David M. Lawrence, M.D., Director
*
Edward A. Mueller, Director
*
N. Anthony Coles, M.D., Director
Susan R. Salka, Director
*
*
Alton F. Irby III, Director
*
Date: May 12, 2015
/s/ Lori A. Schechter
Lori A. Schechter
*Attorney-in-Fact
127
McKESSON CORPORATION
SCHEDULE II
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2015, 2014 and 2013
(In millions)
Description
Year Ended March 31, 2015
Allowances for doubtful accounts
Other allowances
Year Ended March 31, 2014
Allowances for doubtful accounts
Other allowances
Year Ended March 31, 2013
Allowances for doubtful accounts
Other allowances
(1) Deductions:
Written off
Credited to other accounts
Total
Additions
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts (3)
Deductions
From
Allowance
Accounts (1)
Balance at
End of
Year (2)
$112
22
$134
$121
15
$136
$111
14
$125
$ 67
8
$ 75
$ 36
—
$ 36
$ 28
4
$ 32
$ —
—
$ —
$(11)
10
$ (1)
$ 16
1
$ 17
$ (38)
3
$ (35)
$ (34)
(3)
$ (37)
$ (34)
(4)
$ (38)
$141
33
$174
$112
22
$134
$121
15
$136
2015
2014
2013
$ (34)
$ (39)
$ (38)
(1)
2
—
$ (35)
$ (37)
$ (38)
(2) Amounts shown as deductions from current and non-current receivables
$174
$134
$136
(3) Primarily represents reclassifications from other balance sheet accounts.
128
McKESSON CORPORATION
EXHIBIT INDEX
The agreements included as exhibits to this report are included to provide information regarding their terms
and not intended to provide any other factual or disclosure information about the Company or the other parties to
the agreements. The agreements may contain representations and warranties by each of the parties to the
applicable agreement that were made solely for the benefit of the other parties to the applicable agreement, and;
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating
the risk to one of the parties if those statements prove to be inaccurate;
• may apply standards of materiality in a way that is different from what may be viewed as material to
you or other investors; and
• were made only as of the date of the applicable agreement or such other date or dates as may be
specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date
they were made or at any other time.
Exhibits identified under “Incorporated by Reference” in the table below are on file with the Commission
and are incorporated by reference as exhibits hereto.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
Description
Form File Number Exhibit
Filing Date
Incorporated by Reference
8-K
1-13252
3.1
August 2, 2011
8-K
1-13252
3.1
August 2, 2013
10-K
1-13252
4.4
June 19, 1997
S-4
333-30899
4.2
July 8, 1997
8-K
1-13252
4.1
March 5, 2007
8-K
1-13252
4.2
March 5, 2007
8-K
1-13252
4.2
February 12, 2009
8-K
1-13252
4.2
February 28, 2011
Amended and Restated Certificate of
Incorporation of the Company, as filed with the
Delaware Secretary of State on July 27, 2011.
Amended and Restated By-Laws of the Company,
as amended July 31, 2013.
Indenture, dated as of March 11, 1997, by and
between the Company, as issuer, and The First
National Bank of Chicago, as trustee.
Officers’ Certificate, dated as of March 11, 1997,
and related Form of 2027 Note.
Indenture, dated as of March 5, 2007, by and
between the Company, as issuer, and The Bank of
New York Trust Company, N.A., as trustee.
Officers’ Certificate, dated as of March 5, 2007,
and related Form of 2017 Note.
Officers’ Certificate, dated as of February 12,
2009, and related Form of 2014 Note and Form of
2019 Note.
First Supplemental Indenture, dated as of
February 28, 2011, to the Indenture, dated as of
March 5, 2007, among the Company, as issuer, the
Bank of New York Mellon Trust Company, N.A.
(formerly known as The Bank of New York Trust
Company, N.A.), and Wells Fargo Bank, National
Association, as trustee, and related Form of 2016
Note, Form of 2021 Note and Form of 2041 Note.
129
McKESSON CORPORATION
Exhibit
Number
4.7
4.8
4.9
4.10
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Description
Indenture, dated as of December 4, 2012, by and
between the Company, as issuer, and Wells Fargo
Bank, National Association, as trustee.
Officers’ Certificate, dated as of December 4,
2012, and related Form of 2015 Note and Form of
2022 Note.
Officers’ Certificate, dated as of March 8, 2013,
and related Form of 2018 Note and Form of 2023
Note.
Officers’ Certificate, dated as of March 10, 2014,
and related Form of Floating Rate Note, Form of
2017 Note, Form of 2019 Note, Form of 2024
Note, and Form of 2044 Note.
McKesson Corporation 1997 Non-Employee
Directors’ Equity Compensation and Deferral
Plan, as amended through January 29, 2003.
McKesson Corporation Supplemental Profit
Sharing Investment Plan, as amended and restated
on January 29, 2003.
McKesson Corporation Supplemental Profit
Sharing Investment Plan II, as amended and
restated on July 29, 2014.
McKesson Corporation Deferred Compensation
Administration Plan, as amended and restated as
of October 28, 2004.
McKesson Corporation Deferred Compensation
Administration Plan II, as amended and restated as
of October 28, 2004, and Amendment No. 1
thereto effective July 25, 2007.
McKesson Corporation Deferred Compensation
Administration Plan III, as amended and restated
July 29, 2014.
McKesson Corporation Executive Benefit
Retirement Plan, as amended and restated on
October 24, 2008.
McKesson Corporation Executive Survivor
Benefits Plan, as amended and restated as of
January 20, 2010.
McKesson Corporation Severance Policy for
Executive Employees, as amended and restated as
of April 23, 2013.
Incorporated by Reference
File
Number
Exhibit
Filing Date
1-13252
4.1
December 4, 2012
Form
8-K
8-K
1-13252
4.2
December 4, 2012
8-K
1-13252
4.2
March 8, 2013
8-K
1-13252
4.2
March 10, 2014
10-K
1-13252
10.4
June 10, 2004
10-K
1-13252
10.6
June 6, 2003
10-Q
1-13252
10.1
October 28, 2014
10-K
1-13252
10.6
May 13, 2005
10-K
1-13252
10.7
May 7, 2008
10-Q
1-13252
10.2
October 28, 2014
10-Q
1-13252
10.3
October 29, 2008
8-K
1-13252
10.1
January 25, 2010
10-K
1-13252
10.11
May 7, 2013
10.10* McKesson Corporation Change in Control Policy
10-Q
1-13252
10.2
February 1, 2011
for Selected Executive Employees, as amended
and restated on October 26, 2010.
130
McKESSON CORPORATION
Exhibit
Number
Description
10.11* McKesson Corporation 2005 Management
Incentive Plan, as amended and restated on
April 29, 2014.
10.12*
Form of Statement of Terms and Conditions
Applicable to Awards Pursuant to the McKesson
Corporation 2005 Management Incentive Plan,
effective October 21, 2014.
Incorporated by Reference
File
Number
Exhibit
Filing Date
1-13252
10.12
May 14, 2014
Form
10-K
10-Q
1-13252
10.2
February 5, 2015
10.13* McKesson Corporation Long-Term Incentive Plan,
10-Q
1-13252
10.1
July 30, 2010
10.14*
as amended and restated effective May 26, 2010.
Forms of Statement and Terms and Conditions
Applicable to Awards Pursuant to the McKesson
Corporation Long-Term Incentive Plan, effective
October 21, 2014.
10-Q
1-13252
10.1
February 5, 2015
10.15* McKesson Corporation 2005 Stock Plan, as
10-Q
1-13252
10.4
July 30, 2010
10.16*
amended and restated on July 28, 2010.
Forms of (i) Statement of Terms and Conditions,
(ii) Stock Option Grant Notice and (iii), Restricted
Stock Unit Agreement, each as applicable to
Awards under the McKesson Corporation 2005
Stock Plan.
10-Q
1-13252
10.2
July 26, 2012
10.17* McKesson Corporation 2013 Stock Plan, as
8-K
1-13252
10.1
August 2, 2013
10-Q
1-13252
10.3
February 5, 2015
10-Q
1-13252
10.4
February 5, 2015
10.18*
10.19
adopted on May 22, 2013.
Forms of Statement and Terms and Conditions
Applicable to Awards Pursuant to the McKesson
Corporation 2013 Stock Plan.
Amendment No. 5, dated as of November 14,
2014, Amendment No. 4, dated as of January 30,
2014, Amendment No. 3, dated as of
November 15, 2013, Amendment No. 2, dated as
of May 15, 2013, and Amendment No.1, dated as
of May 16, 2012, to the Fourth Amended and
Restated Receivables Purchase Agreement and
Fourth Amended and Restated Receivables
Purchase Agreement, dated as of May 18, 2011,
among the Company, as servicer, CGSF Funding
Corporation, as seller, the several conduit
purchasers from time to time party to the
Agreement, the several committed purchasers from
time to time party to the Agreement, the several
managing agents from time to time party to the
Agreement, and The Bank of Tokyo-Mitsubishi
UFJ, Ltd., New York Branch (as successor to
JPMorgan Chase Bank, N.A.), as collateral agent.
131
McKESSON CORPORATION
Incorporated by Reference
Form
8-K
File
Number
1-3252
Exhibit
Filing Date
10.1
February 5, 2014
8-K
1-13252
10.1
October 25, 2013
8-K
1-13252
10.1
January 15, 2014
8-K
1-13252
10.2
January 15, 2014
8-K
1-13252
10.1
January 29, 2014
8-K
1-13252
10.2
October 25, 2013
8-K
1-13252
10.3
January 29, 2014
Exhibit
Number
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Description
Amendment No. 2, dated January 30, 2014, and
Amendment No. 1, dated November 15, 2013, to
the Credit Agreement and the Credit Agreement
dated as of September 23, 2011, among the
Company and McKesson Canada Corporation,
collectively, the Borrowers, Bank of America,
N.A. as Administrative Agent, Bank of America,
N.A. (acting through its Canada branch), as
Canadian Administrative Agent, JPMorgan Chase
Bank, N.A. and Wells Fargo Bank, National
Association, as Co-Syndication Agents, Wells
Fargo Bank, National Association as L/C Issuer,
The Bank of Tokyo-Mitsubishi UFJ, LTD., The
Bank of Nova Scotia and U.S. Bank National
Association as Co-Documentation Agents, and
The Other Lenders Party Thereto, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Sole
Lead Arranger and Sole Book Manager.
Share Purchase Agreement, dated October 24,
2013, by and among Franz Haniel & Cie. GmbH,
Dragonfly GmbH & Co KGaA and McKesson
Corporation.
First Amendment of the Share Purchase
Agreement, dated December 19, 2013, by and
among Franz Haniel & Cie. GmbH, Dragonfly
GmbH & Co. GKaA and McKesson Corporation.
Second Amendment of the Share Purchase
Agreement, dated January 9, 2014, by and among
Franz Haniel & Cie. GmbH, Dragonfly GmbH &
Co. GKaA and McKesson Corporation.
Amended and Restated Share Purchase
Agreement, dated January 23, 2014, by and among
Franz Haniel & Cie. GmbH, Dragonfly GmbH &
Co KGaA and McKesson Corporation.
Business Combination Agreement, dated
October 24, 2013, by and between Dragonfly
GmbH & Co. KGaA, McKesson Corporation and
Celesio AG.
Amendment to the Business Combination
Agreement, dated January 23, 2014, by and
between Celesio AG, Dragonfly GmbH & Co.
KGaA, McKesson Corporation and Celesio AG.
132
McKESSON CORPORATION
Exhibit
Number
10.27
10.28*
10.29*
10.30*
10.31*
Description
Bond Purchase Agreement, dated January 23,
2014, by and among Elliott International, L.P.,
The Liverpool Limited Partnership, Elliott Capitol
Advisors, L.P., Dragonfly GmbH & Co. KGaA
and McKesson Corporation.
Amended and Restated Employment Agreement,
effective as of November 1, 2008, by and between
the Company and its Chairman, President and
Chief Executive Officer.
Letter dated March 27, 2012 relinquishing certain
rights provided in the Amended and Restated
Employment Agreement by and between the
Company and its Chairman, President and Chief
Executive Officer.
Letter dated February 27, 2014 relinquishing
certain rights provided in the McKesson
Corporation Executive Benefit Retirement Plan by
and between the Company and its Chairman,
President and Chief Executive Officer.
Amended and Restated Employment Agreement,
effective as of November 1, 2008, by and between
the Company and its Executive Vice President and
Group President.
Incorporated by Reference
File
Number
Exhibit
Filing Date
1-13252
10.2
January 29, 2014
Form
8-K
10-Q
1-13252
10.10 October 29, 2008
8-K
1-13252
10.1
April 2, 2012
8-K
1-13252
10.1
February 28, 2014
10-Q
1-13252
10.12 October 29, 2008
10.32*
Form of Director and Officer Indemnification
Agreement.
10-K
1-13252
10.27
May 4, 2010
12†
21†
23†
24†
31.1†
31.2†
32††
Computation of Ratio of Earnings to Fixed
Charges.
List of Subsidiaries of the Registrant.
Consent of Independent Registered Public
Accounting Firm, Deloitte & Touche LLP.
Power of Attorney.
Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended, and
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934 as amended, and
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
133
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—
—
—
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—
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—
—
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—
—
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—
—
—
—
—
—
McKESSON CORPORATION
Incorporated by Reference
File
Number
Exhibit
Filing Date
—
—
—
Form
—
Exhibit
Number
101†
Description
The following materials from the McKesson
Corporation Annual Report on Form 10-K for the
fiscal year ended March 31, 2014, formatted in
Extensible Business Reporting Language (XBRL):
(i) the Consolidated Statements of Operations, (ii)
Consolidated Statements of Comprehensive
Income, (iii) Consolidated Balance Sheets, (iv)
Consolidated Statements of Stockholders’ Equity,
(v) Consolidated Statements of Cash Flows, and
(vi) related Financial Notes.
* Management contract or compensation plan or arrangement in which directors and/or executive officers are
eligible to participate.
†
Filed herewith.
†† Furnished herewith.
Registrant agrees to furnish to the Commission upon request a copy of each instrument defining the rights of
security holders with respect to issues of long-term debt of the registrant, the authorized principal amount of
which does not exceed 10% of the total assets of the registrant.
134
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John H. Hammergren, certify that:
1.
I have reviewed this annual report on Form 10-K of McKesson Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision,
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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: May 12, 2015
/s/ John H. Hammergren
John H. Hammergren
Chairman of the Board, President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Beer, certify that:
1.
I have reviewed this annual report on Form 10-K of McKesson Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision,
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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: May 12, 2015
/s/ James A. Beer
James A. Beer
Executive Vice President and Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of McKesson Corporation (the “Company”) on Form 10-K for the year
ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
the undersigned, in the capacities and on the dates indicated below, each hereby certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ John H. Hammergren
John H. Hammergren
Chairman of the Board, President and Chief Executive Officer
May 12, 2015
/s/ James A. Beer
James A. Beer
Executive Vice President and Chief Financial Officer
May 12, 2015
This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002, and shall not,
except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to McKesson Corporation
and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
Appendix A
RECONCILIATION OF GAAP EARNINGS PER SHARE TO ADJUSTED EARNINGS PER SHARE
(NON-GAAP)
Years Ended March 31,
2015
2014
2013
2012
2011
Diluted earnings per share from continuing operations, net of
tax, attributable to McKesson Corporation (GAAP)
$ 7.54
$6.08
$ 5.69
$5.56
$4.17
Adjustments, net of tax:
Amortization of acquisition-related intangibles
Acquisition expenses and related adjustments
Claim and litigation reserve adjustments
LIFO-related adjustments
1.43
0.63
0.64
0.87
0.85
0.63
0.23
0.81
0.56
(0.02)
0.19
0.03
0.45
0.07
0.24
0.03
0.30
0.14
0.57
0.01
Adjusted earnings per share (Non-GAAP) (1)
$11.11
$8.60
$ 6.45
$6.35
$5.19
Diluted earnings per share from continuing operations, net of tax, attributable to McKesson
Corporation (GAAP)
Adjustments, net of tax:
Amortization of acquisition-related intangibles
Acquisition expenses and related adjustments
Claim and litigation reserve adjustments
LIFO-related adjustments
Adjusted earnings per share (Non-GAAP) (1)
(1) Certain computations may reflect rounding adjustments.
Adjusted Earnings
Years Ended
March 31,
2010
2009
$ 4.46
$2.86
0.26
—
(0.04)
0.02
0.28
—
1.11
0.02
$ 4.70
$4.27
McKesson separately reports financial results on the basis of Adjusted Earnings. Adjusted Earnings is a
Non-Gaap financial measure defined as Generally Accepted Accounting Principles (“GAAP”) income from
continuing operations, excluding amortization of acquisition-related intangible assets, acquisition expenses and
related adjustments, certain claim and litigation reserve adjustments, and Last-In-First-Out (“LIFO”) inventory-
related adjustments.
****
Definitions related to Adjusted Earnings (Non-GAAP) Financial Information
Adjusted Earnings represents income from continuing operations, excluding the effects of the following items
from the Company’s GAAP financial results, including the related income tax effects. The Company evaluates its
definition of Adjusted Earnings on a periodic basis and will update the definition from time to time. The
evaluation considers both the quantitative and qualitative aspect of the Company’s presentation of Adjusted
Earnings.
Amortization of acquisition-related intangibles—Amortization expense of acquired intangible assets
purchased in connection with business acquisitions by the Company.
Acquisition expenses and related adjustments—Transaction and integration expenses that are directly
related to business acquisitions by the Company. Examples include transaction closing costs, professional
service fees, restructuring or severance charges, retention payments, employee relocation expenses, facility
or other exit-related expenses, recoveries of acquisition-related expenses or post-closing expenses, bridge
loan fees, gains or losses related to foreign currency contracts, and gains or losses on business combinations.
Claim and litigation reserve adjustments—Adjustments to the Company’s reserves, including accrued
interest, for estimated probable losses for its Controlled Substance Distribution Claims and the Average
Wholesale Price litigation matters, as such terms are defined in the Company’s Annual Report on Form 10-
K for the fiscal year ended March 31, 2015.
LIFO-related adjustments—Last-In-First-Out (“LIFO”) inventory-related adjustments.
Income taxes on Adjusted Earnings are calculated in accordance with Accounting Standards Codification 740,
“Income Taxes,” which is the same accounting principle used by the Company when presenting its GAAP
financial results. The Company believes the presentation of Non-GAAP measures such as Adjusted Earnings
provides useful supplemental information to investors with regard to its core operating performance, as well as
assists with the comparison of its past financial performance to the Company’s future financial results. Moreover,
the Company believes that the presentation of Adjusted Earnings assists investors’ ability to compare its financial
results to those of other companies in the same industry. However, the Company’s Adjusted Earnings measure
may be defined and calculated differently by other companies in the same industry.
The Company internally uses Non-GAAP financial measures such as Adjusted Earnings in connection with its
own financial planning and reporting processes. Specifically, Adjusted Earnings serves as one of the measures
management utilizes when allocating resources, deploying capital and assessing business performance and
employee incentive compensation. Nonetheless, Non-GAAP financial results and related measures disclosed by
the Company should not be considered a substitute for, nor superior to, financial results and measures as
determined or calculated in accordance with GAAP.
Improving the Global Business of Healthcare
At McKesson, we know that better business health and better patient health go hand
in hand. Our supply chain and information technology solutions help healthcare
businesses run better, improve patient care and integrate the care experience—all for
better health. United by our strong company values, our global team of nearly 77,000
associates is working to create a healthier future for patients worldwide.
28%
appreciation
in stock price;
>$11B
to
added
Market Capitalization
77K
Nearly
employees
worldwide
Market Leadership
(cid:127) Global pharmaceutical
distribution
(cid:127) U.S. Medical-Surgical
alternate site distribution
(cid:127) U.S. Specialty distribution
for community
oncology
(cid:127) U.S. pharmacy
management
systems
182
year history
of serving
customers
Deliver
1/3
of all prescription
medications in
North America
More than
12,000
owned and
banner
pharmacies
$3.1B
in operating
cash flow
3.3B
financial transactions
processed annually
Operations in
more than
20
countries
99.98%
Order
Accuracy
Directors and Officers
Corporate Information
Board of Directors
Corporate Officers
John H. Hammergren
Chairman of the Board,
President and
John H. Hammergren
Chairman of the Board,
President and
Common Stock
McKesson Corporation common stock is listed on the New York
Stock Exchange (ticker symbol MCK) and is quoted in the daily
stock tables carried by most newspapers.
Chief Executive Officer,
Chief Executive Officer,
McKesson Corporation
McKesson Corporation
Stockholder Information
Wells Fargo Shareowner Services, 1110 Centre Pointe Curve, Suite
Andy D. Bryant
Chairman of the Board,
Intel Corporation
Wayne A. Budd
Senior Counsel,
James A. Beer
Executive Vice President
and Chief Financial Officer
101, Mendota Heights, MN 55120-4100 acts as transfer agent, regis-
trar, dividend-paying agent and dividend reinvestment plan agent
for McKesson Corporation stock and maintains all registered stock-
holder records for the Company. For information about McKes-
Patrick J. Blake
Executive Vice President
son Corporation stock or to request replacement of lost dividend
checks, stock certificates or 1099-DIVs, or to have your dividend
Goodwin Procter LLP
and Group President
check deposited directly into your checking or savings account,
N. Anthony Coles, M. D.
Chairman and Chief Executive
Jorge L. Figueredo
Executive Vice President,
Officer, Yumanity Therapeutics,
Human Resources
LLC; Formerly Chairman and
Chief Executive Officer, Onyx
Pharmaceuticals, Inc.
Paul C. Julian
Executive Vice President
and Group President
stockholders may call Wells Fargo Shareowner Services’ telephone
response center at (866) 614-9635. For the hearing impaired call
(651) 450-4144. Wells Fargo Shareowner Services also has a web-
site—www.wellsfargo.com/shareownerservices—that stockholders
may use 24 hours a day to request account information.
Dividends and Dividend Reinvestment Plan
Dividends are generally paid on the first business day of January, April,
Bansi Nagji
Executive Vice President,
July and October. McKesson Corporation’s Dividend Reinvestment
Plan offers stockholders the opportunity to reinvest dividends in
Corporate Strategy and
common stock and to purchase additional shares of common stock.
Business Development
Stock in an individual’s Dividend Reinvestment Plan is held in book
entry at the Company’s transfer agent, Wells Fargo Shareowner
Services. For more information, or to request an enrollment form, call
Wells Fargo Shareowner Services’ telephone response center at (866)
614-9635. From outside the United States, call +1-651-450-4064.
Annual Meeting
McKesson Corporation’s Annual Meeting of Stockholders will be
held at 8:30 a.m. PDT on Wednesday, July 29, 2015 at the Sofitel
San Francisco Bay, 223 Twin Dolphin Drive, Redwood City,
CA 94065.
Lori A. Schechter
Executive Vice President,
General Counsel and Chief
Compliance Officer
Brian P. Moore
Senior Vice President and
Treasurer
Nigel A. Rees
Senior Vice President and
Controller
Willie C. Bogan
Secretary
Alton F. Irby III
Chairman and
Founding Partner,
London Bay Capital
M. Christine Jacobs
Chairman of the Board,
President and Chief Executive
Officer, Retired, Theragenics
Corporation
Donald R. Knauss
Executive Chairman of the
Board, The Clorox Company
Marie L. Knowles
Executive Vice President and
Chief Financial Officer, Retired,
Atlantic Richfield Company
David M. Lawrence, M.D.
Chairman of the Board and
Chief Executive Officer, Retired,
Kaiser Foundation Health Plan,
Inc. and Kaiser Foundation
Hospitals
Edward A. Mueller
Chairman of the Board and
Chief Executive Officer, Retired,
Qwest Communications
International Inc.
Susan R. Salka
Chief Executive Officer and
President, AMN Healthcare
Services, Inc.
McKesson Corporation
One Post Street
San Francisco, CA 94104
www.mckesson.com
© 2015 McKesson Corporation. All rights reserved.