UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20162022
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number: 1-13252
McKESSON CORPORATION
(Exact name of registrant as specified in its charter)
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| Delaware | | 94-3207296 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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One Post Street, San Francisco, California | | 94104 |
(Address of principal executive offices) | | (Zip Code) |
(415) 983-83006555 State Hwy 161,
Irving, TX 75039
(Address of principal executive offices, including zip code)
(972) 446-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: |
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| (Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
| Common stock, $0.01 par value | MCK | New York Stock Exchange |
| 1.500% Notes due 2025 | MCK25 | New York Stock Exchange |
| 1.625% Notes due 2026 | MCK26 | New York Stock Exchange |
| 3.125% Notes due 2029 | MCK29 | 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 x☒ 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 x☒
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 x☒ 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 x☒ 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. x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | x☒ | | Accelerated filer | | ¨☐ |
| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)
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| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Yes ¨ No x
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, 2015,2021, was approximately $42.5 billion.$30.4 billion.
Number of shares of common stock outstanding on April 30, 2016: 225,020,52329, 2022: 145,365,324
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 20162022 Annual Meeting of StockholdersShareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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PART I
Item 1. Business.
General
McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we”“we,” and other similar pronouns), which traces its business roots to 1833, is a global pharmaceutical distributiondiversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. Our teams partner with biopharma companies, care providers, pharmacies, manufacturers, governments, and information technology company, currently ranked 11th on the Fortune 500. Weothers to deliver a comprehensive offering of pharmaceuticalsinsights, products, and medical supplies and provide services to help our customers improve the efficiencymake quality care more accessible and effectiveness of their healthcare operations. We work with payers, healthcare providers, pharmacies, pharmaceutical companies and others across the healthcare industry to improve patients’ access to high-quality care and make healthcare safer while enhancing efficiency and reducing costs.affordable.
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 meanrefers to the Company’s fiscal year. The Company was incorporated on July 7, 1994 in the State of Delaware.
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,”Act”), are available free of charge on ourthe Company’s website (www.mckesson.com under the “Investors — Financial InformationFinancials — SEC Filings” caption) as soon as reasonably practicable after we electronically file such material is electronically filed with, or furnish itfurnished 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 (“Annual Report”) 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 ourCommencing with the second quarter of 2021, the Company operates its business through twoin four reportable segments: McKesson DistributionU.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. The Company’s equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson Technology Solutions.in the fourth quarter of 2020, has been included in Other for retrospective periods presented.
Our Distribution SolutionsU.S. Pharmaceutical segment distributes branded, generic, specialty, biosimilar and genericover-the-counter (“OTC”) pharmaceutical drugs, and other healthcare-related products worldwide andproducts. This segment provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. ThisIn addition, the segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers including offering multiple distribution channels and clinical trial access to our network of oncology physicians. It also provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers within the United States. Additionally, this segment operates retail pharmacies in Europe and supports independent pharmacy networks within North America. It also sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
TheOur Prescription Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chainserves our biopharma and strategic management technologylife sciences partners and patients. RxTS addresses medication challenges for patients throughout their journeys by working across healthcare to connect pharmacies, providers, payers, and biopharma companies to deliver innovative access and adherence solutions as well as connectivity, outsourcingdispensing support services, third-party logistics and wholesale distribution support designed to benefit stakeholders.
Our Medical-Surgical Solutions segment provides medical-surgical supply distribution, logistics, and other services to healthcare providers, including remote hostingphysician offices, surgery centers, nursing homes, hospital reference labs, and managedhome health care agencies. We offer more than 285,000 national brand medical-surgical products as well as McKesson’s own line of high-quality products through a network of distribution centers within the United States (“U.S.”).
Our International segment provides distribution and services to healthcare organizations.wholesale, institutional, and retail customers in 11 European countries and Canada where we own, partner or franchise with retail pharmacies, and support better, safer patient care by delivering vital medicines, supplies, and information technology solutions.
Net revenues for our segments for the last three years were as follows:
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| (Dollars in billions) | | 2016 | | 2015 | | 2014 |
| Distribution Solutions | | $ | 188.0 |
| 98 | % | | $ | 176.0 |
| 98 | % | | $ | 134.1 |
| 98 | % |
| Technology Solutions | | 2.9 |
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| Total | | $ | 190.9 |
| 100 | % | | $ | 179.1 |
| 100 | % | | $ | 137.4 |
| 100 | % |
Distribution Solutions SegmentU.S. Pharmaceutical Segment:
Our Distribution SolutionsU.S. Pharmaceutical segment consists of the following businesses: North America pharmaceuticalprovides distribution and logistics services Internationalfor branded, generic, specialty, biosimilar, and OTC 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 Technology & Services.
U.S. Pharmaceutical Distribution: This business supplies branded, specialty and generic pharmaceuticals anddrugs along with 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).customers. This business also provides solutions and services to pharmacies, hospitals, oncology and other specialty practices, pharmaceutical manufacturers. This business sources materialsmanufacturers, biopharma partners, physicians, payers, and products from a wide-array of different suppliers, including certainpatients throughout the U.S. and Puerto Rico. We also source generic pharmaceutical drugs produced through a contract-manufacturing program.our ClarusONE Sourcing Services LLP joint venture with Walmart (“ClarusONE”).
Our U.S. pharmaceutical distribution businessPharmaceutical segment operates and serves thousands of customer locationscustomers through a network of 3129 distribution centers, as well as a primary redistribution center, aincluding two strategic redistribution center and two repackaging facilities, serving all 50 states and Puerto Rico.centers. We invest in technology and other systems at all of our distribution centers to enhance safety, and reliability, and to provide the best product availability for our customers.availability. For example, in most of our distribution centers we use Acumax® Plus, an award-winning technology that integrates and tracks all internal inventory-related functions such as receiving, put-away and order fulfillment. Acumax® Plus uses bar code technology, wrist-mounted computer hardware and radio frequency signals to provide customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% adjusted accuracy. In addition, we offer Mobile ManagerSM, which integrates portable handheld technology with Acumax® Plus to give customers complete ordering and inventory control. We also offer McKesson ConnectSM, an internet-based ordering system that provides item lookuplook-up and real-time inventory availability as well as ordering, purchasing, third-party reconciliation, and account management functionality. Together, these features helpWe make extensive use of technology as an enabler to ensure customers have the right products at the right time for their facilities and patients.in the right place.
To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology, —which is 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.enhance service accuracy and safety. We provide solutions to our customers including supply management technology, world-class marketing programs, managed care, repackaging products, and services to help them meet their business and quality goals. We continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.
The majorWe have four primary customer groups of our U.S. Pharmaceutical Distribution business can be categorized aspharmaceutical distribution channels: (i) retail national accounts, independent retailwhich include national and regional chains, food and drug combinations, mail order pharmacies, and mass merchandisers, (ii) community pharmacies and health (formerly described as independent, small, and medium chain retail pharmacies), (iii) institutional healthcare providers.providers such as hospitals, health systems, integrated delivery networks, and long-term care providers, and (iv) oncology, biopharma, and other specialty partners.
Retail National Accounts — BusinessAccounts: We provide business solutions that help retail national account customers increase revenues and profitability. Solutions include:
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• | Central FillSM — Prescription refill service that enables pharmacies to more quickly refill prescriptions remotely, more accurately and at a lower cost, while reducing inventory levels and improving customer service.
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•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.
•Strategic Redistribution Centers —- Two facilities totaling over 750,000740,000 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® —SynerGx® - Generic pharmaceutical purchasing program and inventory management that helps pharmacies maximize their cost savings with a broad selection of generic drugs, competitive pricing, and one-stop shopping.
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• | RxPakSM — Bulk-to-bottle repackaging service that leverages our purchasing scale and supplier relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce working capital investment.
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•Inventory Management —- An integrated solution comprising forecasting software and automated replenishment technologies that reduce inventory-carrying costs.
•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.
Independent Retail Pharmacies — Solutions for
Community Pharmacy and Health: We provide managed care contracting, branding and advertising, merchandising, purchasing, operational efficiency, and automation that help independentcommunity pharmacists focus on patient care while improving profitability. Solutions include:
•Health Mart® — Health Mart® is aMart® - A national network of more than 4,600approximately 4,700 independently-owned pharmacies and is one of the industry’s most comprehensive pharmacy franchise programs. Health Mart®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® —•Health Mart Atlas® - Comprehensive managed care and reconciliation assistance services that help independentcommunity pharmacies save time, access competitive reimbursement rates, and improve cash flow.
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• | 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.
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•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® —Generics® - Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, competitive pricing, and one-stop shopping.
Sunmark® —•Health Mart and Sunmark® - Complete line of more than 600 products that provide retail independentcommunity pharmacies with value-priced alternatives to national brands.
•FrontEdge™ —- Strategic planning, merchandising, and price maintenance program that helps independentcommunity pharmacies maximize store profitability.
•McKesson Sponsored Clinical Services (SCS) Network — AccessRxOwnership Program - Assist independent pharmacist owners with the opportunity to patient-support services that allow pharmacists to earn service feesremain independent via succession planning and to develop stronger patient relationships.business operation loans.
•Health Mart Digital Portfolio - Introducing an enhanced online experience for pharmacies and patients.
Institutional Healthcare Providers — Electronic ordering/purchasingProviders: At McKesson, we are relentless in our pursuit of opportunities to achieve operational efficiency, reduce waste, and improve the financial performance of our customers so they can achieve more of their goals today and into the future. Solutions include:
•RxO Advisory Services – A suite of supply chain management, systems that help customers improve financial performance, increase operational efficiencies and deliver better patient care. Solutions include:
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• | 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.
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Asset Management — Award-winning inventorypharmacy optimization, and purchasing management340B program that helps institutional providers lower costs while ensuring product availability.advisory services.
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 —Biologics – A fullrobust portfolio of plasma-derivatives and biologic products.
McKesson OneStop Generics® — Described above.•Outpatient and Specialty Pharmacy – A portfolio of services and solutions customized to each customer’s business and clinical strategy.
McKesson•Contracting and Contract/Purchasing Optimization – Solutions across generics, specialty, branded products, biosimilars, and 340B products, for inpatient and outpatient settings.
•Supply Assurance – Solutions and strategies to enhance product availability and proactively manage inventory of critical items.
•Patient Assistance Solutions – Solutions and resources for patient financial assistance and community benefit programs.
Oncology, Biopharma, and Other Specialty Health (“MSH”): This businessPartners:
The U.S. Pharmaceutical segment provides a range of solutions to oncology and other specialty practices operating in communities across the country, to pharmaceutical and biotechnology suppliers who manufacture specialty drugs and vaccines, and to payers and hospitals. MSH is focused on three core business lines: Manufacturer Solutions, Practice Management and Provider Solutions.
Manufacturer Solutions help manufacturers accelerate the approval and successful commercialization of specialty pharmaceuticals across the product life cycle. MSH’s offerings include supply chain services, including specialty pharmacy services and third party logistics (“3PL”), provider and patient engagement programs, clinical trial support, patient assistance programs, reimbursement services, and analytics. In addition, MSH helps manufacturers minimize reimbursement challenges while offering affordable, safe access to therapies through Risk Evaluation and Mitigation Strategies (“REMS”) programs.
In April 2016, we completed the acquisition of Biologics, Inc (“Biologics”), a Cary, North Carolina-based company that provides oncology pharmacy services to providers and patients as well as solutions for manufacturers and payers. For manufacturers, Biologics helps optimize speed-to-therapy, enhance patient adherence and improve patient access to therapy. In addition, Biologics works with manufacturers to develop custom strategies to enhance the clinical and commercial success of their products at each stage of the life-cycle.
Practice Management provides a variety of solutions, including practice operations, healthcare information technology, revenue cycle management and managed care contracting solutions, evidence-based guidelines and quality measurements to support The U.S. Oncology Network, one of the nation’s largest network of integrated, community-based oncology practices dedicated to advancing high-quality, evidence-based cancer care. We also support U.S. Oncology Research, one of the nation’s largest research networks, specializing in oncology clinical trials.
In April 2016, we also completed the acquisition of Vantage Oncology Holdings LLC (“Vantage”), a leading national provider of integrated oncology and radiation services headquartered in Manhattan Beach, California. Vantage’s comprehensive oncology management services model, including its focus on community-based radiation oncology, medical oncology, and other integrated cancer care services, complements and strengthens the existing offerings of McKesson and The US Oncology Network, while allowing patients to access the care they need in an efficient and cost effective way.
Provider Solutions offers community specialists (oncologists, rheumatologists, ophthalmologists, urologists, neurologists, and other specialists) an extensive set of customizable products and services designed to strengthen core practice operations, enhance value-based care delivery, and expand their service offering to patients. ToolsCommunity-based physicians in this business have broad flexibility and servicesdiscretion to select the products and commitment levels that best meet their practice needs. Services in provider solutions include specialty drug distribution, and group purchasing organizationorganizations (“GPO”) services,like Onmark®, technology solutions, practice consulting services, and vaccine distribution, including our exclusive distributor relationship with the Centers for Disease Control and Prevention’s (“CDC”) Vaccines for Children program. Community-based physiciansAdditionally, to support the U.S. efforts to fight the pandemic caused by the SARS-CoV-2 coronavirus (“COVID-19”), this segment has been distributing certain COVID-19 vaccines since December 2020 at the direction of the U.S. government.
This business provides a variety of solutions, including practice operations, healthcare information technology, revenue cycle management and managed care contracting solutions, evidence-based guidelines, and quality measurements to support U.S. Oncology Network (“USON”), one of the nation’s largest networks of physician-led, integrated, community-based oncology practices dedicated to advancing high-quality, evidence-based cancer care. We also support U.S. Oncology Research, one of the nation’s largest research networks, specializing in thisoncology clinical trials.
This segment includes our Ontada business, line have broad flexibilityproviding software to support the clinical, financial, and choiceoperational needs of our oncology practice partners. Ontada also partners with oncology providers and biopharma partners to select the productsperform real-world evidence studies, retrospective research, and commitment levelsto provide clinical data insights, advisory solutions and education opportunities.
This segment also offers solutions which enable its customers to drive greater efficiencies in their day to day operations, effectively managing their inventories and complying with complex government regulations. Solutions include McKesson Pharmacy Systems, MacroHelix, and Supply Logix, all of which provide innovative software technology and services that best meet their practice needs.support retail pharmacies and hospitals.
When we classify a pharmaceutical productdiscuss specialty products or service as “specialty,”services, we consider the following factors: diseases requiring complex treatment regimens such as cancer and rheumatoid arthritis; plasma and biologics products; ongoing clinical monitoring requirements, high-cost, special handling, storage, and delivery requirements and, in some cases, exclusive distribution arrangements. 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.
McKesson Canada:Prescription Technology Solutions Segment:
Our Prescription Technology Solutions segment works across healthcare to connect pharmacies, providers, payers, and biopharma companies to deliver medication access and adherence solutions that support patients from first prescription fill to ongoing therapy, regardless of their insurance coverage. RxTS has connections with most electronic health record systems, over 50,000 pharmacies, more than 750,000 providers, most payers and pharmacy benefit managers, and over 650 biopharma brands representing most therapeutic areas. Through its industry connections and ability to navigate the healthcare ecosystem, RxTS accelerates innovative solutions created to benefit healthcare stakeholders. Its comprehensive solution suites span across the entire patient journey, including medication access and affordability, prescription decision support and dispensing support services, as well as third-party logistics and wholesale distribution support, to help increase speed to therapy, reduce prescription abandonment, and support improved health outcomes for the patient. In the past year, RxTS helped patients save more than $6 billion on brand and specialty medications, helped to prevent more than 9 million prescriptions from being abandoned due to affordability challenges, and helped patients access their medicine more than 67 million times.
Medical-Surgical Solutions Segment:
Our Medical-Surgical Solutions segment delivers medical-supply distribution, logistics, biomedical maintenance, and other services to healthcare providers across the alternate-site spectrum. Our more than 275,000 customers include physician offices, surgery centers, post-acute care facilities, hospital reference labs, and home health agencies. We partner with manufacturers and channel partners to support our key target end-markets, including primary care, extended care, government, and other markets. We distribute medical-surgical supplies (such as gloves, needles, syringes, and wound care products), infusion pumps, laboratory equipment, and pharmaceuticals. Through a network of distribution centers within the U.S., we offer more than 285,000 products from national brand manufacturers and McKesson’s own brand of high-quality products. Through the right mix of products and services, we help improve efficiencies, profitability, and compliance. We also never lose focus on helping customers improve patient and business outcomes. We develop customized plans to address the product, operational, and clinical support needs of our customers, including tackling inventory management, reducing administrative burdens, and training and educating clinical staff. We deliver for our customers, so they can deliver and care for their patients. Additionally, under contracts with the Department of Health and Human Services (“HHS”) and Pfizer, Inc., McKesson’s Medical-Surgical business leverages its expertise to manage the assembly, storage, and distribution of supply kits needed to administer COVID-19 vaccines, as well as some of the sourcing of those supplies. The kits are produced and distributed at the direction of HHS to support the administration of all COVID-19 vaccines approved in the U.S.
International Segment:
Our International segment provides distribution and services to wholesale, institutional, and retail customers in 11 European countries where we own, partner, or franchise with retail pharmacies and operate through two businesses: Pharmaceutical Distribution and Retail Pharmacy. Our operations in Canada support better, safer patient care by delivering vital medicines, supplies, and information technology solutions to customers, and through several retail health and wellness brands, across Canada.
Our European Pharmaceutical Distribution business delivers pharmaceutical and other healthcare-related products to pharmacies across Europe. This business functions as a vital link, using technology-enabled management systems at our regional wholesale branches to connect manufacturers to retail pharmacies, supplying medicines and other products sold in pharmacies.
Our European Retail Pharmacy business serves patients and consumers in European countries directly through approximately 2,000 of our own pharmacies and 4,800 participant pharmacies operating under brand partnership arrangements. This business provides customers with traditional prescription pharmaceuticals, non-prescription products, and medical services, as well as e-commerce operating under the Lloyds pharmacy branding in Belgium, Ireland, and Italy. In addition, we partner with independent pharmacies under local banner programs.
In fiscal 2022, we announced our intention to exit our businesses in Europe. We entered into an agreement to sell certain of our businesses in the European Union (“E.U.”) located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, our German headquarters and wound-care business, part of a shared services center in Lithuania, and our ownership stake in a joint venture in the Netherlands (“E.U. disposal group”). We also completed the sale of our Austrian business. On April 6, 2022, we completed the sale of our retail and distribution businesses in the United Kingdom (“U.K. disposal group”). Of the owned and banner pharmacies referenced above, all except for approximately 300 owned and 100 partner pharmacies are included within these disposal groups. In executing our strategy to exit Europe, we continue to evaluate suitable exit alternatives for our remaining businesses in Norway and Denmark. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for additional information on our European divestiture activities.
McKesson Canada is one of the largest pharmaceutical wholesale and retail distributors in Canada. McKesson Canada, through its network of 14 distribution centers, provides logistics and distribution for manufacturers - delivering theirThe wholesale business delivers products to retail pharmacies, hospitals, long-term care centers, clinics and institutions throughoutin Canada and through itsa national network of infusion clinics, offers specialty servicesdistribution centers and adherence programs. Beyond pharmaceutical distribution,provides logistics and order fulfillment,distribution services for manufacturers.
Beyond wholesale pharmaceutical logistics and distribution, McKesson Canada provides automation and technology solutions to its retail and hospital customers, dispensing millionscustomers. Additionally, McKesson Canada provides comprehensive specialty health services to Canadians, including a national network of doses each year.specialty pharmacies, personalized patient care and support programs, and INVIVA, Canada’s first and largest accredited network of private infusion clinics. McKesson Canada also providesowns and operates PDCI, Canada’s leading market access consultancy, supporting manufacturers as they introduce new products into the Canadian market.
The Canada retail business includes over 2,700 banner pharmacies under the IDA®, Guardian®, The Medicine Shoppe®, Remedy’sRx®, Proxim®, and Uniprix® banners, and approximately 400 owned pharmacies under the RexallTM brand where we provide patients with greater choice and access, integrated pharmacy care and industry-leading service levels. McKesson Canada also owns and operates Well.caTM, a leading Canadian online health information exchangeand wellness retailer.
Other:
Change Healthcare: Our equity ownership interest in the Change Healthcare JV, a joint venture, was accounted for using the equity method of accounting. The Change Healthcare JV provided software and analytics, network solutions, that streamline clinical and administrative communication and retail bannertechnology-enabled services that help independent pharmacists competedeliver wide-ranging financial, operational, and grow through innovative servicesclinical benefits to payers, providers 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.
Inconsumers. On March 2016, we entered into an agreement to purchase Rexall Health from Katz Group for $3 billion Canadian dollars (or, approximately $2.3 billion U.S. dollars using the currency exchange ratio of 0.77 Canadian dollar to 1 U.S. dollar as of March 31, 2016). Rexall Health, which operates approximately 470 retail pharmacies in Canada, particularly in Ontario and Western Canada, will enhance our Canadian pharmaceutical supply chain. The acquisition is subject to regulatory approval and is expected to close during the second half of calendar year 2016.
McKesson Pharmacy Technology & Services: This business provides offerings that allow large retail chains, hospital outpatient pharmacies and small and independent pharmacies to meet the high demand for prescriptions while maximizing profits and optimizing operations. It supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies. Solutions include:
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.
Pharmaserv® — A fully integrated, server-based pharmacy management system that gives the customer complete control of their pharmacy data.
PharmacyRx — A cost-effective, SaaS-based pharmacy management system that can be installed quickly and makes processing prescriptions fast and easy.
McKesson 340B Solution Suite and Macro Helix® — Software as a Service (SaaS)-based solutions that help providers manage, track and report on medication replenishment associated with the federal 340B Drug Pricing Program.
Supplylogix® — Develops and delivers practical supply chain intelligence solutions to pharmacy and related businesses and provides a wide array of services to healthcare providers nationwide.
International pharmaceutical distribution and services
Our international pharmaceutical distribution and services business provides distribution 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 consists of approximately 109 branches that deliver 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. The retail pharmacy business serves patients and consumers in six European countries directly through over 2,200 of its own pharmacies and over 4,500 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 (“U.K.”), which accounted for approximately 71% of the total volume of the retail pharmacy business for the year ended March 31, 2016.
In April 2016,10, 2020, we completed the acquisitionseparation of the pharmaceutical distribution business of UDG Healthcare Plc (“UDG”) based in Ireland and the U.K. for $412 million. The acquired UDG business primarily provides pharmaceutical and other healthcare products to retail and hospital pharmacies. We also expect to complete the acquisition of the pharmacy business of J Sainsbury Plc (“Sainsbury”) basedour interest in the U.K. duringChange Healthcare JV through a split-off transaction. This transaction reduced our investment in the first quarter of 2017. Once completed, these acquisitions will further enhance our retail pharmacy service capabilities in Ireland and the U.K.
In 2015, we committedChange Healthcare JV to a plan to sell our Brazilian pharmaceutical distribution business, which we acquired through our February 2014 acquisition. The sale is expected to close during the first half of 2017.zero. Refer to Financial Note 9, “Discontinued Operations”,4, “Business Acquisitions and Divestitures,” to the consolidated financial statements appearingincluded 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 distributor 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 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 offor additional information technology and services to help healthcare organizations improve quality of care and ensure 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 to assist with business and clinical redesign, process re-engineering and staffing (both information technology and back-office).
Our Technology Solutions segment consists of the following businesses: McKesson Health Solutions, Connected Care and Analytics (“CCA”), Imaging and Workflow Solutions, Business Performance Services and Enterprise Information Solutions.
McKesson Health Solutions: We offer a suite of services and software products designed to manage the cost and quality of care for payers, providers, hospitals and government organizations. Solutions include:
InterQual® Criteria for clinical decision support and utilization management;
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• | Clear CoverageTM for point-of-care utilization management, coverage determination and network compliance;
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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: We provide health information exchange solutions that streamline clinical and administrative communication among patients, providers, payers, pharmacies, manufacturers, government entities and financial institutions through our vendor-neutral RelayHealth® and its intelligent network, RelayHealth® pharmacy solutions which help our customers 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 clinical and analytical software to support management workflows and analytics for optimization of hospital departments and a comprehensive solution for homecare. We also provide 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.this transaction.
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. We also provide professional services to help customers achieve business results from their software or automation investment. 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.
Restructuring, Business Combinations, Discontinued OperationsInvestments, and Other Divestitures
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, 5,3, and 9 “Business Combinations,4, “Held for Sale,” “Divestiture of Businesses,“Restructuring, Impairment, and Related Charges, Net,” and “Discontinued Operations,“Business Acquisitions and Divestitures,” respectively, to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.Report.
Competition
Our Distribution Solutions segment faces aWe operate in highly competitive globalenvironments, primarily in North America and Europe. In recent years, the healthcare industry has been subject to increasing consolidation. In the pharmaceutical distribution environment within which our U.S. Pharmaceutical and International segments operate, we face strong competition from international, national, regional, and local full-line, short-line, and specialty distributors, service merchandisers, self-warehousing chain drug stores, manufacturers engaged in direct distribution, third-party logistics companies, and large payer organizations. In addition, thisWe consider our largest competitors in distribution, wholesaling, and logistics to be AmerisourceBergen Corporation and Cardinal Health, Inc. Our retail businesses, which primarily operate in our International segment, facesface competition from various global, national, regional, and local retailers, including chain and independent pharmacies.
Our RxTS business experiences substantial competition from many companies, including other biopharma services companies, software services firms, consulting firms, shared service vendors, and internet-based companies with technology applicable to the healthcare industry. Competition in this business varies in size from large to small companies, in geographical coverage, and in scope and breadth of products and services offered.
Our Medical-Surgical Solutions segment provides medical-surgical supply distribution, logistics, and other services to healthcare providers, including physician offices, surgery centers, nursing homes, hospital reference labs, home health care agencies, and other alternative sites with competition from a wide range of national and regional medical supply and equipment distributors throughout the U.S.
In addition, we compete with other service providers and from pharmaceutical and other healthcare manufacturers, as well as other potential customers of the segment,our businesses, which may from time-to-timetime to time decide to develop, for their own internal needs, supply management capabilities that wouldmight otherwise be provided by the segment.our businesses. We believe that our scale and diversity of product and service offerings are our primary competitive advantages. In all areas, key competitive factors include price, quality of service, breadth of product lines, innovation and, in some cases, convenience to the customer.
Our Technology Solutions segment experiences substantial competition from many companies, 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
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,innovations and obtain copyrights coveringcopyright protection for 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, trademarks, and trademarksintellectual property licenses 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 partythird-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.
operations.
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 andas well as our products and services are not materially dependent on any single license or other agreement with any third party.
Human Capital
Our vision for a healthier world begins with our employees, who bring our mission to life every day. We deliver programs that focus on improving employee health and wellness, creating opportunities for growth and development, and providing an inclusive workplace where our employees can reach their full potential. At March 31, 2022, we had approximately 75,000 employees worldwide, including 17,000 part-time employees, as well as 33,000 employees in the U.S. and 13,000 employees in Canada. We also supplement our work force with contractors and/or consultants for certain business projects, processes, and/or operations as demand requires, including for programs such as the COVID-19 vaccine distribution and related ancillary supply kit programs. During 2022, we entered into an agreement to sell the E.U. disposal group which is expected to close within the second half of fiscal year 2023 and completed the sale of our Austrian business. On April 6, 2022, we completed the sale of the U.K. disposal group. At March 31, 2022, we had approximately 29,000 employees in Europe, including 11,000 part-time employees, the majority of whom we expect will be transferred with the E.U. disposal group and U.K. disposal group. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for additional information on our European divestiture activities.
Diversity, Equity, and Inclusion (“DEI”): We are committed to making the principles of DEI integral to everything we do because we believe building a healthier future is everyone’s business. We build successful teams by recruiting, developing, and retaining diverse talent and we recognize our culture of inclusion and belonging as an important element that drives long-term shareholder value. We have 10 employee resource groups (“ERGs”) that are voluntary, employee-led, company-sponsored groups that focus on making a difference among our U.S. employees. ERGs can help employees make authentic connections, showcase leadership skills, and create a positive impact.
At March 31, 2022, women and people of color represented the following:
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| | McKesson
Overall | | McKesson Leadership (2) |
Metric (1) | | | |
Women (3) | 64 | % | | 46 | % |
People of Color (4) (5) | 47 | % | | 22 | % |
(1)The data for our metrics is derived from our voluntary self-identification process as of March 31, 2022 and therefore represents our best estimate at this time. For fiscal year 2021, our metrics did not include our employees related to USON as the data was not available.
(2)Represents our leadership at the vice president level and above.
(3)Represents worldwide employees. In North America, women represent 60% of “McKesson Overall” and 48% of “McKesson Leadership.”
(4)Represents U.S. employees only because the data for Canada and Europe is not available.
(5)People of Color includes the following races and ethnicities: American Indian or Alaska Native, Asian, Black or African American, Hispanic or Latino, Native Hawaiian or Other Pacific Islander, or Two or More Races.
Culture and Leadership: What sets McKesson apart as an exceptional place is our people. Our employees understand that together, unified by our global I2CARE and ILEAD principles, we fulfill our mission of improving care in every setting. Our I2CARE values (Integrity, Inclusion, Customer-First, Accountability, Respect, Excellence) are foundational to all that we do, and who we are as a company. ILEAD (Inspire, Leverage, Execute, Advance, Develop) is our common definition of and shared commitment to leadership. By embracing this commitment, we bring out the best in ourselves and position McKesson to continue to drive better health – for our company, our customers, and the patients they serve – for years to come. We promote leadership behaviors through culture initiatives that offer practical tips on how to debate, decide, and commit, be open and candid, and maintain an enterprise-first mindset when navigating conversations affecting operations within and across our business segments. These values and behaviors help make McKesson unique.
Investment in Employees: To support employee growth and development, we provide regular feedback and training, and work to create and maintain an inclusive environment where everyone can bring their authentic self to work and know they are appreciated, with their perspectives heard and considered. Through training, we encourage leaders to embrace diverse perspectives and lead inclusively. Employee development programs include training, coaching, and 360-degree assessments, which can support the careers of future leaders and their teams. We offer financial assistance programs for higher education opportunities that support employees’ career growth at the company. To provide compensation that is focused on attracting and retaining talent with the skills and experience necessary for a specific role, our compensation program is built on a set of quantifiable factors defined by our guiding principles of internal equity, market competitiveness, and pay for performance. We operate in several countries and our benefits offerings vary accordingly. We offer health and wellness benefits to advance the physical, mental, and social well-being of our people, savings programs to help prepare them for retirement, and flexible work arrangements, among other offerings, when possible. We seek employee feedback through an annual employee opinion survey, which assesses our employees’ levels of engagement, commitment, and overall satisfaction using industry benchmarks, and we then design action plans to improve those metrics.
As broader U.S. labor markets continue to be challenging and evolving, we continue our dedication to recruiting and retaining qualified employees across the organization. During 2022, we committed to increasing base pay and providing long-term incentive awards for certain markets and job classes as necessary to retain top talent. We also made investments in our talent acquisition team by adding recruiters, systems, and process improvements to strengthen our ability to attract employees and reduce the lead time to fill open positions as well as improve our employee value proposition. In response to the COVID-19 pandemic, we offer medical benefits covering COVID-19 related visits, testing (including over-the-counter tests), treatment and vaccines, telehealth options, and emergency paid time off (“PTO”). During the first quarter of 2022, we approved changes to our real estate strategy to increase efficiencies and support flexibility for our employees, as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report. Our North American future of work approach is based on four pillars: best talent and co-location, flexibility, mobility, and a partial remote work model for certain employees.
Health and Safety: Our security and safety departments employ systems designed to continually monitor our facilities and work environment to help identify and prevent or mitigate any potential risks. This includes having procedures in place and investing in equipment for both physical and electronic security. We routinely assess facilities to closely monitor adherence to established security and safety standards. If we identify a vulnerability, it is documented, and the facility prepares an action plan. Our employees receive specialized training related to their role, work setting, and equipment used in their work environment. As our processes evolve, we update relevant safety training modules, which may include new employee training programs. In response to the COVID-19 pandemic, our priority has been, and continues to be, protecting the health and safety of our employees, customers, patients, and communities while also safeguarding the healthcare supply chain. The various responses we put in place to mitigate the impact of COVID-19 on our business operations, including telecommuting and work-from-home policies, restricted travel, and enhanced safety measures, are intended to limit employee exposure to the virus that causes COVID-19 as they perform their jobs while also providing employee support programs and a sense of belonging. During 2022, we implemented COVID-19 vaccination protocols designed to be consistent with federal, state, and local laws and with customer requirements for our U.S. and Canada employees. For additional information on our response to COVID-19 in the workplace, refer to the COVID-19 section of “Trends and Uncertainties” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II included in this Annual Report.
Government Regulation
McKesson, generally and in many of the highly regulated industries in which it operates, is subject to oversight by various federal, state, and local governmental entities in the U.S. and elsewhere. The Company incurs significant expense and makes large investments to enable it to comply with regulations and guidance promulgated by those governmental entities. A failure, or alleged failure, by the Company to comply with statutes, regulations, or other laws could have a material adverse impact to the Company’s business operations, reputation, results of operations, and financial and competitive position.
Controlled Substances: We are subject to the operating and security standards of the U.S. Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”), HHS, the Centers for Medicare & Medicaid Services (“CMS”), various state boards of pharmacy, state health departments, and comparable agencies in the U.S. and other countries. We maintain extensive controlled substance monitoring and reporting programs at considerable expense in order to help us meet those standards. We have incurred monetary penalties and licensing sanctions pursuant to these requirements and future allegations of noncompliance could result in our inability to obtain, maintain, or renew permits, licenses, or other regulatory approvals needed for the operation of our businesses.
Additionally, the Company is a defendant in many litigation matters alleging claims related to its distribution of controlled substances (opioids), including claims about regulatory compliance. On February 25, 2022, the Company and two other U.S. pharmaceutical distribution companies (collectively, "Distributors") determined that there is sufficient State and subdivision participation to proceed with an agreement to settle a substantial majority of opioids-related lawsuits filed against the Distributors by U.S. states, territories, and local governmental entities. The Company incurs and expects to continue to incur significant expense in order to resolve those and other opioids-related matters. As part of that resolution, the Company will bear a portion of the expense to establish and maintain a clearinghouse for data related to distribution of controlled substance. For more information about those litigation matters, refer to Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements in this Annual Report.
Government Contracts: Our contracts with government entities typically are subject to procurement laws that include socio-economic, employment practices, environmental protection, recordkeeping and accounting, and other requirements. These statutory and regulatory requirements complicate our business and increase our compliance burden. We are subject to audits, investigations and oversight proceedings about our compliance with contractual and legal requirements. If we fail to comply with these requirements, or we fail an audit, we may be subject to sanctions such as monetary damages, criminal and civil penalties, termination of contracts and suspension or debarment from government contract work.
Federal, state and local governmental entities in the U.S. and elsewhere continue to strengthen their position and scrutiny of practices that may indicate fraud, waste, and abuse affecting government healthcare programs such as Medicare and Medicaid. Our relationships with pharmaceutical and medical surgical product manufacturers, healthcare providers, and other companies and individuals, as well as our provision of products and services to government entities, subject our business to statutes, regulations, and government guidance that are intended to prevent fraud and abuse. Many of these laws are vague or indefinite and have not been interpreted by the courts and, as such, 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 at added expense. Failure to comply with these laws, including the federal Anti-Kickback Statute, could subject us to federal or state government investigations or qui tam actions, and to liability for damages and civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid and other federal and state healthcare programs, or pursue government contracts.
Healthcare Regulation: In the U.S., the Patient Protection and Affordable Care Act (“ACA”) significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both governmental and private payers. There are also further efforts to broaden healthcare coverage. U.S. lawmakers also have explored proposals to reduce drug prices, including requiring greater price transparency, authorizing the federal government to negotiate prices for some drugs covered under the Medicare program, and drug importation measures. Provincial governments in Canada that provide partial funding for the purchase of pharmaceuticals and independently regulate the sale and reimbursement of drugs have sought to reduce the costs of publicly funded health programs. For example, provincial governments have taken steps to reduce consumer prices for generic pharmaceuticals and, in some provinces, change professional allowances paid to pharmacists by generic manufacturers. Many European governments provide or subsidize healthcare to consumers and patients by regulating pharmaceutical prices, patient eligibility, or reimbursement levels to control government healthcare system costs. European governments are continuously reviewing measures to support the reduction of public healthcare spending. Such measures can exert pressure on pricing frameworks and reimbursement timelines for pharmaceuticals, which in turn may impact customer behavior. There is substantial uncertainty about the likelihood and timing of any healthcare policy reform as each E.U. country operates in a separate healthcare environment.
In December 2020, the CMS issued a final rule pertaining to “Best Price” reporting requirements under the Medicaid Drug Rebate Program. Among other things, that rule may impact drug pricing and solutions to help patients afford their medications. This rule is subject to ongoing litigation. Unless the legal challenge to the rule is successful, the rule will likely become effective on January 1, 2023. There is substantial uncertainly about the likelihood, timing, and ultimate resolutions of these lawsuits.
Additionally, there have been increasing efforts by governments to regulate the pharmaceutical drug supply chain in order to prevent the introduction of counterfeit, stolen, contaminated, or otherwise harmful drugs into the pharmaceutical distribution system, otherwise known as pedigree tracking. For example, the U.S. Drug Quality and Security Act of 2013 (“DQSA”) requires us to participate in a federal prescription drug track and trace system that preempts state drug pedigree requirements, and the U.S. Food and Drug Administration Amendments Act of 2007 requires the FDA to establish standards and identify and validate effective technologies, such as track and trace or authentication technologies, to secure the pharmaceutical supply chain against counterfeit drugs. We also have record-keeping and other obligations under the E.U. Falsified Medicines Directive. Pedigree tracking laws such as these increase our compliance burden and our pharmaceutical distribution costs.
Data Security and Privacy: We are subject to a variety of privacy and data protection laws that change frequently and have requirements that vary from jurisdiction to jurisdiction. For example, under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) we must maintain administrative, physical, and technological safeguards to protect individually identifiable health information (“protected health information”) and ensure the confidentiality, integrity, and availability of electronic protected health information. We are subject to significant compliance obligations under privacy laws such as the General Data Protection Regulation (“GDPR”) in the European Union, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) in Canada, and an expanding list of comprehensive state privacy laws in the United States, including the California Consumer Protection Act (“CCPA”). Some privacy laws prohibit the transfer of personal information to certain other jurisdictions or otherwise limit our use of data. Many of these laws also require us to provide access or other data rights (modification, deletion, portability, etc.) to consumers’ and patients’ individual personal data records within specified periods of time. Laws such as the federal Cyber Incident Reporting for Critical Infrastructure Act of 2022 may require us to provide notifications of significant data privacy breaches or cybersecurity incidents before our investigations are complete. We are subject to privacy and data protection compliance audits or investigations by various government agencies. Failure to comply with these laws subjects us to potential regulatory enforcement activity, fines, private litigation including class actions, reputational impacts, and other costs. We also have contractual obligations that might be breached if we fail to comply with privacy and data security laws. Our efforts to comply with privacy and data security laws complicate our operations and add to our costs.
Environmental Regulation: We are subject to many environmental and hazardous materials regulations, including those relating to radiation-emitting equipment operated at U.S. Oncology Network practices. Additionally, 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, as discussed in more detail below. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental laws. We are committed to maintaining compliance with all environmental laws applicable to our operations, products, and services and to reducing our environmental impact across all aspects of our business. We meet this commitment through an environmental strategy and sustainability program.
We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report.
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 not material to our operations or financial position. 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, regulations, or government guidance in the future.
Climate Change Regulation: Governments in the U.S. and abroad are considering new or expanded laws to address climate change. Such laws may include limitations on greenhouse gas (“GHG”) emissions, mandates that companies implement processes to monitor and disclose climate-related matters, additional taxes or offset charges on specified energy sources, and other requirements. Compliance with climate-related laws may be further complicated by disparate regulatory approaches in various jurisdictions. New or expanded climate-related laws could impose costs on us, including capital expenditures to develop data gathering and reporting systems. Until the timing and extent of climate-related laws are clarified, we cannot predict their potential effect on our capital expenditures or our results of operations.
Other Information about the Business
Customers: During 2016,2022, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 52.4%52% of our total consolidated revenues. Sales to our largest customer, CVS Health Corporation (“CVS”), accounted for approximately 20.3%21% of our total consolidated revenues. At March 31, 2016, trade accounts receivable fromrevenues in 2022. In May 2019, we extended our pharmaceutical distribution relationship with CVS to June 2023. Our ten largest customers werecomprised approximately 32%43%, and CVS was approximately 28%, of total trade accounts receivable. Accounts receivable from CVS were approximately 18% of total trade accounts receivable.at March 31, 2022. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. The accounts receivablesreceivable balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. Substantially all of these revenues and accounts receivable are included in our Distribution SolutionsU.S. Pharmaceutical segment.
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than 6%our largest supplier at 9% of our purchases in 2016.2022. 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.generally sound. The ten largest suppliers in 20162022 accounted for approximately 44%55% of our purchases.
A significant portionSome of our distribution arrangements with the manufacturers providesprovide 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 materialan adverse impact on our gross profit margin.
Research and Development: Research and development costsexpenses were $392$70 million, $392$74 million, and $457$96 million during 2016, 20152022, 2021, and 2014. These costs do not include $30 million, $34 million and $40 million of costs capitalized for software held for sale during 2016, 2015 and 2014. 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.2020, respectively.
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 24, “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 2016 and is not expected to be material in the next year.
Employees: On March 31, 2016, we employed approximately 68,000 full-time equivalent employees.
Financial Information About Foreign and Domestic Operations: Certain financial information relating to foreign and domestic operations is includeddiscussed in Financial Note 27,21, “Segments of Business,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.as well as in “Foreign Operations” in Item 7 of Part II of this Annual Report. See “Risk Factors” in Item 1A of Part I Item 1A below for information regarding risks associated with our foreign operations.
Forward-Looking Statements
This Annual Report, on Form 10-K, including “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(“Securities Act”) 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”“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 risksFactors” 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 theseany forward-looking statements to reflect events or circumstances after the date hereof,the statements are made, or to reflect the occurrence of unanticipated events.
Item 1A. Risk Factors
The discussion below identifies certain representative risks described below could have a material adverse impact onthat might cause our financial position,actual business results of operations, liquidity and cash flows. Although itto materially differ from our estimates. It is not possiblepractical to predictidentify or identifydescribe all such risks and uncertainties they may include, but are not limited to, the factors discussed below.that might materially impact our business operations, reputation, financial position, or results of operations. Our business operations could also be materially affected by additional factorsrisks that arewe have not presently known to usyet identified or that we currently consider not to be material. The reader shouldimmaterial. This is not consider this list to be a complete statement of all potential risks and uncertainties.
Litigation and Regulatory Risks
We experience costly and disruptive legal disputes.
We are routinely named as a defendant in litigation or regulatory proceedings and other legal disputes, which may include asserted class action litigation, such as those described in Financial Note 18, “Commitments and Contingent Liabilities,” to the United Statesconsolidated financial statements in this Annual Report. Regulatory proceedings involve allegations such as false claims, healthcare industryfraud and regulatory environment couldabuse, and antitrust violations. Civil litigation proceedings involve commercial, employment, environmental, intellectual property, tort, and other claims. Despite valid defenses that we assert, legal disputes are often costly, time-consuming, distracting to management and disruptive to normal business operations. The uncertainty and expense associated with unresolved legal disputes might harm our business and reputation even if the matter ultimately is favorably resolved. The outcome of legal disputes is difficult to predict. Outcomes can occur that are not justified by the evidence or existing law. Outcomes include monetary damages, penalties and fines, and injunctive or other relief that requires us to change our business operations and incur significant expense. Accordingly, legal disputes might have a materialmaterially adverse impact on our reputation, our business operations, and our financial position or results of operations.
We might experience losses not covered by insurance or indemnification.
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 and the provision of products that assist clinical decision-making and relate to patient medical histories and treatment plans. For example, pharmacy operations are exposed to risks such as improper filling of prescriptions, mislabeling of prescriptions, inadequacy of warnings, unintentional distribution of counterfeit drugs, and expiration of drugs. Although we seek to maintain adequate insurance coverage, such as property insurance for inventory and professional and general liability insurance, coverages on acceptable terms might be unavailable, or coverages might not cover our losses. We generally seek to limit our contractual exposure, but limitations of liability or indemnity provisions in our contracts may not be enforceable or adequately protect us from liability. Uninsured losses might have a materially adverse impact on our business operations and our financial position or results of operations.
We experience costly legal disputes, government actions, and adverse publicity regarding our role in distributing controlled substances such as opioids.
The Company is a defendant in many litigation matters alleging claims related to the distribution of controlled substances (opioids), as described in Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements in this Annual Report. We regularly are named as a defendant in similar, new cases. The plaintiffs in those cases include governmental entities (such as states, provinces, counties, and municipalities) as well as businesses, groups and individuals. The cases allege violations of controlled substance laws and other laws, and they make common law claims such as negligence and public nuisance. Many of these cases raise novel theories of liability. Any proceedings can have unexpected outcomes that are not justified by evidence or existing law. Legal proceedings such as these often involve significant expense, management time and distraction, and risk of loss that can be difficult to predict or quantify. It is not uncommon for claims to be resolved over many years. Outcomes include monetary damages, penalties and fines, and injunctive or other relief that requires us to change our productsbusiness operations and servicesincur significant expense. Although the Company has valid defenses and is vigorously defending itself, some proceedings have been and others may be resolved by negotiated outcome. Not all proceedings, however, are intended to function within the structure of the healthcare financingresolved by settlement. Our reputation has been 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 enhance efficiencies, reduce costs and improve patient outcomes. These changes have included cuts in Medicare and Medicaid reimbursement levels, changes in the basis for payments, shifting away from fee-for-service and towards value-based payments and risk-sharing models, 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 tomay continue to changebe impacted by publicity regarding the litigation and related allegations. The adverse outcome of legal proceedings might have a materially adverse impact on our business operations and our financial position or results of operations.
We might experience increased costs to distribute controlled substances such as opioids.
Legislative, regulatory, or industry measures related to the distribution of controlled substances such as prescription opioids could affect our business in ways that we may not be able to predict. For example, some states have passed legislation that could require us to pay taxes or assessments on the distribution of opioid medications in those states and other states have considered similar legislation. Liabilities for healthcare delivery models to evolve in the future.
taxes or assessments or other costs of compliance under any such laws might have a materially adverse impact on our reputation, business operations, and our financial position or results of operations.
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.
The majority of our U.S. pharmaceutical distribution business agreements with manufacturersWe 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. Certain distribution business agreements we entered into with manufacturers continue to have pharmaceutical price inflation as a component of our compensation. Consequently, our results of operations could be adversely affected if the frequency or magnitude of pharmaceutical price increases declines, which we do not control. In addition, we distribute generic pharmaceuticals, which can be subject to both price deflationextensive, complex and price inflation. During 2016, our Distribution Solutions segment experienced weaker generic pharmaceutical pricing trends, which are expected to continue in 2017. Continued volatility in the availability, pricing trends or reimbursement of these generic drugs, or significant fluctuations in the nature, frequencychallenging healthcare and magnitude of generic pharmaceutical launches, could have a material adverse impact on our results of operations. Additionally, any future changes in branded and generics drug pricing could be significantly different than our projections.other laws.
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 healthcareOur industry is highly regulated, and further regulation of our distribution businesses and technology 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. For example, we are subject to many environmental and hazardous materials regulations, including those relating to radiation-emitting equipment operated at U.S. Oncology Network practices. Additionally, we are subject to various routine agency and ad hoc inspections by government agencies to determine compliance with various statutes and regulations. Any noncompliance by us with applicable laws or the failure to maintain, renew or obtain necessary permits and licenses could lead to enforcement actions or litigation and might have a materially adverse impact on our business operations and our financial position or results of operations.
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,
Federal, state, and federal governmentslocal governmental entities in the U.S. and elsewhere continue to strengthen their position and scrutiny over practices involvingthat may indicate fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare programs.programs such as Medicare and Medicaid. Our relationships with companies and individuals including pharmaceutical and medical-surgicalmedical surgical product manufacturers and healthcare providers, as well as our provision of products and services to government entities, subject our business to lawsstatutes, regulations, or government guidance that are intended to prevent fraud, waste, and regulations on fraud and abuse, which amongabuse. Among other things:things, those laws: (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 ofmany 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,these laws, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. The regulationscourts, regulators, or enforcing agencies. Those laws 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 failoperations at added expense. Failures to comply with applicablethose laws exposes us to federal or state government investigations or qui tam actions, and regulations, we could become liableto liability for damages and suffer civil and criminal penalties, includingpenalties. Such failures might result in the loss of licenses or our ability to participate in Medicare, Medicaid andor 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, subject to rulemaking, the federal upper limits (“FUL”) for Medicaid reimbursement for multiple source generic drugs available for purchase by retail community pharmacies on a nationwide basis. On January 21, 2016, the Centers for Medicare and Medicaid Services (“CMS”) released the Covered Outpatient Drugs final rule with comment. The final rule, with limited exceptions, establishes the FUL to be 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. States had until May 2016 to implement the FULs. Additionally, the final rule established actual acquisition cost as the basis by which states should determine their ingredient cost reimbursement, addressed the sufficiency of dispensing fees to reflect the cost of the pharmacist’s professional services and cost to dispense drugs to Medicaid beneficiaries, and clarified that states are required to evaluate the sufficiency of both ingredient cost and professional dispensing fee when proposing changes to either component. Use of the revised AMP-based FUL may 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 These sanctions might have a materialmaterially adverse impact on our business operations and our financial position or results of operations.
Operating, SecurityWe might lose our ability to purchase, compound, store or distribute pharmaceuticals and Licensure Standards: controlled substances.
We are subject to the operating and security standards of the Drug Enforcement Administration (“DEA”),DEA, the U.S. Food and Drug Administration (“FDA”),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, distribution, and disposal of controlled substances.
As part of Noncompliance with these operating, security and licensure standards, we regularly receive requests for information and occasionally subpoenas from government authorities. In some instances, these can lead torequirements results in monetary penalties and/or license revocation. In March 2015,licensing sanctions. If we reached an agreement in principle with the DEA and Department of Justice pursuantare not able 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 toobtain, maintain, or renew existing permits, licenses or any other regulatory approvals or obtain without significant delay future permits, licenses, or other regulatory 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 andbusinesses, it might have a materialmaterially adverse impact on our business operations and our financial position or results of operations.
Privacy and data protection laws increase our compliance burden.
Pedigree Tracking: ThereWe are subject to a variety of privacy and data protection laws that change frequently and have been increasing efforts by Congressrequirements that vary from jurisdiction to jurisdiction. For example, under HIPAA we must maintain administrative, physical, and statetechnological safeguards for protected health information and federal agencies, including state boardsensure the confidentiality, integrity, and availability of pharmacy and departments ofelectronic protected health and the FDA,information. We are subject 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. The DSQA also establishes new requirements for drug wholesale distributors and third party logistics providers, including licensing requirements in states that had not previously licensed such entities.
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,significant compliance obligations under privacy laws such as radio frequency identification devicesthe GDPR in the E.U., the PIPEDA in Canada, and other similar technologies. On March 26, 2010,an expanding list of comprehensive state privacy laws in the FDA releasedUnited States, including the Serialized Numerical Identifier (“SNI”) guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulationsCCPA in our distribution operations. The DQSA and other pedigree trackingCalifornia. Some privacy laws and regulations could increaseprohibit 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 confidentialitytransfer of personal information how that information may be used, and the circumstances under which such information may be released. These regulations govern the disclosure andto certain other jurisdictions or otherwise limit our use of confidentialdata. Many of these laws also require us to provide access or other data rights (modification, deletion, portability, etc.) to consumers’ and patients’ individual personal and patient medical record information anddata records within specified periods of time. Laws such as the federal Cyber Incident Reporting for Critical Infrastructure Act of 2022 may require the usersus to provide notifications of such informationsignificant data privacy breaches or cybersecurity incidents before our investigations are complete. We are subject 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 systemsprotection compliance audits or investigations by various government agencies. Failure to comply with the current requirements of applicable state, federal and foreignthese 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 requiresubjects us to incur significant additional costs to re-design our products or services 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 privacypotential regulatory enforcement activity, fines, private litigation including class actions, reputational impacts, 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, media attention and harm to our customer relationships and reputation.
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 or require further rulemaking action or regulatory guidance by governmental agencies to implement and/or finalize (e.g. nondiscrimination in health programs and activities, excise tax on high-cost employer-sponsored health coverage). 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 information technology products 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 information technology (“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. Further, the 21st Century Cures bill that passed the U.S. House of Representatives last year contained language focused on promoting greater interoperability of health IT. Specifically the bill creates penalties for so-called “information blocking” by IT vendors or providers. The bill also carves most health IT products out of the FDA’s jurisdiction, but includes a clawback provision that would enable FDA to regulate products on a case-by-case basis if it determined they pose a risk to patient safety. Finally, the bill included additional funding for the National Institutes of Health, and the FDA. The Senate is currently considering similar legislation with final passage possible this year.
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.costs. 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 systemshave contractual obligations that regulates certain software that electronically stores, transfers or displays data originating from medical devices as Class 1 medical devices themselves (i.e., those devices deemed by the FDA tomight be low risk and subject to the least regulatory controls). 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. Ifbreached if we fail to comply with the applicable requirements, the FDA could respond by imposing fines, injunctionsprivacy and data security laws. Our efforts to comply with privacy laws complicates our operations and adds to our costs. A significant privacy breach or civil penalties, requiring recalls or product corrections, suspending production, refusingfailure to grant pre-market clearance of products, withdrawing clearancescomply with privacy 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. The 21st Century Cures bill would also change the way health IT would be regulated by the FDA. The bill also carves most health IT products out of the FDA’s jurisdiction, but includes a clawback provision that would enable FDA to regulate products on a case-by-case basis if it determined they pose a risk to patient safety. The Senate is currently considering similar legislation with final passage probable this year.
Standards for Submission of Healthcare Claims: HHS previously adopted two rules that impact healthcare claims submitted for reimbursement. The first rule modified 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 Diseases, Tenth Revision (“ICD-10”). The compliance date for ICD-10 conversion was 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 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 as the healthcare industry moves towards compliance with these 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 these 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 thesedata security 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 couldmight have a materialmaterially adverse impact on our results of operations.
Our foreignreputation, business operations, subject us to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial position andor results of operations.
Anti-bribery and anti-corruption laws increase our compliance burden.
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 AG (“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 foreignother 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. FailureOur failure to comply with these laws couldmight subject us to civil and criminal penalties that couldmight have a materialmaterially 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 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. Provincial governments in Canada have introduced significant changes in recent years in an effort to reduce the costs of publicly funded health programs. For instance, to reduce the cost for taxpayers, provincial governments have taken 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, changes to the allowable amounts 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 these 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. 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.
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.
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 1995 European Union (“EU”) Directive on Data Protection (“1995 Data Protection Directive”), which requires EU 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 member state 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, certain member states have adopted more stringent data protection standards. The Company had addressed these requirements by certification to the U.S.-EU Safe Harbor Frameworks prior to such Frameworks being invalidated in October 2015 by the European Court of Justice. Although recent negotiations between the U.S. and the EU have yielded the likely successor to the Safe Harbor Framework, the EU-U.S. Privacy Shield, this new framework has not yet been approved by all of the necessary EU regulatory bodies. In the interim, we are pursuing alternative methods of compliance, but those methods may be subject to scrutiny by data protection authorities in EU member states. On December 15, 2015, the European Parliament and the Council of the European Union (Council) reached a political agreement on the future EU data protection legal framework. Subject to formal adoption by the European Parliament in the first half of 2016, the General Data Protection Regulation (“GDPR”) will replace the 1995 Data Protection Directive. Although the GDPR has not yet been finalized and minor modifications remain possible, the GDPR will have significant impacts on how businesses can collect and process the personal data of EU individuals. The GDPR is expected to become effective sometime in 2018, two years after its final adoption in 2016. 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 fluctuations in foreign currency exchange rates.
We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollar. Changes in foreign currency exchange rates could have a significant adverse impact on our financial results that are reported in the U.S. dollar. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies.
We may from time to time enter into foreign currency contracts or other derivative instruments intended to hedge a portion of our foreign currency exchange rate risks. Additionally, we may use foreign currency borrowings to hedge some of our foreign currency exchange rate risks. These hedging activities may not completely offset the adverse financial effects of unfavorable movements in foreign currency exchange rates during the time the hedges are in place.
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; and challenges 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 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 products 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 these events 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, class actions, 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.
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-consumingCompany and disruptiveOperational Risks
We might record significant charges from impairment 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 and industry consolidation may erode our profit.
Our Distribution Solutions segment faces a highly competitive global environment with strong competition from international, national, regional and local full-line, short-line and specialty distributors, service merchandisers, self-warehousing chain drug stores, 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 pharmaceuticalgoodwill, intangibles 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. In all areas, key competitive factors include price, quality of service, breadth of product lines, innovation and, in some cases, convenience to the customer.
In addition, in recent years, the healthcare industry has been subject to increasing consolidation. As a result, a small number of very large pharmaceutical suppliers could control a significant share of the market. Accordingly, we could depend on fewer suppliers for our products and therefore we may be less able to negotiate price terms with suppliers. Many of our customers, including healthcare organizations that purchase our products and services, have also consolidated to create larger enterprises with greater market power. If this consolidation trend continues among our customers, suppliers and competitors, 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. It would also increase counter-party credit risk as the number of market participants decreases. In addition, when our customers 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 companies, 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 and industry consolidation could have a material adverse impact on our results of operations.
A material reduction in purchasesassets 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 2016, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 52.4% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 20.3% of our total consolidated revenues. At March 31, 2016, trade accounts receivable from our ten largest customers were approximately 32% of total trade accounts receivable. Accounts receivable from CVS were approximately 18% of total trade accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. A material default in payment, a material reduction in purchases from these or any other large customers, or the loss of a large customer or GPO could have a material adverse impact on our financial position, results of operations and liquidity.
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 U.S. False Claims Act, the Procurement Integrity Act, the Buy American Act and the Trade Agreements Act. We must also comply with various other domestic and foreign 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 oversight proceedings. For example, government agencies routinely review and audit government contractors to determine whether contractors are complying with specific contractual or legal requirements. 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 monetary damages and criminal and civil penalties. In addition, any 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.
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 rely on sophisticated computer systems to perform our business operations. Although we and our customers use a variety of security measures to protect our and their computer systems, a failure or compromise of our or our customers’ computer systems from a cyberattack, natural disaster, or malfunction may result in material adverse operational and financial consequences.
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 routinely process, store and transmit large amounts of data in our operations, including sensitive personal information, protected health information, financial information, and confidential information relating to our business or third parties. Some of the data that we process, store and transmit may travel outside of the United States. Additionally, we outsource some important IT functions to external service providers worldwide.
Despite our implementation of a variety of security measures, our and our customers’ computer systems could be subject to cyberattacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other global companies, we and our customers have experienced threats to data and systems, including malware and ransomware attacks, unauthorized access, system failures, and disruptions.
A failure or compromise of our or our customers’ computer systems may jeopardize the confidential, proprietary, and sensitive information processed, stored, and transmitted through such computer systems. Such an event may result in significant damage to our reputation, financial losses, litigation, increased costs, regulatory penalties, customer attrition, brand impairment, or other business harm. These risks may increase in the future as we continue to expand our internet and mobile strategies and to build an integrated digital enterprise.
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 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 we maintain liability insurance, the coverage may not be adequate to protect us against future claims. If our insurance coverage proves to be inadequate or unavailable, or we suffer 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 healthcare information technology 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 evolving healthcare information technology marketplace, our technology businesses must also develop new products and services on a timely basis. The failure to develop competitive products and to introduce new products and services 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 services 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 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 services, obtain a license or cease selling or using the products or services 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 services could have a material adverse impact on our results of operations.
System errors or failures of our products or services 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 clinicians’ use of our software and technology services leads to faulty clinical decisions or injury to patients, we could be subject to claims or litigation by our customers, 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 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.investments.
We are required under U.S. generally accepted accounting principlesGenerally 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 and other long-lived 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 and other long-lived assets may not be recoverable include slower growth rates, the loss of a significant customer, burdensome new laws or divestiture of a business or asset for less than its carrying value. There are inherent uncertainties in management’s estimates, judgments and assumptions used in assessing recoverability of goodwill, intangible, and other long-lived assets. Any material changes in key assumptions, including failure to meet business plans, negative changes in government reimbursement rates, a deterioration in the U.S. and global financial markets, an increase in interest rate or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge. For example, the COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments and assumptions used in our forecasts and impairment assessments. 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 and other long-lived assets is determined. This coulddetermined, which might have a materialmaterially adverse impact on our business operations and our financial position or 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.
We experience cybersecurity incidents that might significantly compromise our technology systems or might result in material data breaches.
Tax legislation initiatives or challengesWe, our external service providers, and other third parties with which we do business use technology and systems to perform our business operations, such as the secure electronic transmission, processing, storage and hosting of sensitive information, including protected health information and other types of personal information, confidential financial information, proprietary information, and other sensitive information relating to our tax positions couldcustomers, company and workforce. Despite physical, technical, and administrative security measures, technology systems and operations of the Company and third parties with which we do business are subject to cyberattacks and cybersecurity incidents. Cybersecurity incidents include unauthorized occurrences on or conducted through our information systems, such as tampering, malware insertion, ransomware attacks, or other system integrity events. The risk of cyberattacks increases from time to time due to a variety of internal and external factors, including during political conflicts or unrest. A cybersecurity incident might involve a material data breach or other material impact to the confidentiality, integrity, availability, and operations of our technology systems or data, which might result in injury to patients or consumers, litigation or regulatory action, disruption of our business operations, loss of customers or revenue, and increased expense, any of which might have a materialmaterially adverse impact on our business, reputation, and our financial position or results of operations.
We are a large multinational corporationmight experience significant problems with information systems or networks.
We rely on sophisticated information systems and networks to perform our business operations, insuch as to obtain, rapidly process, analyze, and manage data that facilitate the United Statespurchase and international jurisdictions. As such, we are subject to the tax laws and regulationsdistribution of the United States federal, state and local governments 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) methodthousands 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 incomeitems 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 lawsdistribution centers. We provide remote services that involve hosting customer data 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 that 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 impactoperating software on our financial position and results of operations.
In addition, as jurisdictions enact legislation to implement the recommendations of the recently concluded base erosion and profit shifting project undertaken by the Organization for Economic Cooperation and Developmentown or as a result of the European Commission’s investigations into illegal state aid, changes to long-standing tax principles may result which could adversely impact our tax expense.
Volatility and disruption to the global capital and credit markets may adversely affect ourthird-party systems. Our customers rely on their ability to access credit,and use these the systems and their data as needed. The networks and hosting systems are vulnerable to interruption or damage from sources beyond our costcontrol, such as power loss, telecommunications failures, fire, natural disasters, software and hardware failures and cybersecurity incidents. If those information systems or networks suffer errors, interruptions, or become unavailable, or if the timely delivery of credit and the financial soundnessmedical care or other customer business requirements are impaired by data access, network, or systems problems, we might experience injury to patients or consumers, litigation or regulatory action, disruption of our business operations, loss of 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 liquidityrevenue, 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.expense. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms, maysuch problems might have a materialmaterially adverse impact on our business, reputation, and our financial position or results of operations and cash flow.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our financial statements.operations.
Our financial statementsproducts or services might not conform to specifications or perform as we intend.
We sell and provide services involving complex software and technology that may contain errors, especially when first introduced to market. Healthcare professionals delivering patient care tend to have heightened sensitivity to system and software errors. If our software and technology services are alleged to have contributed to faulty clinical decisions or injury to patients, we might be subject to the applicationclaims or litigation by users of U.S. GAAP, which is periodically revised and/our software or expanded. From timeservices or their patients. Errors or failures might damage our reputation and negatively affect future sales. A failure of a system or software to time, we are requiredconform to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possiblespecifications might constitute a breach of warranty that future accounting standards we are required to adopt, such as the amended guidance for revenue recognition, leases, and share based payments, may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our systems. Such changes could result in repair costs, contract termination, refunds of amounts previously paid, or claims for damages. Any of these types of errors or failures might have a materialmaterially adverse impact on our reputation, business operations, and our financial position andor results of operations.
We could face significant liability if we withdraw from participation in one or more multiemployer pension plans in which we participate, or if 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.
We maymight not realize the expected benefits from our restructuring and business process initiatives.
On March 14, 2016, the Company committed to aWe may implement restructuring, plan to lower its operating costs (“Cost Alignment Plan”). The Cost Alignment Plan primarily consists of acost reduction in workforce andor other business process initiatives that will be substantially implemented priormight result in extraordinary charges and expenses, failures to the end of 2019. Expense reduction initiatives could yieldachieve our desired objectives, or unintended consequences such as distraction of our management and employees, business disruption, attrition beyond any planned reduction in workforce, inability to attract or retain key personnel and reduced employee productivityproductivity. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be unable to successfully complete or integrate acquisitions or other business combinations.
Our growth strategy includes consummating acquisitions or other business combinations that either expand or complement our business. To fund acquisitions, we may require financing that may not be available on acceptable terms. We may not receive regulatory approvals needed to complete proposed transactions, or such approvals may be subject to delays or conditions that reduce transaction benefits. Achieving the desired outcomes of business combinations involves significant risks including: diverting management’s attention from other business operations; challenges with assimilating the acquired businesses, such as integration of operations and systems; failure or delay in realizing operating synergies; difficulty retaining key acquired company personnel; unanticipated accounting or financial systems issues with the acquired business, which might affect our internal controls over financial reporting; unanticipated compliance issues in the acquired business; challenges retaining customers of the acquired business; unanticipated expenses or charges to earnings, including depreciation and amortization or potential impairment charges; and risks of known and unknown assumed liabilities in the acquired business. Any of these risks could adversely affect our ability to achieve the anticipated benefits of an acquisition and might have a materially adverse impact on our business operations and our financial position or results of operations.
Exclusive forum provisions in our Bylaws could limit our stockholders’ ability to choose their preferred judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide that, unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for specified legal actions is the Court of Chancery of the State of Delaware or the United States District Court for the District of Delaware if the Court of Chancery does not have or declines to accept jurisdiction (collectively, “Delaware Courts”). Current and former stockholders are deemed to have consented to the personal jurisdiction of the Delaware Courts in connection with any action to enforce that exclusive forum provision and to service of process in any such action. These provisions of the bylaws are not a waiver of, and do not relieve anyone of duties to comply with, federal securities laws including those specifying the exclusive jurisdiction of federal courts under the Exchange Act and concurrent jurisdiction of federal and state courts under the Securities Act. To the extent that these provisions of the bylaws limit a current or former stockholder’s ability to select a judicial forum other than the Delaware Courts, they might discourage the specified legal actions, might cause current or former stockholders to incur additional litigation-related expenses and might result in outcomes unfavorable to current or former stockholders. A court might determine that these provisions of the bylaws are inapplicable or unenforceable in any particular action, in which case we may incur additional litigation related expenses in such action, and the action may result in outcomes unfavorable to us, which could negativelyhave a materially adverse impact on our reputation, our business operations, and our financial position or results of operations.
We might be adversely impacted by delays or other difficulties with divestitures.
In July 2021, we announced our intention to exit our businesses in Europe. Refer to Financial Note 2, “Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report for information on our European divestiture activities. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or exit strategies on acceptable terms or in a timely manner, which could delay the achievement of our strategic objectives. After the disposition, we might experience greater dissynergies than expected, and the impact of the divestiture on our revenue or profit might be larger than we expected. We might have difficulties with pre-closing conditions such as regulatory and governmental approvals, which could delay or prevent the divestiture. We might have financial exposure in a divested business, such as through minority equity ownership, financial or performance guarantees, indemnities or other obligations, such that conditions outside of our control might negate the expected benefits of the disposition. Any of these risks could adversely affect our ability to achieve the anticipated benefits of a divestiture and might have a materially adverse impact on our business sales,operations and our financial condition andposition or results of operations. Moreover,
We might not realize the expected tax treatment from our restructuringsplit-off of Change Healthcare.
On March 10, 2020, the Company completed a separation of its interest in Change Healthcare LLC (“Change Healthcare JV”). The divestiture was effected through the split-off of PF2 SpinCo, Inc. (“SpinCo”), a wholly owned subsidiary of the Company that held all of the Company’s interest in the Change Healthcare JV, to certain of the Company’s stockholders through an exchange offer (the “Exchange Offer”), followed by a merger of SpinCo with and business process initiatives result in chargesinto Change Healthcare Inc. (“Change”), with Change surviving the merger (the “Merger” and, expenses that impact our operating results. We cannot guaranteetogether with the Exchange Offer, the “Transactions”). The Company received an opinion from outside legal counsel to the effect that the activities underTransactions qualified as generally tax-free transactions to the Company and its shareholders for U.S. federal income tax purposes. An opinion of legal counsel is not binding on the Internal Revenue Service (the “IRS”) or the courts, and the IRS or the courts may not agree with the intended tax-free treatment of the Transactions. In addition, the opinion could not be relied upon if certain assumptions, representations, and undertakings upon which the opinion was based are materially inaccurate or incomplete, or are violated in any restructuringmaterial respect. If the intended tax-free treatment of the Transactions is not sustained, the Company and business initiative will resultits stockholders who participated in the desired efficienciesTransactions may be required to pay substantial U.S. federal income taxes. In connection with the Transactions, the Company, SpinCo, Change, and estimated cost savings.the Change Healthcare JV entered into the Tax Matters Agreement, which governs their respective rights, responsibilities, and obligations with respect to tax liabilities and benefits, tax attributes, tax contests, and other tax sharing regarding U.S. federal, state, and local, and non-U.S. taxes, other tax matters, and related tax returns. Under the Tax Matters Agreement, Change is required to indemnify the Company if the Transactions become taxable as a result of certain actions by Change or SpinCo, or as a result of certain changes in ownership of the stock of Change after the Merger. If Change does not honor its obligations to indemnify the Company, or if the Transactions fail to qualify for the intended tax-free treatment for reasons not related to a disqualifying action by Change or SpinCo, the resulting tax to the Company could have a significant adverse effect on our financial position or results of operations.
We may experience difficulties with outsourcing and similar third party relationships.
Our ability to conduct our business might be negativelyadversely impacted if we experience difficulties withby outsourcing and managingor similar third-party relationships.
We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. If we fail tobusiness and administrative functions for us. We might not adequately develop, implement and monitor our outsourcing strategies, such strategies prove to be ineffective or fail to providethese outsourced service providers, and we might not realize expected cost savings or our third partyother benefits. Third-party services providers might fail to perform as anticipated, or we might experience unanticipated operational difficulties, compliance requirements or increased costs related to outsourced services. For example, our ability to use outsourcing resources in certain jurisdictions might be limited by legislative action or customer contracts, with the result that the work must be performed at greater expense or we may experience operational difficultiesbe subject to sanctions for non-compliance. Any of these risks might have a materially adverse impact on our business operations and increased costs may adversely affect theour financial position or results of our operations.
We may face risks associatedbe unsuccessful in achieving our strategic growth objectives.
Our business strategy to become a diversified healthcare services company includes investing to build an integrated oncology service business and expand our biopharma services business. Our ability to grow those businesses will depend on our: hiring and retaining talented individuals with necessary knowledge and skills; acquiring, developing, and implementing new technologies and capabilities; forming and expanding business relationships; and successfully competing against providers of similar services. Some competitors have more experience than we do in enabling technologies such as data analytics. We may not achieve our desired return on our investments through our growth strategies. If we fail to achieve acceptable sales and profitability in our strategic growth areas, it might have a materially adverse impact on our business prospects and our financial position or results of operations.
Our business strategy included expanding our retail expansion.
In recent years, we have expanded ourpharmacy operations. Our retail pharmacy operations through a number of acquisitions. As we expand our retail footprint, we may faceinvolve numerous risks, that are different from those we currently encounter. Our expansion into additional retail markets, such as those in Europe and Canada, could result in increased competitive, merchandising and distribution challenges.the following ones. We maymight encounter difficulties in attracting and retaining customers to our retail locations due to a lack of customer familiaritytheir unfamiliarity with our brands andor our lack of familiarityinexperience with local customer preferences and seasonal differencesmarket preferences. Competition from our retail pharmacy operations might strain relationships with our retail pharmacy customers. Consolidation of retail pharmacies with third-party payers, expansion of large retail pharmacy networks, reductions in reimbursement rates, shifts in the market. Our ability to expand successfully will depend on acceptancemix of branded and generic pharmaceutical sales, and exclusion from preferred pharmacy networks can impair our retail store experience by customers, including our abilitypharmacy sales and profitability. Failure to design our stores in a manner that resonates locally and to offer the correct product assortment to appeal to consumers. Furthermore, our continued growth in the retail sector may strain relations with certain of our distribution customers who also compete in themaintain profitable retail pharmacy sector. There can be no assurance thatoperations may result in significant costs, including those associated with site closures and reductions in workforce. We incur long-lived asset impairments related to our retail locations will be received as well as, or achieve net sales or profitability levels consistent with, our projected targets or be comparable to those of our existing stores in the time periods estimated by us, or at all.pharmacy networks. If our retail expansion failspharmacy operations fail to achieve, or are unable to sustain, acceptable net sales and profitability levels, it might have a materially adverse impact on our business results of operations and growth prospects may be materially adversely affected.
Our retail stores may require additional management time and attention. Failure to properly supervise the operation and maintain the consistency of the customer experience in those retail stores could result in loss of customers and potentially adversely affect our financial position or results of operations.
We might be harmed by large customer purchase reductions, payment defaults or contract non-renewal.
We derive a significant portion of our revenue from, and have a significant portion of our accounts receivable with, a small number of customers. At March 31, 2022, sales to our largest customer represented approximately 21% of our consolidated revenues and approximately 28% of our trade receivables, and those of our ten largest customers combined accounted for approximately 52% of our consolidated revenues and approximately 43% of our trade receivables. A material default in payment, reduction in purchases, or the loss of business from a large customer might have a materially adverse impact on our business operations and our financial position or results of operations.
Our contracts with government entities involve future funding and compliance risks.
Our contracts with government entities are subject to risks such as lack of funding and compliance with unique requirements. For example, government contract purchase obligations are typically subject to the availability of funding, which may be eliminated or reduced. In addition, the future volume of products or services purchased by a government customer is often uncertain. Our government contracts might not be renewed or might be terminated for convenience with little prior notice. Government contracts typically expose us to higher potential liability than do other types of contracts. In addition, government contracts typically are subject to procurement laws that include socio-economic, employment practices, environmental protection, recordkeeping and accounting and other requirements. For example, our contracts with the U.S. government generally require us to comply with the Federal Acquisition Regulations, Procurement Integrity Act, Buy American Act, Trade Agreements Act, and other laws and regulations. We are subject to government audits, investigations and oversight proceedings. Government agencies routinely review and audit government contractors to determine whether they are complying with contractual and legal requirements. If we fail to comply with these requirements, or we fail an audit, we may be subject to various sanctions such as monetary damages, criminal and civil penalties, termination of contracts and suspension or debarment from government contract work. These requirements complicate our business and increase our compliance burden. The occurrence of any of these risks could harm our reputation and might have a materially adverse impact on our business operations and our financial position or results of operations.
Our participation in vaccination distribution programs may materially affect our operating results, reputation, and business.
We participate as a distributor in government-sponsored vaccination programs, such as the U.S. government’s COVID-19 distribution program (“Federal COVID-19 Response”). We also provide supplies used for vaccine administration in the Federal COVID-19 Response. Our participation in such programs exposes us to various uncertainties. For example, the novel nature and rapid mutation of the SARS-CoV‑2 virus, the changing distribution scope of COVID-19 vaccines, supply chain stability, inflation, and the effectiveness of other COVID-19 transmission mitigation measures introduce uncertainty about what volumes of vaccines and related supplies may be distributed by us, the safety and efficacy of newly developed vaccines, and the cost of distribution. Because of such uncertainties, our operating results may be subject to variability. Our participation in such programs also exposes us to various risks, including regulatory compliance, government oversight, dependence on government funding, contractual performance, litigation, security risks, and supply chain challenges. Any significant problems with our participation in such programs might have a materially adverse impact on our reputation and our business. Because of these risks and uncertainties our operating results may be materially higher or lower than our projections.
We might be harmed by changes in our relationships or contracts with suppliers.
We attempt to structure our pharmaceutical distribution agreements with manufacturers to ensure that we are appropriately and predictably compensated for the services we provide. Certain distribution agreements with manufacturers include pharmaceutical price inflation as a component of our compensation, and we cannot control the frequency or magnitude of pharmaceutical price changes. We might be unable to renew pharmaceutical distribution agreements with manufacturers in a timely and favorable manner. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
We might infringe intellectual property rights or our intellectual property protections might be inadequate.
We believe that our products and services do not infringe the proprietary rights of third parties, but third parties have asserted infringement claims against us and may do so in the future. If a court were to hold that we infringed other’s rights, we might be required to pay substantial damages, develop non-infringing products or services, obtain a license, stop selling or using the infringing products or services, or incur other sanctions. We rely on trade secret, patent, copyright, and trademark laws, nondisclosure obligations, and other contractual provisions and technical measures to protect our proprietary rights in our products and solutions. We might initiate costly and time-consuming 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. Our intellectual property protection efforts might be inadequate to protect our rights. Our competitors might develop non-infringing products or services equivalent or superior to ours. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
Our use of third-party data is subject to limitations that could impede the growth of our data services business.
We attempt to structure our diligence processes to satisfy contractual and other operative data usage rights and limitations associated with customer, partner, and other third-party data flowing through our businesses. These rights and limitations can apply to both confidential commercial data and personal data provided to us by these customers, partners, and other third parties. Failure to satisfy these data usage rights and limitations can lead to contractual breach and other legal claims or reputational impacts. If a court were to hold that we violated these contractual rights, we might be required to pay substantial damages; we may need to stop using, sharing, and/or selling certain products and services; or we could incur other financial, legal, and/or reputational consequences. In addition, in order to reach our data strategy growth objectives, we might be unable to obtain at an acceptable cost the data usage rights needed to advance such goals. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be unable to successfully recruit and retain qualified employees.
Our ability to attract, engage, develop, and retain qualified and experienced employees, including key executives and other talent, is essential for us to meet our objectives. We compete with many other businesses to attract and retain employees. Competition among potential employers results in increased salaries, benefits, or other employee-related costs, or in our failure to recruit and retain employees. We may experience sudden loss of key personnel due to a variety of causes, such as illness, and must adequately plan for succession of key management roles. Employees might not successfully transition into new roles. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
Industry and Economic Risks
We might be adversely impacted by healthcare reform such as changes in pricing and reimbursement models.
Many of our products and services are designed and intended to function within the structure of current healthcare financing and reimbursement systems. The healthcare industry and related government programs are changing. Some of these changes increase our risks and create uncertainties for our business.
For example, some changes in reimbursement methodologies (including government rates) for pharmaceuticals, medical treatments, and related services reduce profit margins for us and our customers and impose new legal requirements on healthcare providers. Those changes have included cuts in Medicare and Medicaid reimbursement levels, changes in the basis for payments, shifting away from fee-for-service and towards value-based payments and risk-sharing models, and increases in the use of managed care.
In the U.S., the ACA significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both governmental and private payers. There have been continued efforts to challenge the ACA. There are also efforts to broaden healthcare coverage. U.S. lawmakers also have explored proposals to reduce drug prices, including requiring greater price transparency, enabling Medicare to directly negotiate drug prices, and drug importation measures. These proposals might result in significant changes in the pharmaceutical value chain as manufacturers, pharmacy benefit managers, managed care organizations, and other industry stakeholders look to implement new transactional flows and adapt their business models.
Private challenges to government healthcare policy may also have significant impacts on our business. For example, over a dozen pharmaceutical manufacturers have unilaterally restricted sales under the 340B drug pricing program to contract pharmacies. The 340B drug pricing program requires manufacturers to offer discounts on certain drugs purchased by “covered entities,” which include safety-net providers. The HRSA has taken the position that a covered entity may dispense such discounted drugs through multiple contract pharmacies. Starting in 2020, some manufacturers began to restrict such practices. A number of manufacturers and the HHS continue to litigate these issues. So far, lower courts have rendered somewhat conflicting opinions.
Provincial governments in Canada that provide partial funding for the purchase of pharmaceuticals and independently regulate the sale and reimbursement of drugs have sought to reduce the costs of publicly funded health programs. For example, provincial governments have taken steps to reduce consumer prices for generic pharmaceuticals and, in some provinces, change professional allowances paid to pharmacists by generic manufacturers.
Many European governments provide or subsidize healthcare to consumers and patients by regulating pharmaceutical prices, patient eligibility, or reimbursement levels to control government healthcare system costs. European governments are continuously reviewing measures to support the reduction of public healthcare spending. Such measures can exert pressure on pricing frameworks and reimbursement timelines for pharmaceuticals, which in turn may impact customer behavior. There is substantial uncertainty about the likelihood and timing of any healthcare policy reform as each E.U. country operates in a separate healthcare environment.
Although there is substantial uncertainty about the likelihood, timing, and results of these health reform efforts, their implementation might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be adversely impacted by competition and industry consolidation.
Our businesses face a highly competitive global environment with strong competition from international, national, regional and local full-line, short-line, and specialty distributors, service merchandisers, self-warehousing chain drug stores, manufacturers engaged in direct distribution, third-party logistics companies, and large payer organizations. In addition, our businesses face competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that might otherwise be provided by our businesses. Due to consolidation, a few large suppliers control a significant share of the pharmaceuticals market. This concentration reduces our ability to negotiate favorable terms with suppliers and causes us to depend on a smaller number of suppliers. Many of our customers, including healthcare organizations, have consolidated and have greater power to negotiate favorable prices. Consolidation by our customers, suppliers and competitors might reduce the number of market participants and give the remaining enterprises greater bargaining power, which might lead to erosion in our profit margin. Consolidation might increase counter-party credit risk because credit purchases increase for fewer market participants. These competitive pressures and industry consolidation might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be adversely impacted by changes or disruptions in product supply.
Our supply arrangements might be interrupted or adversely affected by a variety of causes over which we have no control, such as export controls or trade sanctions, labor disputes, unavailability of key manufacturing sites, inability to procure raw materials, quality control concerns, ethical sourcing issues, supplier’s financial distress, natural disasters, civil unrest or acts of war, the impact of epidemics or pandemics, such as COVID-19, and other general supply constraints. Our inventory might be requisitioned, diverted, or allocated by government order such as under emergency, disaster, and civil defense declarations. The FDA banned certain manufacturers from selling raw materials and drug ingredients in the U.S. due to quality issues. For example, government actions in response to the COVID-19 pandemic affect our supply allocation, and those and our own allocation decisions can impact our customer relationships. Changes in the healthcare industry’s or our suppliers’ pricing, selling, inventory, distribution, or supply policies or practices could significantly reduce our revenues and net income. We might experience disruptions in our supply of higher margin pharmaceuticals, including generic pharmaceuticals. Any of these changes or disruptions might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be adversely impacted as a result of our distribution of generic pharmaceuticals.
Our generic pharmaceuticals distribution business is subject to pricing risks. We might be adversely impacted if our ClarusONE joint venture is unsuccessful or experiences margins declines. Generic drug manufacturers often offer a generic version of branded pharmaceuticals while they challenge the validity or enforceability branded pharmaceutical patents. The patent holder might assert infringement claims against us for distributing those generic versions and the generic drug manufactures may not fully indemnify us against such claims. These risks, as well as changes in the availability, pricing volatility, reimbursement rates for generic drugs, or significant changes in the nature, frequency or magnitude of generic pharmaceutical launches, might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be adversely impacted by inflation, an economic slowdown, or recession.
Inflationary conditions result in increased costs and decreased levels of consumer commercial spending and, to the extent we are not able to offset such cost increases from our suppliers, increase the costs which we incur to purchase inventories and services. Inflationary pressure is increased by supply chain disruptions and reduced availability of key commodities. Cost inflation during 2022 generally increased our transportation, operational, and other administrative costs associated with our normal business operations. An economic slowdown or recession could reduce the prices our customers are able or willing to pay for our products and services and reduce the volume of their purchases. Recessionary pressure may be increased by the COVID-19 pandemic and regional political and military conflicts. Any economic slowdown or recession and the impact of inflation might have a materially adverse impact on our business operations and our financial position or results of operations.
Disruption or other changes in capital and credit markets might impede access to credit and increase borrowing costs for us and our customers and suppliers and might impair the financial soundness of our customers and suppliers.
Volatility and disruption in global capital and credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by financial institutions, or decreased liquidity and increased costs in the commercial paper market, might adversely affect our borrowing ability and cost of borrowing. We generally sell our products and services under short-term unsecured credit arrangements. An adverse change in general economic conditions or access to capital might cause our customers to reduce their purchases from us, or delay or fail paying amounts owed to us. Suppliers might increase their prices, reduce their output or change their terms of sale due to limited availability of credit. Suppliers might be unable to make payments due to us for fees, returned products, or incentives. These risks are increased by the COVID-19 pandemic and regional political and military conflicts. Interest rate increases or changes in capital market conditions might impede our or our customers’ or suppliers’ ability or cost to obtain credit. Any of these risks might have a material adverse impact on our business operations and our financial position or results of operations.
We may have difficulties in sourcing or selling products due to a variety of causes.
We might experience difficulties and delays in sourcing and selling products due to a variety of causes, such as: difficulties in complying with the legal requirements for export or import of pharmaceuticals or components; suppliers’ failure to satisfy production demand; manufacturing or supply problems such as inadequate resources; and real or perceived quality issues. Difficulties in product manufacturing or access to raw materials could result in supplier production shutdowns, product shortages and other supply disruptions. The FDA banned certain manufacturers from selling raw materials and drug ingredients in the U.S. due to quality issues. The COVID-19 pandemic adversely affects the availability of some products, resulting in product allocation and delivery delays. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
We might be adversely impacted by tax legislation or challenges to our tax positions.
We are subject to the tax laws in the U.S. at the federal, state, and local government levels and to the tax laws of many other jurisdictions in which we operate or sell products or services. Tax laws might change in ways that adversely affect our tax positions, effective tax rate, and cash flow. The tax laws are extremely complex and subject to varying interpretations. We are subject to tax examinations in various jurisdictions that might assess additional tax liabilities against us. Our tax reporting positions might be challenged by relevant tax authorities, we might incur significant expense in our efforts to defend those challenges, and we might be unsuccessful in those efforts. Developments in examinations and challenges might materially change our provision for taxes in the affected periods and might differ materially from our historical tax accruals. Any of these risks might have a materially adverse impact on our business operations, our cash flows, and our financial position or results of operations.
We might be adversely impacted by fluctuations in foreign currency exchange rates.
We conduct our business in various currencies, including the U.S. dollar, euro, British pound sterling and Canadian dollar. Changes in foreign currency exchange rates could reduce our revenues, increase our costs, or otherwise adversely affect our financial results reported in U.S. dollars. For example, we are exposed to transactional currency exchange risk due to our import and export of products that are purchased or sold in currencies other than the U.S. dollar. We also have currency exchange risk due to intercompany loans denominated in various currencies. The COVID-19 pandemic and regional political and military conflict have affected and might increase currency exchange rate volatility. We may from time to time enter into foreign currency contracts, foreign currency borrowings or other techniques intended to hedge a portion of our foreign currency exchange rate risks. These hedging activities may not completely offset the adverse financial effects of unfavorable movements in foreign currency exchange rates during the time the hedges are in place. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
General Risk Factors
We might be adversely impacted by events outside of our control, such as widespread public health issues, natural disasters, political events, and other catastrophic events.
We might be adversely affected by events outside of our control, including: widespread public health issues, such as epidemic or pandemic infectious diseases; natural disasters such as earthquakes, floods, or severe weather; political events such as terrorism, military conflicts, and trade wars; and other catastrophic events. These events can disrupt operations for us, our suppliers, our vendors, and our customers. They might affect consumer confidence levels and spending or the availability of certain goods or commodities. For example, in February 2022, the Russian Federation began conducting military operations against Ukraine, resulting in global economic uncertainty and increased cost of various commodities. As another example, the COVID-19 pandemic affects product manufacturing, supply, and transport availability and cost in unpredictable ways that depend on highly uncertain future developments. In response to these types of events, we might suspend operations, implement extraordinary procedures, seek alternate sources for product supply, or suffer consequences that are unexpected and difficult to mitigate. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.
We may be unableadversely affected by global climate change or by legal, regulatory, or market responses to keep existing retail store locationssuch change.
The long-term effects of climate change are difficult to predict and may be widespread. The impacts may include physical risks (such as rising sea levels or open new retail locationsfrequency and severity of extreme weather conditions), social and human effects (such as population dislocations or harm to health and well-being), compliance costs and transition risks (such as regulatory or technology changes), and other adverse effects. The effects could impair, for example, the availability and cost of certain products, commodities, and energy (including utilities), which in desirable places, whichturn may impact our ability to procure goods or services required for the operation of our business at the quantities and levels we require. We bear losses incurred as a result of, for example, physical damage to or destruction of our facilities (such as distribution or fulfillment centers), loss or spoilage of inventory due to unusual ambient temperatures, and business interruption due to weather events that may be attributable to climate change. These events and impacts could materially adversely affect our business operations, financial position, or results of operation.
We might be adversely impacted by changes in accounting standards.
Our consolidated financial statements are subject to the application of U.S. GAAP, which periodically is revised or reinterpreted. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (“FASB”) and the SEC. It is possible that future accounting standards may require changes to the accounting treatment in our consolidated financial statements and may require us to make significant changes to our financial systems. Such changes might have a materially adverse impact on our financial position or results of operations.
We may be unable to keep existing retail locations or open new retail locations in desirable places in the future. We compete with other retailers and businesses for suitable retail locations. Local land use, local zoning issues, environmental regulations and other regulations may affect our ability to find suitable retail locations and also influence the cost of leasing or buying them. We also may have difficulty negotiating real estate leases for new stores, renewing real estate leases for existing stores or negotiating purchase agreements for new sites on acceptable terms. In addition, construction, environmental, zoning and real estate delays may negatively affect retail location openings and increase costs and capital expenditures. If we are unable to keep up our existing retail store locations or open new retail store locations in desirable places and on favorable terms, our results of operations could be materially adversely affected.Item 1B. Unresolved Staff Comments.
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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. TheRetail pharmacies and most 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 than historical levels. Information as to material lease commitments is included in Financial Note 22, “Lease Obligations,10, “Leases,” to the consolidated financial statements appearingincluded in this Annual Report.
In July 2021, we announced ourintention to exit our businesses in Europe. As of March 31, 2022, the majority of our properties in Europe are expected to be divested and are classified asAssets held for sale in the Company’s Consolidated Balance Sheet, as discussed in more detail in Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report.
During the first quarter of 2022, we approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily included the rationalization of our office space in North America. Where we ceased using office space, we exited the portion of the facility no longer used. We also retained and repurposed certain other office locations. This initiative was substantially completed in 2022. Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report on Form 10-K.for further details.
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Item 3. | Legal Proceedings. |
Item 3. Legal Proceedings.
Certain legal proceedings in which we are involved are discussed in Financial Note 24,18, “Commitments and Contingent Liabilities,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.Report. Disclosure of an environmental proceeding with a governmental agency is generally included only if we expect monetary sanctions in the proceeding to exceed $1 million, unless otherwise material.
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Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Information about our 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 term of office of each executive officers are elected on an annual basis generally and their termofficer expires at the first meeting of the Board of Directors (“Board”) following the annual meeting of stockholders,shareholders, or until their successors are elected and have qualified, or until death, resignation, or removal, whichever is sooner.
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| Name | | Age | | Position with Registrant and Business Experience |
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NameBrian S. Tyler | | Age55 | | Position with Registrant and Business Experience |
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John H. Hammergren | | 57 | | Chairman of the Board since July 2002; President and Chief Executive Officer since April 2001; and a director since July 1999.April 2019; President and Chief Operating Officer from August 2018 to March 2019; Chairman of the Management Board of McKesson Europe AG from 2017 to 2018; President and Chief Operating Officer, McKesson Europe from 2016 to 2017; President of North America Distribution and Services from 2015 to 2016; and Executive Vice President, Corporate Strategy and Business Development from 2012 to 2015. Service with the Company — 20- 25 years. |
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James A. BeerBritt J. Vitalone | | 5553 | | Executive Vice President and Chief Financial Officer since October 2013; Executive Vice President and Chief Financial Officer, Symantec Corporation from 2006 to October 2013;January 2018; Senior Vice President and Chief Financial Officer, AMR CorporationU.S. Pharmaceutical from July 2014 to December 2017; Senior Vice President and its principal subsidiary, American Airlines, Inc.,Chief Financial Officer, U.S. Pharmaceutical and Specialty Health from 2004October 2017 to 2006,December 2017; Senior Vice President of Corporate Finance and M&A Finance from March 2012 to June 2014. Service with the Company — 2- 16 years. |
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Patrick J. BlakeTracy L. Faber | | 52 | | Executive Vice President and Group PresidentChief Human Resources Officer since June 2009;October 2019. Previously, Senior Vice President of McKesson Specialty Care Solutions (now McKesson Specialty Health) from April 2006 to June 2009.Human Resources. Service with the Company — 20- 11 years. |
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Jorge L. FigueredoNancy Flores | | 55 | | Executive Vice President, Human Resources since May 2008; Service with the Company — 8 years. |
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Paul C. Julian | | 60 | | Executive Vice President and Group President since April 2004. Service with the Company — 20 years. |
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Kathleen D. McElligott | | 60 | | Executive Vice President, Chief Information Officer and Chief Technology Officer since July 2015;January 2020. Chief Information Officer, Johnson Controls from 2018 to July 2019. Corporate Officer and Vice President Informationof Business and Technology Emerson ElectricServices, Abbott Laboratories from 20101996 to July 2015.2018. Service with the Company — 9 months.- 2 years. |
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Bansi NagjiThomas L. Rodgers | | 51 | | Executive Vice President, CorporateChief Strategy and Business Development Officer since February 2015; Principal, Deloitte Consulting, LLPJune 2020. Previously, Senior Vice President and Global Leader, Monitor Deloitte (which was formed by the global mergerManaging Director of Monitor Group with Deloitte)McKesson Ventures from January 20132014 to February 2015; President, Monitor Group from July 2012 to January 2013; Partner, Monitor Group from 2001 to January 2013.2020. Service with the Company — 1 year, 3 months.- 8 years. |
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| Lori A. Schechter | | 5460 | | Executive Vice President, Chief Legal Officer and General Counsel and Chief Compliance Officer since June 2014;2014. Associate General Counsel from January 2012 to June 2014;2014. Litigation Partner, Morrison & Foerster LLP from January 1995 to December 2011. Service with the Company — 4- 10 years. |
PART II
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Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
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(a) | Market Information: Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. 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 reportedis traded is the New York Stock Exchange (“NYSE”) under the trading symbol of “MCK.”
Holders: At March 31, 2022, there were 4,636 holders of record of our common stock.
Dividends: In July 2021, our quarterly dividend was raised from $0.42 to $0.47 per common share for dividends declared on NYSEor after such date by the Board. We declared regular cash dividends of $1.83, $1.67, and $1.62 per share for each quarterly period of the two most recently completed fiscal years:years ended March 31, 2022, 2021, and 2020, respectively.
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| | | | | | | | | | | | | |
| | 2016 | | 2015 |
| | High | Low | | High | Low |
| First quarter | $ | 243.61 |
| $ | 219.51 |
| | $ | 192.03 |
| $ | 162.90 |
|
| Second quarter | $ | 236.86 |
| $ | 160.10 |
| | $ | 200.00 |
| $ | 185.66 |
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| Third quarter | $ | 202.20 |
| $ | 169.00 |
| | $ | 214.37 |
| $ | 178.28 |
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| Fourth quarter | $ | 196.84 |
| $ | 148.29 |
| | $ | 232.69 |
| $ | 205.72 |
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(b) | Holders: The number of record holders of the Company’s common stock at March 31, 2016 was approximately 6,204.
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(c) | Dividends: In July 2015, the Company’s quarterly dividend was raised from $0.24 to $0.28 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 $1.08 and $0.96 per share in the years ended March 31, 2016 and 2015.
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The Company anticipatesWe anticipate that itwe 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’sour future earnings, financial condition, capital requirements, and other factors.
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(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.
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(e) | Share Repurchase Plans: Stock repurchases may be made from time to timeSecurities Authorized for Issuance under Equity Compensation Plans: Information relating to this item is provided under Part III, Item 12, to this Annual Report. 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. |
In May and October 2015, the Board authorized the repurchase of up to $500 million and $2 billion of the Company’s common stock.
In 2014, we made no share repurchases. In 2015, we repurchased 1.5 million shares for $340 million at an average price of $226.55 per share. In 2016, we repurchased 4.5 million shares of the Company’s common stock for $854 million through open market transactions, at an averageprivately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by combinations of such methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, percorporate and regulatory requirements, restrictions under the Company’s debt obligations, and other market and economic conditions. During the last three years, our share repurchases were transacted through both open market transactions and ASR programs with third-party financial institutions.
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| Share Repurchases (1) |
| (In millions, except price per share data) | | Total Number of Shares Purchased (2) | | Average Price
Paid Per Share | | Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs |
| Balance, March 31, 2019 | | | | | | $ | 3,469 | |
| Shares repurchased - Open market | | 9.2 | | | $ | 144.68 | | | (1,334) | |
| Shares repurchased - May 2019 ASR | | 4.7 | | | $ | 127.68 | | | (600) | |
| Balance, March 31, 2020 | | | | | | 1,535 | |
| Shares repurchase authorization increase in 2021 | | | | | | 2,000 | |
Shares repurchased - Open market (3) | | 4.7 | | | $ | 160.33 | | | (750) | |
| Balance, March 31, 2021 | | | | | | 2,785 | |
| Shares repurchased - May 2021 ASR | | 5.2 | | | $ | 193.22 | | | (1,000) | |
| Shares repurchased - Open market | | 4.6 | | | $ | 217.73 | | | (1,007) | |
| Shares repurchase authorization increase in 2022 | | | | | | 4,000 | |
Shares repurchased - February 2022 ASR (4) | | 4.8 | | | $ | 265.56 | | | (1,500) | |
| Balance, March 31, 2022 | | | | | | $ | 3,278 | |
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations or forfeitures of equity awards. It also excludes shares related to our split-off of the Change Healthcare JV as described in Financial Note 19, “Stockholders' Equity (Deficit)” to the consolidated financial statements included in this Annual Report.
(2)The number of shares purchased reflects rounding adjustments.
(3)Of the total dollar value, $8 million was accrued within “Other accrued liabilities” in our Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April.
(4)In February 2016, we2022, the Company entered into an ASR program with a third partythird-party financial institution to repurchase $650 million$1.5 billion of the Company’s common stock. The average price paid per share and total number of shares purchased under this program are estimates based on the initial share purchase price and initial delivery of shares under an ASR agreement and may differ from the average price paid per share and total number of shares purchased under the ASR program was completed during the fourth quarter and we repurchased 4.2 million shares at an average price per share of $154.04. All share repurchases were funded with cash on hand.upon its final settlement in May 2022.
The total authorization outstanding for repurchases of the Company’s common stock was $1.0 billion at March 31, 2016. In 2016, we retired 115.5 million or $7.8 billion of the Company’s previously repurchased treasury shares. Under the applicable state law, these shares resumed the status of authorized and unissued shares upon retirement.
The following table provides information on the Company’sour share repurchases during the fourth quarter of 2016:2022:
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| Share Repurchases (1) |
| (In millions, except price per share) | Total Number of Shares Purchased | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| January 1, 2022 - January 31, 2022 | — | | | $ | — | | | — | | | $ | 4,778 | |
| February 1, 2022 - February 28, 2022 | 4.8 | | | 265.56 | | | 4.8 | | | 3,278 | |
| March 1, 2022 - March 31, 2022 | — | | | — | | | — | | | 3,278 | |
| Total | 4.8 | | | | | 4.8 | | | |
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations or forfeitures of equity awards.
(2)The average price paid per share and total number of shares purchased under this program are estimates based on the initial share purchase price and initial delivery of shares under an ASR agreement and may differ from the average price paid per share and total number of shares purchased under the ASR program upon its final settlement in May 2022.
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| | | | | | | | | | | | | |
| | Share Repurchases (1) |
| (In millions, except price per share) | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| January 1, 2016 - January 31, 2016 | — |
| | $ | — |
| | — |
| | $ | 1,646 |
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| February 1, 2016 - February 29, 2016 | 3.2 |
| | 154.04 |
| | 3.2 |
| | 1,148 |
|
| March 1, 2016 - March 31, 2016 | 1.0 |
| | 154.04 |
| | 1.0 |
| | 996 |
|
| Total | 4.2 |
| | | | 4.2 |
| | $ | 996 |
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(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. |
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(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 and the S&P 500 Health Care Index. 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 the same industry.
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| | March 31, |
| | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
| McKesson Corporation | $ | 100.00 |
| | $ | 112.13 |
| | $ | 139.12 |
| | $ | 229.03 |
| | $ | 294.79 |
| | $ | 206.10 |
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| S&P 500 Index | $ | 100.00 |
| | $ | 108.54 |
| | $ | 123.69 |
| | $ | 150.73 |
| | $ | 169.92 |
| | $ | 172.95 |
|
| S&P 500 Health Care Index | $ | 100.00 |
| | $ | 116.36 |
| | $ | 145.65 |
| | $ | 188.21 |
| | $ | 237.45 |
| | $ | 225.15 |
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| March 31, |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| McKesson Corporation | $ | 100.00 | | | $ | 95.83 | | | $ | 80.55 | | | $ | 94.18 | | | $ | 137.19 | | | $ | 217.12 | |
| S&P 500 Index | $ | 100.00 | | | $ | 113.99 | | | $ | 124.82 | | | $ | 116.11 | | | $ | 181.54 | | | $ | 209.94 | |
| S&P 500 Health Care Index | $ | 100.00 | | | $ | 111.27 | | | $ | 127.84 | | | $ | 126.55 | | | $ | 169.62 | | | $ | 202.01 | |
* Assumes $100 invested in McKesson Common Stock and in each index on March 31, 20112017 and that all dividends are reinvested.
Item 6. Reserved.
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Item 6. | Selected Financial Data. |
FIVE-YEAR HIGHLIGHTS
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| | As of and for the Years Ended March 31, |
| (In millions, except per share data and ratios) | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| Operating Results | | | | | | | | | | |
| Revenues | | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
| | $ | 122,196 |
| | $ | 122,453 |
|
| Percent change | | 6.6 | % | | 30.3 | % | | 12.4 | % | | (0.2 | )% | | 9.5 | % |
| Gross profit | | $ | 11,416 |
| | $ | 11,411 |
| | $ | 8,352 |
| | $ | 6,881 |
| | $ | 6,435 |
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| Income from continuing operations before income taxes | | 3,250 |
| | 2,657 |
| | 2,171 |
| | 1,950 |
| | 1,915 |
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| Income (loss) after income taxes | | | | | | | | | | |
| Continuing operations | | 2,342 |
| | 1,842 |
| | 1,414 |
| | 1,363 |
| | 1,394 |
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| Discontinued operations | | (32 | ) | | (299 | ) | | (156 | ) | | (25 | ) | | 9 |
|
| Net income | | 2,310 |
| | 1,543 |
| | 1,258 |
| | 1,338 |
| | 1,403 |
|
Net (income) loss attributable to noncontrolling interests (1) | | (52 | ) | | (67 | ) | | 5 |
| | — |
| | — |
|
| Net income attributable to McKesson Corporation | | 2,258 |
| | 1,476 |
| | 1,263 |
| | 1,338 |
| | 1,403 |
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| | | | | | | | | | | |
| Financial Position | | | | | | | | | | |
| Working capital | | $ | 3,366 |
| | $ | 3,173 |
| | $ | 3,221 |
| | $ | 1,813 |
| | $ | 1,917 |
|
Days sales outstanding for: (2) | | | | | | | | | | |
| Customer receivables | | 28 |
| | 26 |
| | 29 |
| | 26 |
| | 24 |
|
| Inventories | | 32 |
| | 31 |
| | 33 |
| | 33 |
| | 31 |
|
| Drafts and accounts payable | | 59 |
| | 54 |
| | 54 |
| | 51 |
| | 49 |
|
| Total assets | | $ | 56,563 |
| | $ | 53,870 |
| | $ | 51,759 |
| | $ | 34,786 |
| | $ | 33,093 |
|
| Total debt, including capital lease obligations | | 8,154 |
| | 9,844 |
| | 10,594 |
| | 4,873 |
| | 3,980 |
|
Total McKesson stockholders’ equity (3) | | 8,924 |
| | 8,001 |
| | 8,522 |
| | 7,070 |
| | 6,831 |
|
Payments for property, plant and equipment
| | 488 |
| | 376 |
| | 278 |
| | 241 |
| | 221 |
|
| Acquisitions, net of cash and cash equivalents acquired | | 40 |
| | 170 |
| | 4,634 |
| | 1,873 |
| | 1,051 |
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| Common Share Information | | | | | | | | | | |
| Common shares outstanding at year-end | | 225 |
| | 232 |
| | 231 |
| | 227 |
| | 235 |
|
| Shares on which earnings per common share were based | | | | | | | | | | |
| Diluted | | 233 |
| | 235 |
| | 233 |
| | 239 |
| | 251 |
|
| Basic | | 230 |
| | 232 |
| | 229 |
| | 235 |
| | 246 |
|
Diluted earnings (loss) per common share attributable to McKesson Corporation (4) | | | | | | | | | | |
| Continuing operations | | $ | 9.84 |
| | $ | 7.54 |
| | $ | 6.08 |
| | $ | 5.69 |
| | $ | 5.56 |
|
| Discontinued operations | | (0.14 | ) | | (1.27 | ) | | (0.67 | ) | | (0.10 | ) | | 0.04 |
|
| Total | | 9.70 |
| | 6.27 |
| | 5.41 |
| | 5.59 |
| | 5.60 |
|
| Cash dividends declared | | 249 |
| | 226 |
| | 214 |
| | 192 |
| | 202 |
|
| Cash dividends declared per common share | | 1.08 |
| | 0.96 |
| | 0.92 |
| | 0.80 |
| | 0.80 |
|
Book value per common share (4) (5) | | 39.66 |
| | 34.49 |
| | 36.89 |
| | 31.15 |
| | 29.07 |
|
| Market value per common share - year-end | | 157.25 |
| | 226.20 |
| | 176.57 |
| | 107.96 |
| | 87.77 |
|
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| Supplemental Data | | | | | | | | | | |
Debt to capital ratio (6) | | 43.7 | % | | 50.3 | % | | 55.4 | % | | 40.6 | % | | 36.8 | % |
Average McKesson stockholders’ equity (7) | | $ | 8,688 |
| | $ | 8,703 |
| | $ | 7,803 |
| | $ | 7,294 |
| | $ | 7,108 |
|
Return on McKesson stockholders’ equity (8) | | 26.0 | % | | 17.0 | % | | 16.2 | % | | 18.3 | % | | 19.7 | % |
Footnotes to Five-Year Highlights:
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(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. |
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(2) | Based on year-end balances and sales or cost of sales for the last 90 days of the year. |
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(3) | Excludes noncontrolling and redeemable noncontrolling interests. |
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(4) | Certain computations may reflect rounding adjustments. |
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(5) | Represents McKesson stockholders’ equity divided by year-end common shares outstanding. |
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(6) | Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity excluding accumulated other comprehensive income (loss). |
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(7) | Represents a five-quarter average of McKesson stockholders’ equity. |
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(8) | 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. |
McKESSON CORPORATION
FINANCIAL REVIEW
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS
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Item 7. | Management’s Discussion |
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GENERAL
Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial“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 CompanyMcKesson Corporation together with its subsidiaries.subsidiaries (collectively, the “Company,” “McKesson,” “we,” “our,” or “us” and other similar pronouns). 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’s10-K (“Annual Report”).
Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’sour fiscal year.
Our Financial Review within this Form 10-K generally discusses 2022 and 2021 results and year-over-year comparisons between 2022 and 2021. For a discussion on our year-over-year comparisons between 2021 and 2020, refer to our Annual Report on Form 10-K for the year ended March 31, 2021, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part II, previously filed with the Securities and Exchange Commission on May 12, 2021.
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 seestatements and 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.
Overview of Our Business:
We conductare a diversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. Our teams partner with biopharma companies, care providers, pharmacies, manufacturers, governments, and others to deliver insights, products, and services to help make quality care more accessible and affordable.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We report our business through two operatingresults in four reportable segments: McKesson DistributionU.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and McKesson Technology Solutions.International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes.
The following summarizes our four reportable segments. Refer to Financial Note 27,21, “Segments of Business,” to the consolidated financial statements appearingincluded in this Annual Report for further information regarding our reportable segments.
•U.S. Pharmaceutical is a reportable segment that distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
•Prescription Technology Solutions is a reportable segment that combines automation and our ability to navigate the healthcare ecosystem to connect pharmacies, providers, payers, and biopharma companies to address patients’ medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives.
•Medical-Surgical Solutions is a reportable segment that provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the United States (“U.S.”).
•International is a reportable segment that includes our operations in Europe and Canada, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. During 2022, we entered into agreements to sell certain of our businesses in the European Union (“E.U.”) and our retail and distribution businesses in the United Kingdom (“U.K.”), as well as completed the sale of our Austrian business. These divestitures are further described in the “European Divestiture Activities” section below.
European Divestiture Activities
On July 5, 2021, we entered into an agreement to sell certain of our businesses in the E.U. located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, along with our German headquarters and wound-care business, part of a shared services center in Lithuania, and our ownership stake in a joint venture in the Netherlands (“E.U. disposal group”) to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.4 billion) adjusted for certain items, including cash, net debt and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG (“McKesson Europe”) at the transaction closing date. We recorded charges of $438 million for the year ended March 31, 2022 in total operating expenses to remeasure the E.U. disposal group to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $151 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. The transaction is anticipated to close within the second half of fiscal year 2023, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals.
On November 1, 2021, we announced an agreement to sell our retail and distribution businesses in the U.K. (“U.K. disposal group”) to Aurelius Elephant Limited. In April 2022, we entered into an amendment to the agreement for a purchase price of £110 million (or, approximately $144 million), including certain adjustments. We recorded charges of $1.2 billion for the year ended March 31, 2022 in total operating expenses to remeasure the U.K. disposal group to fair value less costs to sell. The remeasurement adjustment includes a $734 million loss related to the accumulated other comprehensive income balances associated with the U.K. disposal group, driven by declines in the British pound sterling. The transaction closed on April 6, 2022, and at closing the buyer assumed and repaid a note payable to us of approximately $118 million.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
On January 31, 2022, we completed the sale of our Austrian business to Quadrifolia Management GmbH in a management-led buyout for a purchase price of €244 million (or, approximately $276 million), including certain adjustments. We divested net assets of the Austrian business of $272 million, primarily within the International segment, and the buyer assumed a note payable to us of approximately $63 million which was paid to us in the fourth quarter of 2022. We recorded a charge of $32 million for the year ended March 31, 2022 in total operating expenses to remeasure the Austrian business to fair value less costs to sell.
On January 31, 2022, we sold our 30% interest in the German pharmaceutical wholesale joint venture to Walgreens Boots Alliance (“WBA”). We recognized a $42 million gain within “Other income, net” in the Consolidated Statement of Operations for the year ended March 31, 2022 related to this sale.
As of March 31, 2022, we had $4.5 billion of assets and $4.7 billion of liabilities classified as “Assets held for sale” and “Liabilities held for sale,” respectively, in the Consolidated Balance Sheet primarily related to the European divestiture activities described above. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information.
Executive Summary:
The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the year ended March 31, 2022.
•The pandemic disease caused by the SARS-CoV-2 coronavirus (“COVID-19”) impacted our results of operations for the year ended March 31, 2022. As previously disclosed in our 2021 Annual Report, pharmaceutical distribution volumes decreased across the enterprise during the first quarter of 2021 as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government-mandated business shutdowns and shelter-in-place orders, following the onset of the pandemic. The recovery from the pandemic is favorably reflected in our results when comparing 2022 versus 2021. We also had favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs during 2022;
•In 2021, we began distributing certain COVID-19 vaccines under the direction of the Centers for Disease Control and Prevention (“CDC”). Since 2021 and through the end of 2022, we distributed over 380 million COVID-19 vaccine doses to administration sites all across the U.S. and in support of the U.S. government’s international donation mission. For a more in-depth discussion of how COVID-19 impacted our business, operations, and outlook, refer to the COVID-19 section of "Trends and Uncertainties" included below;
•Revenues of $264 billion, reflects an 11% increase from the prior year primarily driven by market growth in our U.S. Pharmaceutical segment;
•Gross profit increased 8% from the prior year primarily driven by improvements in primary care patient visits and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment as well as growth of specialty pharmaceuticals and the contribution from our COVID-19 vaccination distribution program in our U.S. Pharmaceutical segment;
•Total operating expenses in 2022 includes fair value remeasurement charges related to our “European Divestiture Activities” discussed above;
•Other income, net in 2022 includes net gains of $98 million related to our McKesson Ventures equity investments and $42 million related to the gain on sale of our 30% interest in the German pharmaceutical wholesale joint venture with WBA;
•On July 23, 2021, we completed a cash tender offer and paid an aggregate consideration of $1.1 billion to redeem certain notes with a principal amount of $922 million. As a result of the redemption, we incurred a loss on debt extinguishment in the second quarter of 2022 of $191 million, consisting of the premiums paid and a portion of the write-off of unamortized debt issuance costs in an amount proportional to the principal amount of debt retired. Refer to Financial Note 12, “Debt and Financing Activities,” to the consolidated financial statements included in this Annual Report for more information;
•Diluted earnings per common share from continuing operations attributable to McKesson Corporation in 2022 of $7.23 reflects the aforementioned items, net of any respective tax impacts, discrete tax items recognized, and a lower share count compared to the prior year due to the cumulative effect of share repurchases;
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
•We paid $1.0 billion to purchase 34.5 million shares of McKesson Europe in 2022 through exercises of a put right by the noncontrolling shareholders pursuant to the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”);
•On July 17, 2021, we redeemed our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021. The notes were redeemed using cash on hand. On August 12, 2021, we also completed a public offering of 1.30% notes due August 15, 2026 with a principal amount of $500 million for proceeds received, net of discounts and offering expenses, of $495 million. We utilized the net proceeds from this note for general corporate purposes;
•We returned $3.8 billion of cash to shareholders through $3.5 billion of common stock repurchases and $277 million of dividend payments during 2022. On July 23, 2021, we raised our quarterly dividend from $0.42 to $0.47 per common share; and
•In December 2021, we announced that our Board of Directors (the “Board”) approved an increase of $4.0 billion for the authorized repurchases of our common stock.
Trends and Uncertainties:
The Impact of Inflationary and Global Events
Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, increased competition for talent, and disruption of the supply chain, as well as by political or civil unrest or military action, including the conflict between Russia and Ukraine. Cost inflation during 2022 generally affects us by increasing transportation, operational, and other administrative costs associated with our normal business operations which we might not be able to fully pass along to our customers. Although, it is difficult to predict the impact that these factors may have on our business in the future, they did not have a material effect on our results of operations, financial condition, or liquidity for the year ended March 31, 2022.
COVID-19
The SARS-CoV-2 novel strain of coronavirus, which causes the infectious disease known as COVID-19, continues to evolve since it was declared a global pandemic on March 11, 2020 by the World Health Organization. We continue to evaluate the nature and extent of the ongoing impacts COVID-19 has on our business, operations, and financial results. The full extent to which COVID-19 will impact us depends on many factors and future developments, which are described in our “Risks and Forward-Looking Information” section below.
Our Response to COVID-19 in the Workplace
We are committed to continuing to supply our customers and protect the safety of our employees. The various responses we put in place to mitigate the impact of COVID-19 on our business operations include telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures. During the first quarter of 2022, we approved changes to our real estate strategy to increase efficiencies and support flexibility for our employees, including a partial remote work model for certain employees as further discussed in this Financial Review and in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report. During the third quarter of 2022, we continued to refine our policies and apply safety measures in the workplace as recommended by the Centers for Disease Control and Prevention (“CDC”) as COVID-19 cases increased across North America and Europe driven by the highly contagious Omicron variant.
During 2022, we continued COVID-19 vaccination protocols for our U.S. and Canada employees, which are designed to be consistent with federal, state, and local laws and with customer requirements and to protect the safety of our employees, customers, patients, and communities while also safeguarding the healthcare supply chain. In Europe, we followed applicable government guidelines. We continue to monitor all of these changing laws, requirements and guidelines. We have not observed a material increase in employee turnover as a result of COVID-19 vaccination protocols; however, we are unable to predict whether such protocols will have a material impact on our workforce in the future.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits
As a diversified healthcare services leader, we remain well positioned to respond to the COVID-19 pandemic in the U.S., Canada, and Europe. We have worked and continue to work closely with national and local governments, agencies, and industry partners to ensure that available supplies, including PPE, and medicine reach our customers and patients.
Through a contract with the CDC, we continue to support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines. We began distributing certain COVID-19 vaccines in December 2020. In the first quarter of 2022, McKesson began supporting the U.S. government’s commitment to donate COVID-19 vaccines worldwide. For this initiative, we are responsible for picking and packing the COVID-19 vaccines into temperature-controlled coolers and preparing them for pickup by an international partner. We do not manage the actual shipments of the vaccines to other countries. The results of operations related to our vaccine distribution are reflected in our U.S. Pharmaceutical segment. We also continue to manage the assembly, storage, and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies, through agreements with both the Department of Health and Human Services (“HHS”) and Pfizer, Inc. The results of operations for the kitting and distribution of ancillary supplies are reflected in our Medical-Surgical Solutions segment. The future financial impact of the arrangements with the CDC and HHS depend on numerous uncertainties, which are described in our “Risks and Forward-Looking Information” section below.
McKesson Canada and McKesson Europe are playing a role by supporting governments and public health entities through distributing COVID-19 vaccines and administering them in pharmacies. Additionally, McKesson Canada and McKesson Europe are distributing COVID-19 tests and certain PPE.
Trends in our Business
At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we had higher pharmaceutical distribution volumes and increased retail pharmacy foot traffic as our customers increased supplies on hand in March. During 2021, pharmaceutical distribution volumes decreased as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government-mandated business shutdowns and shelter-in-place orders. We also had a decrease in demand for primary care medical-surgical supplies due to deferrals in elective procedures in hospitals and surgery centers as well as decreased traffic and closures of doctors’ offices, which was partially offset by demand for PPE and COVID-19 tests. Additionally, the decreased traffic in doctors’ offices and general shelter-in-place guidance by governmental authorities negatively impacted retail pharmacy foot traffic in both Europe and Canada. This drove favorability in our results when comparing 2022 versus 2021, particularly during the first quarter.
We have observed improvements in prescription volumes and primary care patient visits during 2022 compared to the prior year period; however, the recovery of COVID-19 continues to be non-linear and impacted by virus variants such as Omicron and ongoing fluctuations in case levels. During the year ended March 31, 2022, the U.S. distribution of COVID-19 vaccines and related ancillary kits favorably impacted our results. We recognized higher sales for COVID-19 tests primarily due to limited product availability in the first quarter of 2021 and increased demand during 2022 corresponding with the spike in positive COVID-19 cases as a result of the Delta and Omicron variants.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Impact to our Supply Chain
We also continue to monitor and address the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers, industry partners, and government agencies to meet the needs of our customers during the pandemic. Overall, during 2022 we had an increase in supply chain costs primarily related to transportation and labor; however, this did not materially impact our results of operations for the year ended March 31, 2022. In our Medical-Surgical Solutions segment, we have observed certain supply chain disruptions for COVID-19 tests, which poses a potential risk for supply availability to meet the future demand. As potential shortages or disruptions of any products are identified we address supply continuity, which includes securing additional products when available, sourcing back-up products when needed, and following allocation procedures to maintain and protect supply as much as possible. We utilize business continuity action planning to maintain and protect operations across all locations and facilities.
Impact to our Results of Operations, Financial Condition, and Liquidity
For the year ended March 31, 2022, COVID-19 tests and the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately $1.8 billion, or 16% to segment revenues, and including total inventory charges as further described below, increased our segment operating profit by approximately $208 million, or 22%.
The distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment contributed less than 10% to segment operating profit during the year ended March 31, 2022. The financial impact from our COVID-19 response efforts in the International segment during 2022 was not material to our consolidated results, but contributed to year over year favorability in segment operating results. During the year ended March 31, 2021, particularly during the first quarter, we had lower pharmaceutical volumes, specialty drug volumes, and patient care visits that negatively impacted our consolidated revenues and income (loss) from continuing operations before income taxes. The recovery of prescription volume trends and patient care visits, which are also described in more detail above in the “Trends in our Business” section, had a favorable impact year over year across our businesses when comparing 2022 versus 2021.
Additionally, certain PPE items held for resale were valued in our inventory at costs that were inflated by earlier COVID-19 pandemic demand levels. That inventory valuation, if not supported by market resale prices, may be written down to net realizable value. We may also write-off inventory due to decreased customer demand and excess inventory. During the year ended March 31, 2022, we recorded inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. Of this amount, we recorded $147 million in cost of sales driven by the intent of management not to sell certain excess PPE inventory, which required an inventory write-down to zero, and instead direct it to charitable organizations or otherwise dispose. We recorded $8 million in total operating expenses for excess inventory which had already been committed for donation at the time of the charge and subsequently was delivered during 2022. In addition, $9 million of inventory charges were recorded in cost of sales for PPE and other related products that management intends to sell. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods of other PPE and related product categories, we are taking measures to mitigate such risk.
Overall, these COVID-19 related items had a net favorable impact on consolidated income from continuing operations before income taxes for the year ended March 31, 2022 compared to the prior year period. Impacts to future periods due to COVID-19 may differ based on future developments, which is described in our “Risks and Forward-Looking Information” section below.
During the year ended March 31, 2022, we maintained appropriate labor and overall vendor supply levels and experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. We continue to monitor the COVID-19 situation closely and engage with manufacturers, industry partners, and government agencies to anticipate shortages and respond to demand for certain medications and therapies. We are monitoring our customers closely for changes to their timing of payments or ability to pay amounts owed to us as a result of COVID-19 pandemic impacts to their businesses. We remain well-capitalized with access to liquidity from our revolving credit facility. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, have remained open and accessible to us during the COVID-19 pandemic. At March 31, 2022, we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Risks and Forward-Looking Information
The COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments, and assumptions used in our forecasts. We still face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our future business operations, financial condition, results of operations, and liquidity. The full extent to which COVID-19 will impact us depends on many factors and future developments, including: the duration and spread of the COVID-19 pandemic; potential seasonality of viral outbreaks; impacts of additional variants of the SARS-Cov-2 virus; the amount of COVID-19 vaccines and ancillary supply kits that we are contracted to distribute; the effectiveness of COVID-19 vaccines and governmental measures designed to mitigate the spread of the virus; the effectiveness of treatments of infected individuals; commercialization of COVID-19 vaccines; competition in COVID-19 vaccine distribution; and changes or disruptions in product supply. We have experienced and may experience difficulties in sourcing products and changes in pricing due to the effects of the COVID-19 pandemic on supply chains. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when COVID-19 may no longer significantly impact our ability to forecast future financial performance remain challenging. Additionally, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Key assumptions and estimates about future values in our impairment assessments can be affected by a variety of factors, including the impacts of the COVID-19 pandemic on industry and economic trends as well as on our business strategy and internal forecasts. Material changes to key assumptions and estimates can decrease the projected cash flows or increase the discount rates and have resulted in impairment charges of certain long-lived assets and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of this Annual Report for a disclosure of risk factors related to COVID-19.
Opioid-Related Litigation and Claims
We are a defendant in many legal proceedings asserting claims related to the distribution of controlled substances (opioids) in federal and state courts throughout the U.S., and in Puerto Rico and Canada. The plaintiffs in these actions have included state attorneys general, county and municipal governments, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals.
On February 25, 2022, the Company and two other United States pharmaceutical distribution companies (collectively, "Distributors") determined that there is sufficient State and subdivision participation to proceed with an agreement ("Settlement") to settle a substantial majority of opioids-related lawsuits filed against the Distributors by U.S. states, territories and local governmental entities. Under the Settlement, 46 of 49 eligible states and their participating subdivisions, as well as the District of Columbia and all eligible territories (collectively, "Settling Governmental Entities"), have agreed to join the Settlement. The Settlement became effective on April 2, 2022. If all conditions to the Settlement are satisfied, including the receipt of approval by relevant courts of consent decrees to dismiss the lawsuits, the Distributors would pay the Settling Governmental Entities up to approximately $19.5 billion over 18 years, with up to approximately $7.4 billion to be paid by the Company for its 38.1% portion. Under the Settlement, a minimum of 85% of the settlement payments must be used by state and local governmental entities to remediate the opioid epidemic. Most of the remaining percentage relates to plaintiffs’ attorneys’ fees and costs, and would be payable over a shorter time period. Under the Settlement, the Distributors will establish a clearinghouse to consolidate their controlled-substance distribution data, which will be available to the settling U.S. states to use as part of their anti-diversion efforts. The Settlement provides that the Distributors do not admit liability or wrongdoing and do not waive any defenses.
The Settlement only addresses the claims of attorneys general of U.S. states and territories and political subdivisions in participating states and territories. The terms under which the Distributors previously agreed to settle opioids claims of the states of New York, Ohio, Rhode Island, Florida and Texas, and each of their participating subdivisions, will become part of the Settlement. The previously disclosed agreement for the Distributors to settle opioids claims of the attorney general of West Virginia will remain a separate settlement arrangement that is not part of the Settlement. Governmental entities not participating in the Settlement may continue to pursue their claims. The states of Alabama, Oklahoma and Washington chose not to participate in the Settlement. We have reached separate agreements in principle with the attorneys general of Alabama and Washington to settle the claims of those states and their subdivisions. The Distributors previously settled with the Cherokee Nation and reached a separate agreement in principle to settle the claims of the remaining federally recognized Native American Tribes.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We recorded a charge of $8.1 billion during the year ended March 31, 2021 related to our estimated liability to U.S. governmental entities, including those expected to participate in the Settlement, the states and subdivisions that were not expected to participate or were not eligible, and the Native American tribes. In connection with the Settlement and other opioid-related settlement accruals described above, we recorded additional charges of $274 million during the year ended March 31, 2022 within “Claims and litigation charges, net” in our Consolidated Statement of Operations. Our total estimated liability for opioid-related claims was $8.3 billion as of March 31, 2022, of which $1.0 billion was included in “Other accrued liabilities” for the amount estimated to be paid prior to March 31, 2023, and the remaining liability was included in “Long-term litigation liabilities” in our Consolidated Balance Sheet.
Although the vast majority of opioid claims have been brought by governmental entities in the U.S., the Company is also a defendant in cases brought in the U.S. by private plaintiffs, such as hospitals, health and welfare funds, third-party payors, and individuals, as well as four cases brought in Canada (three by governmental or tribal entities and one by an individual). These claims, and those of private entities generally, are not included in the Settlement or in the charges recorded by the Company, described above. The Company believes it has valid legal defenses in these matters and intends to mount a vigorous defense.
Because of the many uncertainties associated with ongoing opioid-related litigation matters, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. In light of the uncertainty, the amount of any ultimate loss may differ materially from the amount accrued.
Notwithstanding the Settlement, we also continue to prepare for trial in pending matters. We believe that we have valid defenses to the claims pending against us and, absent an acceptable settlement, intend to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity, or results of operations. Refer to Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report on Form 10-K10‑K for a description of these segments.
more information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
RESULTS OF OPERATIONS
Overview:Overview of Consolidated Results:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share data) | Years Ended March 31, | | | | |
| 2022 | | 2021 | | | | Change | |
| Revenues | $ | 263,966 | | | $ | 238,228 | | | | | 11 | | % | | |
| Gross profit | 13,130 | | | 12,148 | | | | | 8 | | | | |
| Gross profit margin | 4.97 | | % | 5.10 | | % | | | (13) | | bp | | |
| Total operating expenses | $ | (11,092) | | | $ | (17,188) | | | | | (35) | | % | | |
| Total operating expenses as a percentage of revenues | 4.20 | | % | 7.21 | | % | | | (301) | | bp | | |
| Other income, net | $ | 259 | | | $ | 223 | | | | | 16 | | % | | |
| Loss on debt extinguishment | (191) | | | — | | | | | — | | | | |
| | | | | | | | | | |
| Interest expense | (178) | | | (217) | | | | | (18) | | | | |
| Income (loss) from continuing operations before income taxes | 1,928 | | | (5,034) | | | | | 138 | | | | |
| Income tax benefit (expense) | (636) | | | 695 | | | | | (192) | | | | |
| Income (loss) from continuing operations | 1,292 | | | (4,339) | | | | | 130 | | | | |
| Loss from discontinued operations, net of tax | (5) | | | (1) | | | | | 400 | | | | |
| Net income (loss) | 1,287 | | | (4,340) | | | | | 130 | | | | |
| Net income attributable to noncontrolling interests | (173) | | | (199) | | | | | (13) | | | | |
| Net income (loss) attributable to McKesson Corporation | $ | 1,114 | | | $ | (4,539) | | | | | 125 | | % | | |
| | | | | | | | | | |
| Diluted earnings (loss) per common share attributable to McKesson Corporation | | | | | | | | | | |
| Continuing operations | $ | 7.26 | | | $ | (28.26) | | | | | 126 | | % | | |
| Discontinued operations | (0.03) | | | — | | | | | — | | | | |
| Total | $ | 7.23 | | | $ | (28.26) | | | | | 126 | | % | | |
| | | | | | | | | | |
| Weighted-average diluted common shares outstanding | 154.1 | | | 160.6 | | | | | (4) | | % | | |
bp - basis points
All percentage changes displayed above which are not meaningful are displayed as zero percent.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions, except per share data) | Years Ended March 31, | | Change |
| 2016 | | 2015 | | 2014 | | 2016 | | 2015 |
| | | | | | | | | | | | |
| Revenues | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
| | 7 |
| % | | 30 |
| % |
| | | | | | | | | | | | |
| Gross Profit | $ | 11,416 |
| | $ | 11,411 |
| | $ | 8,352 |
| | - |
| % | | 37 |
| % |
| | | | | | | | | | | | |
| Operating Expenses | $ | 7,871 |
| | $ | 8,443 |
| | $ | 5,913 |
| | (7 | ) | % | | 43 |
| % |
| | | | | | | | | | | | |
| Income from Continuing Operations Before Income Taxes | $ | 3,250 |
| | $ | 2,657 |
| | $ | 2,171 |
| | 22 |
| % | | 22 |
| % |
| Income Tax Expense | (908 | ) | | (815 | ) | | (757 | ) | | 11 |
| | | 8 |
| |
| Income from Continuing Operations | 2,342 |
| | 1,842 |
| | 1,414 |
| | 27 |
| | | 30 |
| |
| Loss from Discontinued Operations, Net of Tax | (32 | ) | | (299 | ) | | (156 | ) | | (89 | ) | | | 92 |
| |
| Net Income | 2,310 |
| | 1,543 |
| | 1,258 |
| | 50 |
| | | 23 |
| |
| Net (Income) Loss Attributable to Noncontrolling Interests | (52 | ) | | (67 | ) | | 5 |
| | (22 | ) | | | (1,440 | ) | |
| Net Income Attributable to McKesson Corporation | $ | 2,258 |
| | $ | 1,476 |
| | $ | 1,263 |
| | 53 |
| % | | 17 |
| % |
| | | | | | | | | | | | |
| Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation | | | | | | | | | | | |
| Continuing Operations | $ | 9.84 |
| | $ | 7.54 |
| | $ | 6.08 |
| | 31 |
| % | | 24 |
| % |
| Discontinued Operations | (0.14 | ) | | (1.27 | ) | | (0.67 | ) | | (89 | ) | | | 90 |
| |
| Total | $ | 9.70 |
| | $ | 6.27 |
| | $ | 5.41 |
| | 55 |
| % | | 16 |
| % |
| | | | | | | | | | | | |
| Weighted Average Diluted Common Shares | 233 |
| | 235 |
| | 233 |
| | (1 | ) | % | | 1 |
| % |
Revenues increased for 2016the years ended March 31, 2022 and 2015 increased 7% and 30%2021 compared to the same periods a year ago. Excluding unfavorable foreign currency effects of 2%, revenues increased 9% for 2016. Revenues benefited fromrespective prior years primarily due to market growth, andincluding expanded volumebusiness with existing customers within our North America pharmaceutical distribution businesses. Revenues for 2015 also increased as a result of our February 2014 acquisition of Celesio AG (“Celesio”).U.S. Pharmaceutical segment. Market growth reflectsincludes growing drug utilization, which includesprice increases, and newly launched drugs and price increases,products, partially offset by price deflation associated with brandbranded to generic drug conversions.conversion.
Gross Profit
Gross profit was flat in 2016 and increased 37% in 2015for the year ended March 31, 2022 compared to the same periods aprior year ago. Excludingprimarily in our Medical-Surgical Solutions segment driven by improvements in patient care visits in our primary care business, the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by the unfavorable foreign currency effects of 4%, gross profit increased 4% in 2016.impact from PPE and other related products largely due to inventory charges. Gross profit margin decreasedwas favorably impacted by growth of specialty pharmaceuticals and the contribution from our vaccine distribution programs in 2016our U.S. Pharmaceutical segment. Gross profit was also driven by increased volume with new and existing customers in our RxTS segment.
Gross profit for the years ended March 31, 2022 and 2021, included LIFO inventory credits of $23 million and $38 million, respectively. The lower LIFO credits in 2022 compared to 2021 is primarily due to a lower sell margin within our North America distribution business driven by increased customer sales volume with somehigher brand inflation and delays of our largest customers, partially offset by higher buy margin including benefits from our global procurement arrangements, lower LIFO-related inventory chargesbranded off-patent to generic drug launches. Refer to the “Critical Accounting Policies and $76Estimates” section included in this Financial Review for further information. Gross profit for the years ended March 31, 2022 and 2021 also included net cash proceeds received of $46 million in cash receiptsand $181 million, respectively, representing our share of antitrust legal settlements. Additionally, this business has been experiencing weaker generic pharmaceutical pricing trends,
Total Operating Expenses
A summary and description of the components of our total operating expenses for the years ended March 31, 2022 and 2021 is as follows:
•Selling, distribution, general, and administrative expenses (“SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, administrative expenses, remeasurement charges to the lower of carrying value or fair value less costs to sell, and other general charges.
•Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes in estimates. Legal fees to defend claims, which are expected to continueexpensed as incurred, are included within SDG&A.
•Goodwill impairments charges: We perform an impairment test on goodwill balances annually in 2017. Gross profit margin increasedthe third quarter and more frequently if indicators for potential impairment exist. The resulting goodwill impairment charges are reflected within this line item.
•Restructuring, impairment, and related charges, net: Restructuring charges that are incurred for programs in 2015 primarily due towhich we change our Celesio acquisition, higher buy margin includingoperations, the effectsscope of generic price increases anda business undertaken by our mix of business partially offset by lower sell profit. Gross profit included LIFO-related inventory charges of $244 million, $337 million and $311 millionunits, or the manner in 2016, 2015 and 2014.which that business is conducted as well as long-lived asset impairments.
Operating expenses decreased 7% and increased 43% in 2016 and 2015 compared to the same periods a year ago. Excluding unfavorable foreign currency effects of 5%, operating expenses decreased 2% in 2016 primarily due to pre-tax gains of $103 million from the sale of two businesses and lower acquisition-related expenses, partially offset by pre-tax restructuring charges of $203 million, | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended March 31, | | | | |
| (Dollars in millions) | 2022 | | 2021 | | | | Change |
| Selling, distribution, general, and administrative expenses | $ | 10,537 | | | $ | 8,849 | | | | | 19 | | % | | |
| Claims and litigation charges, net | 274 | | | 7,936 | | | | | (97) | | | | |
| Goodwill impairment charges | — | | | 69 | | | | | (100) | | | | |
| Restructuring, impairment, and related charges, net | 281 | | | 334 | | | | | (16) | | | | |
| Total operating expenses | $ | 11,092 | | | $ | 17,188 | | | | | (35) | | % | | |
| Percent of revenues | 4.20 | | % | 7.21 | | % | | | (301) | | bp | | |
bp - basis points
All percentage changes displayed above which are not meaningful are displayed as further discussed below. Additionally, 2015 operating expenses 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.
zero percent.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
On March 14, 2016, the Company committed to a restructuring plan to lower its operating costs (“Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce and business process initiatives that will be substantially implemented prior to the end of 2019. During the fourth quarter of 2016, we recorded $229 million of pre-tax restructuring charges primarily representing severance and employee-related costs. The charges were included in our results as follows: $26 million in cost of sales and $203 million in operating expenses.
Operating expenses increased in 2015 primarily due to our business acquisitions, including increases in acquisition-related expenses and intangible asset amortization, and higher compensation and benefit costs. Additionally, operating expenses for 2015 included the $150 million settlement charge and for 2014, included $68 million of pre-tax charges associated with our Average Wholesale Price (“AWP”) litigation.
Income from continuing operations before income taxes increased in 2016 compared with the prior year primarily due to lowerTotal operating expenses and increased in 2015 primarily due to higher gross profit, partially offset by higher operating and interest expense.
Our reported income tax rates were 27.9%, 30.7% and 34.9% in 2016, 2015 and 2014. Income tax expense for 2014 included a charge of $122 million relating to our litigation with the Canadian Revenue Agency (“CRA”).
Net income attributable to noncontrolling interests for 2016 and 2015 primarily reflects the recurring annual compensation and the guaranteed dividends that McKesson is obligated to pay to the noncontrolling shareholders of Celesio under the domination and profit and loss transfer agreement (the “Domination Agreement”), which became effective in December 2014.
Loss from discontinued operations, net of tax, for 2015 included pre-tax non-cash impairment charges of $241 million ($235 million after-tax) associated with our Brazilian pharmaceutical distribution business, which we acquired through our acquisition of Celesio. On January 31, 2016, we entered into an agreement to sell this business to a third party. The sale is expected to be completed during the first half of 2017, subject to regulatory approval and customary closing conditions. We expect to recognize an after-tax charge of approximately $80 million to $100 million upon the disposition of the business within discontinued operations as a result of settlement of certain indemnifications. 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 income attributable to McKesson Corporation was $2,258 million, $1,476 million and $1,263 million in 2016, 2015 and 2014. Diluted earnings per common share attributable to McKesson Corporation from continuing operations were $9.84, $7.54 and $6.08 and diluted loss per common share attributable to McKesson Corporation from discontinued operations were $0.14, $1.27 and $0.67 in 2016, 2015 and 2014.
We have recently acquired or have agreements to acquire a number of businesses whose financial results will be reported within our Distribution Solutions segment from their respective acquisition date. These businesses are described in Financial Note 2, “Business Combinations” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues:
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 |
| Distribution Solutions | | | | | | | | | | | |
North America pharmaceutical distribution & services | $ | 158,469 |
| | $ | 143,711 |
| | $ | 123,929 |
| | 10 |
| % | | 16 |
| % |
| International pharmaceutical distribution & services | 23,497 |
| | 26,358 |
| | 4,485 |
| | (11 | ) | | | 488 |
| |
| Medical-Surgical distribution & services | 6,033 |
| | 5,907 |
| | 5,648 |
| | 2 |
| | | 5 |
| |
| Total Distribution Solutions | 187,999 |
| | 175,976 |
| | 134,062 |
| | 7 |
| | | 31 |
| |
| | | | | | | | | | | | |
| Technology Solutions - products and services | 2,885 |
| | 3,069 |
| | 3,330 |
| | (6 | ) | | | (8 | ) | |
| Total Revenues | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
| | 7 |
| % | | 30 |
| % |
Revenues increased 7% and 30% in 2016 and 2015 compared to the same periods a year ago. Excluding unfavorable foreign currency effects of 2%, revenues increased 9% in 2016. These increases were primarily driven by our Distribution Solutions segment, which accounted for approximately 98% of our consolidated revenues.
Distribution Solutions
North America pharmaceutical distribution and services revenues increased over the last two years primarily due to market growth, expanded business with existing customers and our mix of business. These increases were partially offset by customer losses. Market growth reflects growing drug utilization, which includes newly launched drugs and price increases, partially offset by price deflation associated with brand to generic drug conversions. Additionally, our 2015 revenues benefited from newly launched drugs for the treatment of Hepatitis C.
International pharmaceutical distribution and services revenues for 2016 decreased 11%. Excluding unfavorable foreign currency effects of 12%, revenues increased 1% in 2016 primarily reflecting higher revenues in the United Kingdom due to a new distribution agreement with a manufacturer, which was almost fully offset by lower revenues in Norway associated with the loss of a hospital contract. Revenues increased in 2015 primarily due to our acquisition of Celesio in February 2014.
Medical-Surgical distribution and services revenues increased over the last two years primarily due to market growth. Revenues for 2016 were unfavorably affected by the sale of our ZEE Medical business in the second quarter of 2016.
Our Distribution Solutions segment is experiencing customer consolidation, including business combinations that impact our customers.
Technology Solutions
Technology Solutions revenues decreased over the last two years primarily due to a decline in hospital software revenues, partially offset by higher revenues in our other businesses. Additionally, 2016 revenues decreased as a result of the sale of our nurse triage business and the transition of our workforce business within our International Technology business to a third party during the first quarter of 2016. Revenues decreased in 2015 compared to 2014 primarily due to a decline in hospital software revenues, the planned elimination of a product line and lower revenues from the workforce business within our International Technology business, which was transitioned to another service provider during the first quarter of 2016. These decreases were partially offset by higher revenues in our other businesses.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Gross Profit:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2016 | | | 2015 | | | 2014 | | | 2016 | | 2015 |
| Gross Profit | | | | | | | | | | | | | | |
Distribution Solutions (1) (2) | $ | 9,948 |
| | | $ | 9,937 |
| | | $ | 6,745 |
| | | - |
| % | | 47 |
| % |
Technology Solutions (2) | 1,468 |
| | | 1,474 |
| | | 1,607 |
| | | - |
| | | (8 | ) | |
| Total | $ | 11,416 |
| | | $ | 11,411 |
| | | $ | 8,352 |
| | | - |
| % | | 37 |
| % |
| | | | | | | | | | | | | | | |
| Gross Profit Margin | | | | | | | | | | | | | | |
| Distribution Solutions | 5.29 |
| % | | 5.65 |
| % | | 5.03 |
| % | | (36 | ) | bp | | 62 |
| bp |
| Technology Solutions | 50.88 |
| | | 48.03 |
| | | 48.26 |
| | | 285 |
| | | (23 | ) | |
| Total | 5.98 |
| | | 6.37 |
| | | 6.08 |
| | | (39 | ) | | | 29 |
| |
bp - basis points
| |
(1) | Gross profit for our Distribution Solutions segment includes LIFO expenses of $244 million, $337 million and $311 million for 2016, 2015 and 2014, and for 2016 and 2014 includes $76 million and $37 million of net cash proceeds representing our share of antitrust legal settlements. |
| |
(2) | Gross profit includes pre-tax restructuring charges of $5 million and $21 million for the Cost Alignment Plan within our Distribution Solutions segment and Technology Solutions segment in 2016.
|
Gross profit was flat in 2016 and increased 37% in 2015 compared to the same periods a year ago. Excluding unfavorable foreign currency effects of 4%, gross profit increased 4% in 2016. Gross profit margin decreased in 2016 and increased in 2015. These changes were primarily due to our Distribution Solutions segment.
Distribution Solutions
Distribution Solutions segment’s gross profit was flat in 2016 and increased in 2015. Excluding unfavorable foreign currency effects of 4%, gross profit increased 4% in 2016. Gross profit margin decreased in 2016 primarily due to a lower sell margin within our North America distribution business driven by increased customer sales volume with some of our largest customers, partially offset by higher buy margin including benefits from our global procurement arrangements, lower LIFO-related inventory charges and $76 million in cash receipts representing our share of antitrust legal settlements. Additionally, this business has been experiencing weaker generic pharmaceutical pricing trends, which are expected to continue in 2017. Buy margin primarily reflects volume and timing of compensation we receive from pharmaceutical manufacturers, including the effects of price increases of both branded and generic drugs.
Gross profit margin increased in 2015 primarily due to our Celesio acquisition, higher buy margin including the effects of generic price increases and our mix of business, partially offset by lower sell profit. Gross profit margin for 2015 was unfavorably affected by the increased sales associated with newly launched drugs for the treatment of Hepatitis C. Additionally, gross profit margin for 2014 included a $50 million charge for the reversal of a fair value step-up of inventory acquired through our Celesio acquisition and $37 million of cash receipts representing our share of antitrust settlements.
Our LIFO-related inventory expenses were $244 million, $337 million and $311 million in 2016, 2015 and 2014. Our North America 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 net 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 net impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our annual LIFO expense is affected by 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. LIFO expense decreased in 2016 primarily due to the impact of lower price increases.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
As a result of cumulative net price deflation, at March 31, 2013, pharmaceutical inventories at LIFO were more than market and accordingly, a $60 million lower-of-cost or market (“LCM”) reserve reduced inventories to market. Starting in 2014, we have experienced net inflation in our pharmaceutical inventories and LIFO-related charges were incurred, and accordingly, the $60 million LCM reserve was fully released resulting in an increase in gross profit. As of March 31, 2016 and 2015, pharmaceutical inventories at LIFO did not exceed market.
Technology Solutions
Technology Solutions segment’s gross profit decreased over the last two years. Gross profit margin increased in 2016 and decreased in 2015. In addition to changes in our mix of business, gross profit margin was impacted by:
2016 vs. 2015: Gross profit margin benefited from the sale of our nurse triage business, transitioning of our workforce business within our International Technology business to a third party, and higher pull-through of deferred revenue. These increases were partially offset by $49 million of pre-tax reduction-in-force severance charges, including charges associated with the Cost Alignment Plan. Additionally, in 2015 we recorded a $34 million pre-tax non-cash charge representing a catch-up in depreciation and amortization expense associated with our workforce business within our International Technology business. This business, which was previously designated as a discontinued operation, was reclassified to a continuing operation in 2015 when we decided to retain the business.
2015 vs. 2014: In 2015, gross profit margin was negatively impacted by the $34 million non-cash depreciation and amortization charge, partially offset by a decrease in product alignment charges. In 2014, we recorded $57 million of pre-tax product alignment charges, which primarily relate to employee severance and asset impairments. Charges were recorded in our 2014 financial results as follows: $34 million in cost of sales and $23 million in operating expenses. Additionally, gross profit margin was favorably impacted by the planned elimination of a product line.
Operating Expenses:
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | | | 2016 | | 2015 |
| Operating Expenses | | | | | | | | | | | | |
Distribution Solutions (1) (2) (3) | $ | 6,436 |
| | $ | 6,938 |
| | $ | 4,301 |
| | | (7 | ) | % | | 61 |
| % |
Technology Solutions (1) (2) | 951 |
| | 1,039 |
| | 1,161 |
| | | (8 | ) | | | (11 | ) | |
| Corporate | 484 |
| | 466 |
| | 451 |
| | | 4 |
| | | 3 |
| |
| Total | $ | 7,871 |
| | $ | 8,443 |
| | $ | 5,913 |
| | | (7 | ) | % | | 43 |
| % |
| | | | | | | | | | | | | |
| Operating Expenses as a Percentage of Revenues | | | | | | | | | | | | |
| Distribution Solutions | 3.42 |
| % | 3.94 |
| % | 3.21 |
| % | | (52 | ) | bp | | 73 |
| bp |
| Technology Solutions | 32.96 |
| | 33.85 |
| | 34.86 |
| | | (89 | ) | | | (101 | ) | |
| Total | 4.12 |
| | 4.72 |
| | 4.30 |
| | | (60 | ) | | | 42 |
| |
| |
(1) | Operating expenses for 2016 include pre-tax charges associated with the Cost Alignment Plan of $156 million, $30 million and $17 million within our Distribution Solutions and Technology Solutions segments, and Corporate. |
| |
(2) | Operating expenses for 2016 include pre-tax gains of $52 million from the sale of our ZEE Medical business within our Distribution Solutions segment and $51 million from the sale of our nurse triage business within our Technology Solutions segment. |
| |
(3) | Operating expenses for 2015 and 2014 include pre-tax claim and litigation charges of $150 million and $68 million. |
Operating expenses for 2016 decreased 7% and increased 43% in 2015 compared to the same periods a year ago. Excluding unfavorable foreign currency effects of 5%, operating expenses decreased 2% for 2016.
On March 14, 2016, the Company committed to a restructuring plan to lower its operating costs, as previously discussed. The Cost Alignment Plan primarily consists of a reduction in workforce and business process initiatives that will be substantially implemented prior to the end of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms, as well as the disposal and abandonment of certain non-core businesses.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
As a result of the Cost Alignment Plan, the Company expects to record total pre-tax charges of approximately $270 million to $290 million. During the fourth quarter of 2016, we recorded $229 million of pre-tax restructuring charges primarily representing severance and employee-related costs. The charges were included in our results as follows: $26 million in cost of sales and $203 million in operating expenses. Estimated remaining charges primarily consist of exit-related costs and accelerated depreciation and amortization, which are largely attributed to our Distribution Solutions segment. Estimated savings in 2017 as a result of this plan are approximately $200 million to $220 million. Additional information on our Cost Alignment Plan is included in Financial Note 3, “Restructuring” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Distribution Solutions
Distribution Solutions segment’s operating expenses for 2016 decreased 7% compared to the prior year. Excluding unfavorable foreign currency effects of 5%, operating expenses decreased 2%. Operating expenses and operating expenses as a percentage of revenues decreased primarily duefor the year ended March 31, 2022 compared to the prior year. Total operating expenses for the years ended March 31, 2022 and 2021 were affected by the following significant items:
2022
•SDG&A includes charges totaling $1.2 billion to remeasure our U.K. disposal group to fair value less costs to sell. The remeasurement adjustment includes a $150$734 million chargeloss related to the accumulated other comprehensive income balances associated with the settlement of controlled substance distribution claims recordedU.K. disposal group, driven by declines in the prior year, lower acquisition-relatedBritish pound sterling. Of the total charges recorded during the period, $1.1 billion are included within our International segment and $42 million are included within Corporate expenses, relatingnet;
•SDG&A includes charges of $438 million to integration activitiesremeasure assets and liabilities of our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $151 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. Of the total charges recorded during the period, $383 million are included within our International segment and $55 million are included within Corporate expenses, net;
•SDG&A reflects a cost reduction of $142 million related to the cessation of depreciation and amortization of long-lived assets and operating lease right-of-use assets classified as held for sale for our acquisitions andEuropean divestiture disposal groups;
•SDG&A includes opioid-related costs of $130 million primarily related to litigation expenses;
•SDG&A includes a gain of $59 million related to the sale of our ZEE Medical business, including a $52 million pre-tax gain on sale. These decreases wereCanadian health benefit claims management and plan administrative services business;
•SDG&A when compared to the same prior year period also includes increased employee-related and transportation costs across our businesses, partially offset by pre-tax charges of $156 million associated with the Cost Alignment Plan, higher compensation and benefit costs and bad debt expense.
Operating expense andlower operating expenses as a percentage of revenues increased in 2015 compareddue to the prior year primarily duecontribution of a majority of our German pharmaceutical business to a joint venture with WBA in the third quarter of 2021;
•Claims and litigation charges, net includes a charge of $274 million related to our business acquisitions, including increasesestimated liability for opioid-related claims as previously discussed in acquisition-relatedthe “Trends and Uncertainties” section;
•Restructuring, impairment, and related charges, net includes charges related to Corporate expenses, and intangible asset amortization, and higher compensation and benefit costs. Operating expenses in 2015 also included a $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 operating expenses included $68 million of charges associated withnet, as well as our AWP litigation.International segment. Refer to the “Restructuring Initiatives and Long-Lived Asset Impairments” and “Segment Operating Profit (Loss) and Corporate Expenses, Net”sections below as well as Financial Note 24, “Commitments3, “Restructuring, Impairment, and Contingent Liabilities,Related Charges, Net,” to the consolidated financial statements included in this Annual Report for more information; and
•Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations.
2021
•SDG&A includes opioid-related costs of $153 million, primarily related to litigation expenses;
•SDG&A reflects cost savings of $95 million on Form 10-Ktravel and entertainment due to travel and meeting restrictions associated with COVID-19;
•SDG&A reflects charges of $58 million to remeasure assets and liabilities held for sale to fair value less costs to sell related to the completed contribution of the majority of our German pharmaceutical wholesale business to create a joint venture with WBA in which we held a 30% ownership interest within our International segment. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information;
•SDG&A includes a charge of $50 million related to our estimated liability under the State of New York Opioid Stewardship Act (“OSA”);
•SDG&A also includes lower operating expenses due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA and a divestiture in our Medical-Surgical Solutions segment that closed in 2020;
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
•Claims and litigation charges, net includes a charge of $8.1 billion related to our estimated liability for opioid-related claims;
•Claims and litigation charges, net includes a net gain of $131 million reflecting insurance proceeds received, net of attorneys' fees and expenses awarded to plaintiffs' counsel, in connection with the previously reported $175 million settlement of the shareholder derivative action related to our controlled substances monitoring program;
•Goodwill impairment charges of $69 million were recorded in connection with our segment realignment that commenced in the second quarter of 2021. Refer to the “Goodwill Impairment” section below for further informationdetails;
•Restructuring, impairment, and related charges, net includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe within our International segment, and the remaining $219 million primarily represents costs associated with our operating model and cost optimization efforts in our corporate headquarters and International segment. In addition, certain charges related to restructuring initiatives are included under the caption “Cost of sales” in our Consolidated Statements of Operations and were not material for the year ended March 31, 2021; and
•Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations.
Goodwill Impairments
As discussed in the “Overview of Our Business” section, our operating structure was realigned commencing in the second quarter of 2021 into four reportable segments: U.S. Pharmaceutical, RxTS, Medical-Surgical Solutions, and International. These reportable segments encompass all operating segments of the Company. The segment realignment resulted in changes in multiple reporting units across the Company. As a result, we were required to perform a goodwill impairment test for these reporting units and recorded a goodwill impairment charge in our Europe Retail Pharmacy reporting unit of $69 million during the second quarter of 2021. At March 31, 2022, the balance of goodwill for our reporting units in Europe was approximately nil and the remaining balance of goodwill in the International segment primarily relates to one of our reporting units in Canada.
We evaluate goodwill for impairment on an annual basis as of October 1, and at an interim date, if indicators of potential impairment exist. The annual impairment testing performed in 2022 and 2021 did not indicate any impairment of goodwill. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment, where the risk of material goodwill impairment is higher than other reporting units. Refer to “Critical Accounting Policies and Estimates” included in this Financial Review for further information.
Restructuring Initiatives and Long-Lived Asset Impairments
During the first quarter of 2022, we approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily included the rationalization of our office space in North America. Where we ceased using office space, we exited the portion of the facility no longer used. We also retained and repurposed certain other office locations. We recorded charges of $124 million for the year ended March 31, 2022 primarily related to lease right-of-use and other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization. This initiative was substantially complete in 2022 after which immaterial charges will continue to be incurred through the termination date of certain leases.
During the first quarter of 2021, we committed to an initiative within the U.K., which is included in our International segment, to further drive transformational changes in technologies and business processes, operational efficiencies, and cost savings. The initiative included reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. Charges incurred for this initiative were not material for 2022, and were $57 million for the year ended March 31, 2021, primarily related to asset impairments and accelerated depreciation expense as well as employee severance and other employee-related costs. This initiative was substantially complete in 2022 and remaining costs we expect to record under this initiative are not material.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In 2022, we recognized charges totaling $36 million to impair certain long-lived assets within our International segment related to our operations in Denmark and our retail pharmacy businesses in Canada. Restructuring, impairment, and related charges, net for the year ended 2021 includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe within our International segment.
Refer to Financial Note 3 , “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report for more information.
Other Income, Net
Other income, net for the years ended March 31, 2022 and 2021 includes net gains recognized from our equity investments of $98 million and $133 million, respectively. This primarily reflects mark-to-market gains on our investments in certain U.S. growth stage companies in the healthcare industry and realized gains on the controlled substance distribution claimsexit of some of these investments as further described in Financial Note 16, “Fair Value Measurements,” to the consolidated financial statements included in this Annual Report. In future periods, fair value adjustments recognized in our operating results for these types of investments may be adversely impacted by market volatility. Other income, net for the year ended March 31, 2022 also includes a gain of $42 million related to the sale of our 30% interest in the German pharmaceutical wholesale joint venture with WBA.
Loss on Debt Extinguishment
The loss on debt extinguishment recorded for the year ended March 31, 2022 of $191 million includes premiums of $182 million as well as the write-off of unamortized debt issuance costs and transaction fees incurred of $9 million, and was driven by our July 2021 tender offer to redeem a portion of our existing debt. Refer to Financial Note 12, “Debt and Financing Activities,” to the AWP litigation.consolidated financial statements included in this Annual Report for more information.
Technology SolutionsInterest Expense
Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenuesInterest expense decreased in 2016 decreased2022 compared to the prior year primarily due to the salerepayment of our nurse triage business in the first quarter of 2016, including a pre-tax gain on sale of $51 million, and lower compensation and benefit costs. These decreases were partially offset by pre-tax charges of $30 million for the Cost Alignment Plan as well as the write-off of internal-use software. Operating expenses and operating expenses as a percentage of revenue in 2015 decreased from the comparable year primarily due to lower research and development expenses, integration-related expenses and severance charges.
Corporate
Corporate expenses increased in 2016 compared to the prior year primarily due to pre-tax charges of $17 million associated with the Cost Alignment Plan, partially offset by lower acquisition-related expenses and a decrease in compensation and benefit costs. Corporate expenses increased in 2015 compared to the prior year 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.
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 were $114 million, $224 million and $218 million in 2016, 2015 and 2014. Expenses primarily related to our business acquisitions and integrations of our February 2014 acquisition of Celesio and February 2013 acquisition of PSS World Medical, Inc. (“PSSI”).
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 |
| Cost of Sales | $ | — |
| | $ | 1 |
| | $ | 3 |
|
| Operating Expenses | | | | | |
| Transaction closing expenses | 10 |
| | 6 |
| | 39 |
|
| Restructuring, severance and relocation | — |
| | 57 |
| | 43 |
|
| Outside service fees | 27 |
| | 66 |
| | 27 |
|
| Other | 73 |
| | 94 |
| | 46 |
|
| Total | 110 |
| | 223 |
| | 155 |
|
| Other Income, Net | 4 |
| | — |
| | 14 |
|
| Interest Expense - bridge loan fees | — |
| | — |
| | 46 |
|
| Total Acquisition Expenses and Related Adjustments | $ | 114 |
| | $ | 224 |
| | $ | 218 |
|
Acquisition expenses and related adjustments by segment were as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 |
| Cost of Sales | $ | — |
| | $ | 1 |
| | $ | 3 |
|
| Operating Expenses and Other Income, Net | | | | | |
| Distribution Solutions | 112 |
| | 211 |
| | 120 |
|
| Technology Solutions | — |
| | — |
| | 15 |
|
| Corporate | 2 |
| | 12 |
| | 34 |
|
| Total | 114 |
| | 223 |
| | 169 |
|
| Corporate - Interest Expense | — |
| | — |
| | 46 |
|
| Total Acquisition Expenses and Related Adjustments | $ | 114 |
| | $ | 224 |
| | $ | 218 |
|
During 2016, 2015 and 2014, we incurred $9 million, $109 million and $129 million of acquisition-related expenses for our acquisition of Celesio and $70 million, $110 million, and $68 million for our acquisition of PSSI. These expenses primarily include restructuring, severance, 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. Integration activities for our PSSI acquisition are substantially completed.
Amortization Expenses of Acquired Intangible Assets
Amortization expenses of acquired intangible assets in connection with acquisitions recorded in operating expenses were $423 million, $483 million and $308 million in 2016, 2015 and 2014. Amortization expenses decreased in 2016 primarily due to foreign currency effects and intangible assets that were fully amortized. Amortization expenses increased in 2015 primarily due to our Celesio acquisition.
Amortization expense by segment was as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 |
| Distribution Solutions | $ | 389 |
| | $ | 442 |
| | $ | 255 |
|
| Technology Solutions | 34 |
| | 40 |
| | 52 |
|
| Corporate | — |
| | 1 |
| | 1 |
|
| Total | $ | 423 |
| | $ | 483 |
| | $ | 308 |
|
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Other Income, Net:
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 |
| Distribution Solutions | $ | 41 |
| | $ | 48 |
| | $ | 28 |
| | (15 | ) | % | | 71 |
| % |
| Technology Solutions | 2 |
| | 3 |
| | 2 |
| | (33 | ) | | | 50 |
| |
| Corporate | 15 |
| | 12 |
| | 2 |
| | 25 |
| | | 500 |
| |
| Total | $ | 58 |
| | $ | 63 |
| | $ | 32 |
| | (8 | ) | % | | 97 |
| % |
Other income, net in 2016 approximated the prior year and increased in 2015 primarily due to our acquisition of Celesio which included higher equity investment income. Additionally, 2014 other income, net included a loss on a foreign exchange option relating to our acquisition of Celesio.
Segment Operating Profit, Corporate Expenses, Net and Interest Expense:
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | | Change |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | | | 2016 | | 2015 |
Segment Operating Profit (1) (2) | | | | | | | | | | | | |
| Distribution Solutions | $ | 3,553 |
| | $ | 3,047 |
| | $ | 2,472 |
| | | 17 |
| % | | 23 |
| % |
| Technology Solutions | 519 |
| | 438 |
| | 448 |
| | | 18 |
| | | (2 | ) | |
| Subtotal | 4,072 |
| | 3,485 |
| | 2,920 |
| | | 17 |
| | | 19 |
| |
Corporate Expenses, Net (2) | (469 | ) | | (454 | ) | | (449 | ) | | | 3 |
| | | 1 |
| |
| Interest Expense | (353 | ) | | (374 | ) | | (300 | ) | | | (6 | ) | | | 25 |
| |
Income From Continuing Operations Before Income Taxes (2) | $ | 3,250 |
| | $ | 2,657 |
| | $ | 2,171 |
| | | 22 |
| % | | 22 |
| % |
| | | | | | | | | | | | | |
| Segment Operating Profit Margin | | | | | | | | | | | | |
| Distribution Solutions | 1.89 |
| % | 1.73 |
| % | 1.84 |
| % | | 16 |
| bp | | (11 | ) | bp |
| Technology Solutions | 17.99 |
| | 14.27 |
| | 13.45 |
| | | 372 |
| | | 82 |
| |
| |
(1) | Segment operating profit includes gross profit, net of operating expenses, plus other income, net, for our two operating segments. |
| |
(2) | In connection with the Cost Alignment Plan, the Company recorded pre-tax restructuring charges of $229 million in 2016. Pre-tax charges were recorded as follows: $161 million, $51 million and $17 million within our Distribution Solutions segment, Technology Solutions segment and Corporate expenses, net. |
Segment Operating Profit
Distribution Solutions: Operating profit increased over the last two years primarily due to growth in our business and for 2015 due to our business acquisitions. Operating profit margin for 2016 increased due to lower operating expenses as a percentage of revenues, partially offset by a decline in gross profit margin. Operating profit and operating profit margin in 2016 includes $161 million of pre-tax charges associated with the Cost Alignment Plan, lower LIFO charges, and a $52 million pre-tax gain on the sale of our ZEE Medical business. Operating profit margin for 2015 decreased 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. In 2015 and 2014, operating profit and operating profit margin includes $150 million and $68 million of reserve adjustments for estimated probable losses related to our controlled substance distribution claims and AWP litigation.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Technology Solutions: Operating profit and operating profit margin increased in 2016 primarily due to higher gross profit margin and a decrease in operating expenses as a percentage of revenue. Operating profit and operating profit margin for 2016 includes a $51 million pre-tax gain from the sale of our nurse triage business and $51 million of pre-tax charges associated with the Cost Alignment Plan. Operating profit margin increased in 2015 from 2014 primarily due to lower operating expenses as a percentage of revenues, partially offset by a decline in gross profit margin. In 2015 and 2014, operating profit and operating profit margin were unfavorably affected by $34 million and $57 million of charges associated with a depreciation and amortization catch-up related to 2014, and product alignment and impairment charges.
Corporate: Corporate expenses, net, increased over the last two years primarily due to higher operating expenses as previously discussed.
Interest Expense: Interest expense decreased in 2016 compared to the prior year primarily due to repayments of debt and certain foreign currency-denominated credit facilities. Interest expense increased in 2015 compared to the prior year primarily due to the March 2014 issuance of $4.1$1.0 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 acquisition of Celesio. Partially offsetting these increases, interest expense benefited from the repayment oflong-term debt in the fourththird quarter of 2014.
2021 and our tender offer activity in the second quarter of 2022. Interest expense fluctuates based on timing, amounts and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.
Income TaxesTax (Benefit) Expense
During 2016, 2015 and 2014,We recorded income tax (benefit) expense related to continuing operations was $908 million, $815of $636 million and $757 million, which included net discrete tax benefits of $42 million($695 million) for the years ended March 31, 2022 and $33 million in 2016 and 2015 and a net discrete tax expense of $94 million in 2014.2021, respectively. Our reported income tax (benefit) expense rates were 27.9%, 30.7%33.0% and 34.9%(13.8%) in 2016, 20152022 and 2014. 2021, respectively.
Fluctuations in our reported income tax rates are primarily due to non-cash charges related to remeasuring the value of certain of our European businesses to fair value less costs to sell, the impact of opioid-related claims, and changes withinin our business mix including varying proportions of income attributableearnings between various taxing jurisdictions. Refer to foreign countries that have lowerFinancial Note 7, “Income Taxes,” to the consolidated financial statements included in this Annual Report for more information.
Our reported income tax rates, and discrete items.rate for 2021 was impacted by the charge for opioid-related claims of $8.1 billion ($6.8 billion after-tax).
Significant judgments and estimates are required in determining the consolidated income tax provision and evaluating income tax uncertainties. Although our major taxing jurisdictions include the U.S., Canada, and Canada,the U.K., 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.
We received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2013. During 2016, we reached an agreement to settle the transfer pricing matter for years 2003 through 2013 and recorded a net discrete tax benefit of $8 million.
The Internal Revenue Service (“IRS”) is currently examining our U.S. corporation income tax returns for 2007 through 2009 and may issue a Revenue Agent Report during the first quarter of 2017. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits. During 2015, we reached an agreement with the 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Loss from Discontinued Operations, Net of Tax
LossesLoss from discontinued operations, net of tax, were $32 million, $299 million and $156 million in 2016, 2015 and 2014.
In 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business within our Distribution Solutions segment, which we acquired through our February 2014 acquisition of Celesio. Loss from discontinued operations, net for 2015 included $241 million of non-cash pre-tax ($235 million after-tax) impairment charges, which were recorded to reduce the carrying value of this business to its estimated fair value, less costs to sell. On January 31, 2016, we entered into an agreement to sell the Brazilian pharmaceutical distribution business to a third party. The sale is expected to be completed during the first half of 2017, subject to regulatory approval and customary closing conditions. We expect to recognize an after-tax charge of approximately $80 million to $100 million upon the disposition of the business within discontinued operations as a result of settlement of certain indemnifications.
Loss from discontinued operations, net for 2015 also included a pre-tax and after-tax loss of $6 million from the sale of a software business within our International Technology business. Loss from discontinued operations, net for 2014, included a pre-tax and after-tax loss ofwas $5 million and $7$1 million within our discontinued operations fromand for the sale of our Hospital Automation business. Additionally, during 2014, we recorded an $80 million non-cash pre-taxyears ended March 31, 2022 and after-tax impairment charge to reduce the carrying value of our International Technology business to its estimated fair value less costs to sell. Refer to Financial Note 9, “Discontinued Operations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.2021, respectively.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Net Income (Loss) Attributable to Noncontrolling Interests: Interests
Net income attributable to noncontrolling interests for 2016 and 2015 primarily represents ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC, and the guaranteed dividends andaccrual of the annual recurring compensation amount of €0.83 per McKesson Europe AG (“McKesson Europe”) share that we areMcKesson is obligated to pay to the noncontrolling shareholders of CelesioMcKesson Europe under the Domination Agreement. Net loss attributable toNoncontrolling interests with redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests for 2014 primarily represents the portionare presented outside of Celesio’s net loss that was not allocable to McKesson Corporation.Corporation stockholders’ deficit in our consolidated balance sheet. Refer to the “Selected Measures of Liquidity and Capital Resources” section of this Financial Review and Financial Note 10, “Noncontrolling8, “Redeemable Noncontrolling Interests and Redeemable Noncontrolling Interests,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K for additional information.information on changes to our redeemable and noncontrolling interests that occurred during the first quarter of 2022.
Net Income (Loss) Attributable to McKesson Corporation: Corporation
Net income (loss) attributable to McKesson Corporation was $2,258 million, $1,476 million$1.1 billion and $1,263 million in 2016, 2015$(4.5) billion for the years ended March 31, 2022 and 2014 and diluted2021, respectively. Diluted earnings (loss) per common share were $9.70, $6.27attributable to McKesson Corporation was $7.23 and $5.41.$(28.26) for the years ended March 31, 2022 and 2021, respectively. Net loss per diluted share for the year ended March 31, 2021 is calculated by excluding dilutive securities from the denominator due to their antidilutive effects. Additionally, our 2022 and 2021 diluted earnings (loss) per share reflect the cumulative effects of share repurchases.
Weighted AverageWeighted-Average Diluted Common Shares Outstanding: Outstanding
Diluted earnings (loss) per common share was calculated based on a weighted averageweighted-average number of shares outstanding of 233 million, 235154.1 million and 233160.6 million for 2016, 2015the years ended March 31, 2022 and 2014. Weighted average2021, respectively. Weighted-average diluted common shares outstanding is affectedimpacted by the exercise and settlement of share-based awards and in 2016 and 2014, the cumulative effect of share repurchases.
Foreign Operations
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Overview of Segment Results:
Segment Revenues:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | | | |
| (Dollars in millions) | 2022 | | 2021 | | | | Change |
| Segment revenues | | | | | | | | | | |
| U.S. Pharmaceutical | $ | 212,149 | | | $ | 189,274 | | | | | 12 | | % | | |
| Prescription Technology Solutions | 3,864 | | | 2,890 | | | | | 34 | | | | |
| Medical-Surgical Solutions | 11,608 | | | 10,099 | | | | | 15 | | | | |
| International | 36,345 | | | 35,965 | | | | | 1 | | | | |
| Total revenues | $ | 263,966 | | | $ | 238,228 | | | | | 11 | | % | | |
The changes in revenues for each of our segments for the year ended March 31, 2022 compared to the prior year consisted of the following:
| | | | | | | |
| (Dollars in millions) | Increase (decrease) |
| Sales to pharmacies and institutional healthcare providers | $ | 20,577 | | | |
Sales to specialty practices and other (1) | 2,298 | | | |
| Total change in U.S. Pharmaceutical revenues | $ | 22,875 | | | |
| | | |
| Total change in Prescription Technology Solutions revenues | $ | 974 | | | |
| | | |
| Sales to primary care customers | $ | 1,300 | | | |
| Sales to extended care customers | (138) | | | |
Other (2) | 347 | | | |
| Total change in Medical-Surgical Solutions revenues | $ | 1,509 | | | |
| | | |
| Sales in Europe, excluding FX impact | $ | (2,159) | | | |
| Sales in Canada, excluding FX impact | 1,560 | | | |
| Impact from FX | 979 | | | |
| Total change in International revenues | $ | 380 | | | |
| | | |
| Total change in revenues | $ | 25,738 | | | |
FX - foreign currency exchange fluctuations. We calculate the impact from FX by converting current year period results of our operations in foreign countries, which are recorded in local currencies, into U.S. dollars by applying the average foreign currency exchange rates of the comparable prior year period.
(1)Includes the results for the distribution of COVID-19 vaccines.
(2)Includes the results for the kitting and distribution of ancillary supply kits needed to administer COVID-19 vaccines.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
U.S. Pharmaceutical
2022 vs. 2021
U.S. Pharmaceutical revenues for the year ended March 31, 2022 increased 12% compared to the prior year primarily due to market growth, including growth in specialty pharmaceuticals, branded pharmaceutical price increases, and higher volumes from retail national account customers, partially offset by branded to generic drug conversions. Revenues for this segment were also favorable year over year driven by the recovery of prescription volumes from the prior year impact of COVID-19, including increased customer demand for pharmaceuticals in retail pharmacies and institutional healthcare providers.
Prescription Technology Solutions
2022 vs. 2021
RxTS revenues for the year ended March 31, 2022 increased 34% compared to the prior year primarily due to increased volume with new and existing customers primarily in our third-party logistics and wholesale distribution services.
Medical-Surgical Solutions
2022 vs. 2021
Medical-Surgical Solutions revenues for the year ended March 31, 2022 increased 15% compared to the prior year largely in our primary care business driven by improvements in patient care visits. Revenues for this segment were also favorably impacted by the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines.
International
2022 vs. 2021
International revenues for the year ended March 31, 2022 increased 1% compared to the prior year. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 2% largely due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. This was partially offset by favorability year over year due to the recovery of volumes from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment as well as sales to new customers in our Canadian business.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Segment Operating Profit (Loss) and Corporate Expenses, Net:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | | | |
| (Dollars in millions) | 2022 | | 2021 | | | | Change | | |
Segment operating profit (loss) (1) | | | | | | | | | | |
U.S. Pharmaceutical (2) | $ | 2,879 | | | $ | 2,763 | | | | | 4 | | % | | |
| Prescription Technology Solutions | 500 | | | 395 | | | | | 27 | | | | |
Medical-Surgical Solutions (3) | 959 | | | 707 | | | | | 36 | | | | |
International (4) | (968) | | | (37) | | | | | — | | | | |
| | | | | | | | | | |
| Subtotal | 3,370 | | | 3,828 | | | | | (12) | | | | |
Corporate expenses, net (5) | (1,073) | | | (8,645) | | | | | (88) | | | | |
Loss on debt extinguishment (6) | (191) | | | — | | | | | — | | | | |
| Interest expense | (178) | | | (217) | | | | | (18) | | | | |
| Income (loss) from continuing operations before income taxes | $ | 1,928 | | | $ | (5,034) | | | | | 138 | | % | | |
| | | | | | | | | | |
| Segment operating profit (loss) margin | | | | | | | | | | |
| U.S. Pharmaceutical | 1.36 | | % | 1.46 | | % | | | (10) | | bp | | |
| Prescription Technology Solutions | 12.94 | | | 13.67 | | | | | (73) | | | | |
| Medical-Surgical Solutions | 8.26 | | | 7.00 | | | | | 126 | | | | |
| International | (2.66) | | | (0.10) | | | | | (256) | | | | |
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
(1)Segment operating profit (loss) includes gross profit, net of total operating expenses, as well as other income (expense), net, for our reportable segments.
(2)Operating profit for our U.S. Pharmaceutical segment includes cash receipts of our share of antitrust legal settlements of $46 million and $181 million for the years ended March 31, 2022 and 2021, respectively. Operating profit includes a charge of $50 million for the year ended March 31, 2021 related to our estimated liability under the OSA.
(3)Operating profit for our Medical-Surgical Solutions segment for the years ended March 31, 2022 and 2021 includes charges totaling $164 million and $136 million, respectively, on certain PPE and other related products due to inventory impairments and excess inventory.
(4)Operating loss for our International segment for the year ended March 31, 2022 includes charges of $1.1 billion to remeasure our U.K. disposal group held for sale to fair value less costs to sell. Operating loss for the year ended March 31, 2022 includes charges of $383 million to remeasure our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. Operating loss for the year ended March 31, 2022 also includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business as well as a gain of $42 million related to the sale to WBA of our 30% interest in the German pharmaceutical wholesale joint venture to WBA. Operating loss for the year ended March 31, 2021 includes charges of $58 million to remeasure to fair value the assets and liabilities of our German pharmaceutical wholesale business which was contributed to a joint venture. Operating loss for the year ended March 31, 2021 includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe. Operating loss for the year ended March 31, 2021 includes a goodwill impairment charge of $69 million related to our European retail business.
(5)Corporate expenses, net for the year ended March 31, 2022 includes charges of $55 million primarily related to the effect of accumulated other comprehensive loss components from our E.U. disposal group. Corporate expenses, net for the year ended March 31, 2022 includes charges of $42 million primarily related to the effect of accumulated other comprehensive loss components from our U.K. disposal group. Corporate expenses, net includes net gains from our equity investments of $98 million and $133 million for the years ended March 31, 2022 and 2021, respectively. Corporate expenses, net includes charges of $274 million and $8.1 billion for the years ended March 31, 2022 and 2021, respectively, related to our estimated liability for opioid-related claims. Corporate expenses, net includes $130 million and $153 million for the years ended March 31, 2022 and 2021, respectively, of opioid-related costs, primarily litigation expenses. Corporate expenses, net for the year ended March 31, 2021 includes a net gain of $131 million recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program.
(6)Loss on debt extinguishment for the year ended March 31, 2022 consists of a charge of $191 million on debt extinguishment related to our July 2021 tender offer to redeem a portion of our existing debt.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
U.S. Pharmaceutical
2022 vs. 2021
Operating profit increased for the year ended March 31, 2022 compared to the prior year primarily due to growth in specialty pharmaceuticals and the contribution from our COVID-19 vaccine distribution program. Operating profit was unfavorably impacted by a decrease in net cash proceeds received of $135 million representing our share of antitrust legal settlements, an increase in operating expenses, and product mix and volume.
Prescription Technology Solutions
2022 vs. 2021
Operating profit increased for the year ended March 31, 2022 compared to prior year primarily driven by increased volumes with new and existing customers due to growth in our access and adherence solutions.
Medical-Surgical Solutions
2022 vs. 2021
Operating profit increased for the year ended March 31, 2022 compared to prior year primarily due to favorability in our primary care business from improvements in patient care visits, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines. This increase was partially offset by inventory charges on certain PPE and other related products, and an increase in employee-related expenses to support business growth.
International
2022 vs. 2021
Operating loss increased for the year ended March 31, 2022 compared to the prior year primarily due to fair value remeasurement charges related to our E.U. disposal group and our U.K. disposal group, partially offset by the cessation of depreciation and amortization expenses, a prior year goodwill impairment charge related to our European retail business and a gain recognized related to the sale of our Canadian health benefit claims management and plan administrative services business. This segment also observed favorability year over year due to the distribution of COVID-19 vaccines, COVID-19 tests, and PPE, as well as volume recovery from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment.
Corporate
2022 vs. 2021
Corporate expenses, net decreased for the year ended March 31, 2022 compared to the prior year due to a charge of $8.1 billion recorded in 2021 related to our estimated liability for opioid-related claims. The decrease in Corporate expenses, net was partially offset by $274 million recorded in 2022 related to our estimated liability for opioid-related claims, a net gain of $131 million recognized in 2021 in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program, and fair value remeasurement charges related to our E.U. disposal group and our U.K. disposal group.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
FOREIGN OPERATIONS
Our foreign operations represented approximately 17%, 20%14% and 11%15% of our consolidated revenues in 2016, 20152022 and 2014.2021, respectively. Foreign operations are subject to certain risks, including currency fluctuations. Refer to Item 1A - Risk Factors in Part I of this Annual Report for a risk factor related to fluctuations in foreign currency exchange rates. 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. We conduct our business worldwide in local currencies including Euro, British pound sterling, and Canadian dollar. As a result, the comparability of our results reported in U.S. dollars can be affected by changes in foreign currency exchange rates. In discussing our operating results, we may use the term “foreign currency effect”,exchange fluctuations,” which refers to the effect of changes in foreign currency exchange rates used to convert the local currency results of our operations in foreign countries where the functional currency is not the U.S. dollar. We present this information to provide a framework for assessing how our business performed excluding the effect of foreign currency exchange rate fluctuations. In computing the foreign currency effect,exchange fluctuations, we translate our current year results of our operations in foreign countries recorded in local currencies into U.SU.S. dollars by applying their respective average foreign currency exchange rates of the corresponding prior year periods, and we subsequently compare those results to the previously reported results of the comparable prior year periods reported in U.S. dollars.
In July 2021, we announced our intention to exit our businesses in Europe. In 2022, we entered into agreements to sell the E.U. disposal group and U.K. disposal group and completed the previously announced sale of our Austrian business. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information on these European divestitures.
Additional information regarding our foreign operations is also included in Financial Note 27,21, “Segments of Business,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.Report.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Business CombinationsBUSINESS COMBINATIONS
Refer to Financial Notes 2Note 4, “Business Acquisitions and 16, “Business Combinations” and “Debt and Financing Activities,Divestitures,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K for additional information.
2017 OutlookFISCAL 2023 OUTLOOK
Information regarding the Company’s 2017fiscal 2023 outlook is contained in the release of our fourth quarter fiscal 2022 financial results included as an exhibit to our Form 8-K datedfurnished to the SEC on May 5, 2016. This2022, which is not incorporated by reference into this Annual Report. That Form 8-K should be read in conjunction with the sectionsforward-looking statements in the "Trends and Uncertainties" section of this Financial Review, as well as the cautionary statements in Item 1, - Business"Business - Forward-Looking Statements," and Item 1A, - Risk"Risk Factors," in Part I of this Annual Report on Form 10-K.Report.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters based upon past experience and management’s judgment 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 appearingincluded in this Annual Report on Form 10-K.Report. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
AllowanceAllowances for Doubtful Accounts: Credit Losses: Our receivables primarily consist of short-term trade accounts receivable from customers that result from the sale of goods and services. We also 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The Company considers historical experience, the appropriatecurrent economic environment, customer credit ratings or bankruptcies, legal disputes, and reasonable and supportable forecasts to develop its allowance for doubtful accounts, which includes general and specific reserves,credit losses. Management reviews these factors quarterly to determine if any adjustments are needed to the Company reviews accounts receivable aging, industry trends, customer financial strength, credit standing, historical write-off trends and payment historyallowance.
Sales to assess the probability of collection. If the frequency and severity of customer defaults due to our customers’ financial condition or general economic conditions change, our allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding receivables and other customer financing and adjust allowances for accounts where collection may be in doubt. During 2016, sales to ourCompany’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 52.4%52% of our total consolidated revenues.revenues in 2022 and comprised approximately 43% of total trade accounts receivable at March 31, 2022. Sales to our largest customer, CVS Health Corporation (“CVS”), accounted for approximately 20.3%21% of our total consolidated revenues. At March 31, 2016, trade accounts receivable from our ten largest customers wererevenues in 2022 and comprised approximately 32%28% of total trade accounts receivable. Accounts receivable from CVS were approximately 18% of total trade accounts receivable.at March 31, 2022. As a result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. The accounts receivablesreceivable balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. A material default in payment, a material reduction in purchases from these or any other large customers, or the loss of a large customer or GPO could have a material adverse impact on our financial position, 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 20162022 are appropriate and consistent within the context of historical methodologies employed. At this time, we are not awareemployed, as well as assessment of any internal process or customer issues that might lead to a significant increase in our allowance for doubtful accounts as a percentage of net revenue in the foreseeable future.trends currently available.
At March 31, 2016,2022, trade and notes receivables were $14,685 million$16.8 billion prior to allowances of $212$99 million. In 2016, 20152022, 2021 and, 2014,2020, our provision for bad debts was $113$29 million, $67$4 million, and $36 million.$91 million, respectively. At March 31, 20162022 and 2015,2021, the allowance as a percentage of trade and notes receivables was 1.4%0.6% and 1.1%.1.2%, respectively. An increase or decrease of a hypothetical 0.1% in the 20162022 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $15$17 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst caseworst-case scenarios. Additional information concerning our allowanceallowances for doubtful accountscredit losses may be found in Schedule II included in this Annual Report on Form 10-K.Report.
Inventories: Inventories consist of merchandise held for resale. We report inventories at the lower of cost or market (“LCM”). Inventoriesnet realizable value, except for our Distribution Solutions segment consistinventories determined using the LIFO method which are valued at the lower of merchandise held for resale. For our Distribution Solutions segment,LIFO cost or market. LIFO method presumes that the most recent inventory purchases are the first items sold and the inventory cost under LIFO approximates market. The majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign and certain domestic 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.and weighted-average purchase prices. 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 $15.3 billion and $14.3 billion at March 31, 2016 and 2015.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The LIFO method was used to value approximately 74% and 73% of our inventories at March 31, 2016 and 2015. If we had used the FIFO method of inventory valuation, which approximates current replacement costs, inventories would have been approximately $1,012 million and $768 million higher than the amounts reported at March 31, 2016 and 2015. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. In 2016, 2015, and 2014, we recognized net LIFO expense of $244 million, $337 million and $311 million within our consolidated statements of operations. 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.
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. As of March 31, 2016 and 2015, inventories at LIFO did not exceed market.
In determining whether an inventory valuation issues exist,allowance is required, 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.
At March 31, 2022 and 2021, total inventories, net were $18.7 billion and $19.2 billion, respectively, in our Consolidated Balance Sheets. The LIFO method was used to value approximately 63% and 58% of our inventories at March 31, 2022 and 2021, respectively. If we had used the moving average method of inventory valuation, inventories would have been approximately $383 million and $406 million higher than the amounts reported at March 31, 2022 and 2021, respectively. These amounts are equivalent to our LIFO reserves. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. We recognized LIFO credits of $23 million, $38 million, and $252 million in 2022, 2021 and, 2020, respectively, in our Consolidated Statements of Operations. The lower LIFO credits in 2022 compared to 2021 are primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We believe that the moving 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. As of March 31, 2022 and 2021, inventories at LIFO did not exceed market.
Business Combinations: We account for acquired businessesbusiness combinations using the acquisition method of accounting which requireswhereby the identifiable assets and liabilities of the acquired business, as well as any noncontrolling interest in the acquired business, are recorded at their estimated fair values as of the date that oncewe obtain control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values.business. Any purchase consideration in 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 a method that is a form or variation of the income method. This method starts withapproach, whereby a forecast of all of the expected future net cash flows associated with each asset. These cash flowsattributable to the asset are then adjusteddiscounted to present value by applying an appropriateusing a risk-adjusted discount rate that reflects the risk factors associated with the cash flow streams.rate. Some of the more significant estimates and assumptions inherent in the income method or other methodsapproach 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 theexpected 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.life. Refer to Financial Note 2,4, “Business Combinations,Acquisitions and Divestitures,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K for additional information regarding our acquisitions.
Goodwill and IntangibleLong-Lived Assets:
Goodwill
As a result of acquiring businesses, we have $9,786 million and $9,817 million$9.5 billion of goodwill at March 31, 20162022 and 20152021, and $3,021 million$2.1 billion and $3,441 million$2.9 billion of intangible assets, net at March 31, 20162022 and 2015. We maintain goodwill assets on our books unless the assets are considered to be impaired.2021, respectively. We perform an impairment test on goodwill balances annually in the fourththird quarter orand more frequently if indicators for potential impairment exist. Indicators that are considered include significant changesdeclines 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.
Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The first step inWe apply the goodwill testing requires us to compareimpairment test by comparing 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 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.equal to the amount of excess carrying value above the estimated fair value, if any, but not to exceed the amount of goodwill allocated to the reporting unit.
To estimate the fair value of our reporting units, we generally 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.that is commensurate with the risk inherent within the reporting unit. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the reasonableness of our concluded 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. 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 reviewtesting date and are based on expectations and assumptions that have been deemed reasonable by management. Any material changes in key assumptions, including failure to meet business plans, a furthernegative changes in government reimbursement rates, deterioration in the U.S. and global financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry, or other unanticipated events and circumstances may affectdecrease the accuracyprojected cash flows or validity of such estimatesincrease the discount rates and could potentially result in an impairment charge. In 2016, 2015Under the market approach, significant estimates and 2014, we concluded that there were no impairmentsassumptions also include the selection of appropriate guideline companies and the determination of appropriate valuation multiples to apply to the reporting unit. Under the income approach, significant estimates and assumptions also include the determination of discount rates. The discount rates represent the weighted-average cost of capital measuring the reporting unit’s cost of debt and equity financing, which are weighted by the percentage of debt and percentage of equity in a company’s target capital structure. Included in the estimate of the weighted-average cost of capital is the assumption of an unsystematic risk premium to address incremental uncertainty related to the reporting units’ future cash flow projections. An increase in the unsystematic risk premium increases the discount rate.
The annual impairment testing performed for 2022, 2021, and 2020 did not indicate any impairment of goodwill. The segment change in the second quarter of 2021 prompted changes in multiple reporting units across the Company and as a result, goodwill included in impacted reporting units was reallocated using a relative fair value approach and assessed for impairment both before and after the reallocation. We recorded a goodwill impairment charge of $69 million in 2021 as the estimated fair value of the Europe Retail Pharmacy reporting unit was lower than its reassigned carrying value based on changes in the composition of the Europe Retail Pharmacy reporting unit within the International segment. At March 31, 2022 and 2021, the balance of goodwill in the International segment primarily relates to our McKesson Canada reporting unit.
The estimated fair value of our McKesson Canada reporting unit in our International segment exceeded the carrying value of the reporting unit by 22% in 2022. The goodwill balance of this reporting unit was $1.5 billion at March 31, 2022, or approximately 16% of the consolidated goodwill balance. Generally, a decline in estimated future cash flows in excess of approximately 22% for McKesson Canada or an increase in the discount rate in excess of approximately 2% could result in an indication of goodwill impairment for this reporting unit in future reporting periods under the income approach. Other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions may require us to further revise the projected cash flows, which could adversely affect the fair value of eachour other reporting unit exceeded its carrying value.units in future periods. Refer to Financial Note 11, “Goodwill and Intangible Assets, Net,” to the consolidated financial statements included in this Annual Report for additional information.
Long-Lived Assets
Currently, all of our intangible and other long-lived assets are subject to amortization and are amortized or depreciated based on the pattern of their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to thirty-eight24 years. We review intangible and other long-lived assets for impairment at an asset group level whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability of intangible and other long-lived assets is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from the 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 group 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 2016, 2015 or 2014 within our continuing operations.
Our ongoing consideration of all the factors described previously could result in further impairment charges in the future, which could adversely affect our net income.
Supplier Reserves: We establish reserves against amounts due from suppliers relating Refer to various priceFinancial Note 3, “Restructuring, Impairment, and rebate incentives, including deductions or billings taken against payments otherwise dueRelated Charges, Net,” to them. These reserve estimates are established basedthe consolidated financial statements included in this Annual Report for additional information 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, 2016 and 2015, supplier reserves were $144 million and $167 million. The final outcome of any outstanding claims may differ from our estimate. All of the supplier reserves at March 31, 2016 and 2015 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, 2016 would result in an increase or decrease in the cost of sales of approximately $29 million in 2016. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
long-lived asset impairments.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Long-lived assets classified as held for sale are measured at the lower of carrying amount or fair value less costs to sell, and are not depreciated or amortized. Fair value is determined based on the total consideration expected to be received by the Company. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale.
Valuation of Equity Method Investments: We evaluate our investments for other-than-temporary impairments when circumstances indicate those assets may be impaired. When the decline in value is deemed to be other than temporary, an impairment is recognized to the extent that the fair value is less than the carrying value of the investment. We consider various factors in determining whether a loss in value of an investment is other than temporary including: the length of time and the extent to which the fair value has been below cost, the financial condition of the investees, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery of value. Management makes certain judgments and estimates in its assessment including but not limited to: identifying if circumstances indicate a decline in value is other than temporary, expectations about the business operations of investees, as well as industry, financial, and market factors. Any significant changes in assumptions or judgments in assessing impairments could result in an impairment charge.
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.uncertainties, including those used to conclude on the tax-free nature of the separation of the Change Healthcare JV and the unrecognized tax position related to opioid-related litigation and claims, and may differ from the actual amounts of tax benefit recognized. 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 $1,272 million and $1,189 million at March 31, 2016 and 2015 and deferred tax liabilities of $3,947 million and $3,791 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 $267 million and $229 million for 2016 and 2015 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 tax expense and cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex new 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.
An increase or decrease of a hypothetical 1% in our 2016 effective tax rate as applied to income from continuing operations would result in an increase or decrease in the provision for income taxes of approximately $33 million for 2016.
Loss Contingencies: We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict, and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Legal fees are recognized as incurred when the legal services are 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 potential 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 future negotiations with or decisions by third parties, such as regulatory agencies, the court system, and other interested parties. Such factors bear directlyIn conjunction with the preparation of the consolidated financial statements included in this Annual Report, we considered matters related to ongoing controlled substances claims to which we are a party. On February 25, 2022, the Company and two other U.S. pharmaceutical distribution companies (collectively, “Distributors”) determined that there is sufficient state and subdivision participation to proceed with an agreement to settle a substantial majority of opioid-related lawsuits filed against the Distributors by U.S. states, territories, and local governmental entities. Based on whether it isour estimated liability under the Settlement and to governmental entities not expected to participate in the settlement, we recorded a charge of $8.1 billion for the year ended March 31, 2021 within “Claims and litigation charges, net” in our Consolidated Statement of Operations included in this Annual Report. In connection with the Settlement and other opioid-related settlement accruals, we recorded additional charges of $274 million during the year ended March 31, 2022 within “Claims and litigation charges, net,” in our Consolidated Statement of Operations. Because of the many uncertainties associated with the remaining opioid-related litigation matters, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. While we are not able to predict the outcome or reasonably estimate a range of potential losspossible losses in these matters, an adverse judgment or negotiated resolution in any of these matters could have a material adverse effect on our results of operations, financial position, cash flows, or liquidity. Refer to Financial Note 18, “Commitments and boundaries of high and low estimate.Contingent Liabilities,” to the consolidated financial statements included in this Annual Report for additional information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 revolving credit facilities, accounts receivable factoring facilities and commercial paper issuance,program, will be sufficient to fund our long-termshort-term and short-termlong-term capital expenditures, working capital, and other cash requirements. In addition,We remain well-capitalized with access to liquidity from our $4.0 billion revolving credit facility. At March 31, 2022, we may accesswere in compliance with all debt covenants, and believe we have the long-termability to continue to meet our debt capital markets from time to time. We arecovenants in the process of acquiring certain businesses,future.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The following table summarizes the net change in cash, cash equivalents, and restricted cash for the cost of these acquisitions may be partially funded throughperiods shown:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, | | |
| (Dollars in millions) | 2022 | | 2021 | | Change |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 4,434 | | | $ | 4,542 | | | $ | (108) | |
| Investing activities | (89) | | | (415) | | | 326 | |
| Financing activities | (6,321) | | | (1,693) | | | (4,628) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 55 | | | (61) | | | 116 | |
Cash, cash equivalents, and restricted cash classified within Assets held for sale (1) | (540) | | | — | | | (540) | |
| Net change in cash, cash equivalents, and restricted cash | $ | (2,461) | | | $ | 2,373 | | | $ | (4,834) | |
(1)Refer to Financial Note 2, “Held for Sale,” to the issuance of debt.accompanying consolidated financial statements included in this Annual Report for further information.
Operating Activities
Net cash flowprovided from operating activities was $3,672 million in 2016 compared to $3,112 million in 2015$4.4 billion and $3,136 million in 2014. Operating activities over$4.5 billion for the last three years were affected by an increase in draftsended March 31, 2022 and accounts payable reflecting longer payment terms for certain purchases and increases in receivables and inventories primarily associated with our revenue growth.2021, respectively. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers, inventory receipts, 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 the year ended March 31, 2022 were affected by net income adjusted for non-cash items, including the losses on our European businesses held for sale and our classifications of receivables, drafts and accounts payables, and inventories as held for sale. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for further information. Excluding the aforementioned classifications, operating activities for the year ended March 31, 2022 were affected by increases in inventory of $1.2 billion and drafts and accounts payable of $2.8 billion due to timing of purchases, and an increase in receivables of $1.8 billion resulting from timing of collections and higher revenues. Operating activities for the year ended March 31, 2021 were affected by net income adjusted for non-cash items, including the pre-tax $8.1 billion (after-tax $6.8 billion) non-cash charge related to our estimated liability for opioid-related claims, an increase in inventory of $2.3 billion and an increase in drafts and accounts payable of $1.3 billion driven by higher inventory stock levels to meet increased volume demand as part of our inventory management, as well as a decrease in receivables of $1.1 billion driven by timing, higher sales recognized at the end of March 2020, and higher collections in our fourth quarter of 2021.
Other non-cash items within operating activities for the year ended March 31, 2022 includes an adjustment to net income of $191 million related to loss on debt extinguishment, non-cash inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment, and stock-based compensation of $161 million. Other non-cash items for the year ended March 31, 2021 primarily includes stock-based compensation of $151 million and fair value remeasurement charges of $58 million related to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA.
Investing Activities
Net cash used in investing activities was $1,557$89 million in 2016 compared to $677and $415 million in 2015for the years ended March 31, 2022 and $5,046 million in 2014.2021, respectively. Investing activities for 2016the year ended March 31, 2022 include $40 million of net cash payments for acquisitions, $488$388 million and $189$147 millionin capital expenditures for property, plant, and equipment and capitalized software, and $210 million ofrespectively. Investing activities for the year ended March 31, 2022 also includes net cash proceeds of $578 million from sales of businesses. Additionally, we prepaid $939 million for acquisitions that closed subsequent to year end.businesses and investments, primarily driven by our European divestiture activities described above including the disposal of our Austria business, and the sale of certain of our equity investments.
Investing activities for 2015 included $170 million of net cash payments for acquisitions, $376the year ended March 31, 2021 include $451 million and $169$190 millionin capital expenditures for property, plant, and equipment and capitalized software, and $15 million ofrespectively. Investing activities for the year ended March 31, 2021 also includes net cash proceeds of $400 million from sales of our automation businessbusinesses and an equity investment. Investing activities for 2014 included $4,634 million of net cash payments for acquisitions,investments, including $4,497 million for our acquisition of Celesio. Investing activities in 2014 also included $278 million and $141$286 million in capital expendituresexchange for property, plant and equipment, and capitalized software, and $97 million of cash proceeds from salesthe contribution of our automationGerman pharmaceutical wholesale business and equity investment.to a joint venture with WBA.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Financing Activities
Net cash used in financing activities utilized $3,453 millionwas $6.3 billion and $968 million of cash in 2016$1.7 billion for the years ended March 31, 2022 and 2015 and generated net cash of $3,619 million in 2014.2021, respectively. Financing activities for 2016the year ended March 31, 2022 include cash receipts of $1,561 million$11.2 billion and payments of $1,688$11.2 billion for short-term borrowings of commercial paper. Financing activities for the year ended March 31, 2022 include a cash tender offer of $1.1 billion to redeem certain notes with a principal amount of $922 million and the redemption of our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021 using cash on hand. This resulted in total repayments of long-term debt during the year ended March 31, 2022 of $1.8 billion, including $184 million of cash paid for premiums and transaction fees. This was partially offset by the issuance of long-term debt in August 2021 from a public offering of 1.30% notes due August 15, 2026 for proceeds received of $498 million, which was utilized for general corporate purposes. Financing activities for the year ended March 31, 2022 also include $3.5 billion of cash paid for share repurchases and $277 million of cash paid for dividends. Additionally, financing activities for the year ended March 31, 2022 include payments of $1.0 billion to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders. Cash used for other financing activities for the year ended March 31, 2022 includes payments to noncontrolling interests, and funds temporarily held on behalf of unaffiliated medical practice groups.
Financing activities for the year ended March 31, 2021 include cash receipts of $6.3 billion and payments of $6.3 billion from short-term borrowings. We made repaymentsborrowings of commercial paper, along with the issuance of the 2025 Notes in a principal amount of $500 million, the retirement of our $700 million total principal amount of notes due on long-term debtNovember 30, 2020 at a fixed interest rate of $1,5983.65% upon maturity, and the redemption of our 4.75% $323 million in 2016.total principal of notes due on March 1, 2021 prior to maturity. The notes were redeemed using cash on hand and proceeds from the 2025 Notes. Financing activities in 2016for the year ended March 31, 2021 also include $1,504$742 million of cash paid for stock repurchases and $244$276 million of dividends paid.
FinancingCash used for other financing activities for 2015 include cash receipts of $3,100 milliongenerally includes payments to noncontrolling interests and payments of $3,152 millionactivity 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,our finance leases. Other 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 inthe year ended March 2014. Financing activities for 201431, 2021 also include restricted cash receiptsnet inflow related to funds temporarily held on behalf of $4,124 million from the issuance of long-term debt in March 2014 and cash paid of $348 million for repayments of long-term debt. Additionally, financing activities for 2014 included $130 million of cash payments for stock repurchases and $214 million of dividends paid.unaffiliated medical practice groups.
Share Repurchase Plans
The Company’s Board has authorized the repurchase of McKesson’s common stock from time-to-timetime to time in open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or by any combinationcombinations of such methods.methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. 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.
The Board authorized During the repurchase of the Company’s common stock up to $2 billion in October 2015 and up to $500 million in May 2015. In 2016, we repurchased 8.7 million oflast two years, our sharesshare repurchases were transacted through both an ASR program and open market transactions and in 2015 repurchased 1.5 million of our shares all through open market transactions. AllASR programs with third-party financial institutions.
Information regarding the share repurchases were funded with cash on hand.repurchase activity over the last two years is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Share Repurchases (1) |
| (In millions, except price per share data) | | Total Number of Shares Purchased (2) | | Average Price
Paid Per Share | | Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs |
| Balance, March 31, 2020 | | | | | | $ | 1,535 | |
| Shares repurchase authorization increase in 2021 | | | | | | 2,000 | |
Shares repurchased - Open market (3) | | 4.7 | | | $ | 160.33 | | | (750) | |
| Balance, March 31, 2021 | | | | | | 2,785 | |
| Shares repurchased - May 2021 ASR | | 5.2 | | | $ | 193.22 | | | (1,000) | |
| Shares repurchased - Open market | | 4.6 | | | $ | 217.73 | | | (1,007) | |
| Shares repurchase authorization increase in 2022 | | | | | | 4,000 | |
Shares repurchased - February 2022 ASR (4) | | 4.8 | | | $ | 265.56 | | | (1,500) | |
| Balance, March 31, 2022 | | | | | | $ | 3,278 | |
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations or forfeitures of equity awards.
(2)The number of shares purchased reflects rounding adjustments. |
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions, except per share data) | 2016 | | 2015 | | 2014 |
Number of shares repurchased (1) | 8.7 |
| | 1.5 |
| | — |
|
| Average price paid per share | $ | 173.64 |
| | $ | 226.55 |
| | $ | — |
|
Total value of shares repurchased (1) | $ | 1,504 |
| | $ | 340 |
| | $ | — |
|
| |
(1) | Excludes shares surrendered for tax withholding. |
At(3)Of the total dollar value, $8 million was accrued within “Other accrued liabilities” in our Consolidated Balance Sheet as of March 31, 2016,2021 for share repurchases that were executed in late March and settled in early April.
(4)In February 2022, the total authorization outstanding was $1.0Company entered into an ASR program with a third-party financial institution to repurchase $1.5 billion available under the October 2015 share repurchase plan for future repurchases of the Company’s common stock. The average price paid per share and total number of shares purchased under this program are estimates based on the initial share purchase price and initial delivery of shares under an ASR agreement and may differ from the average price paid per share and total number of shares purchased under the ASR program upon its final settlement in May 2022.
We believe that our future 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 continuedan increase in volatility 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:Resources
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| March 31, |
| (Dollars in millions) | 2022 | | 2021 |
| Cash, cash equivalents, and restricted cash | $ | 3,935 | | | | $ | 6,396 | | |
| Working capital | (2,235) | | | | 1,279 | | |
Days sales outstanding for: (1) | | | | | |
| Customer receivables | 22 | | | | 26 | | |
| Inventories | 27 | | | | 31 | | |
| Drafts and accounts payable | 55 | | | | 63 | | |
Debt to capital ratio (2) | 114.5 | | % | | 83.1 | | % |
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| | | | | | | | | | | | | | |
| | March 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 |
| Cash and cash equivalents | $ | 4,048 |
| | | $ | 5,341 |
| | | $ | 4,193 |
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| Working capital | 3,366 |
| | | 3,173 |
| | | 3,221 |
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Debt to capital ratio (1) | 43.7 |
| % | | 50.3 |
| % | | 55.4 |
| % |
Return on McKesson stockholders’ equity (2) | 26.0 |
| | | 17.0 |
| | | 16.2 |
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(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 and accumulated other comprehensive income (loss). |
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(2) | 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. |
(2)This ratio describes the relationship and changes within our capital resources, and is computed as the sum of short-term borrowings, current portion of long-term debt, and long-term debt divided by the sum of short-term borrowings, current portion of long-term debt, long-term debt, and McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive loss.
Cash equivalents, which are available-for-sale,readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime andAAA-rated U.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily 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 byand the U.S. government and an AAA rated prime money market fund denominated infunctional currencies of our foreign subsidiaries, including Euro, British pound sterling.
The remaining cashsterling, and cash equivalents are deposited with several financial institutions.Canadian dollars. 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.
Our cash and cash equivalents balance as of March 31, 20162022 and 2021 included approximately $2.2$1.5 billion and $2.3 billion of cash held by our subsidiaries outside of the United States.U.S., respectively. Our primary intent is to utilize this cash infor foreign operations and acquisitions 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 StatesU.S. is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the U.S. is generally no longer taxable for federal state and local income tax. tax purposes.
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 currentaccrued liabilities. Our Distribution Solutions segment requires abusinesses require substantial investmentinvestments in working capital that isare 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Consolidated working capital increaseddecreased at March 31, 20162022 compared to March 31, 2015the prior year primarily due to increases in receivables and inventories and a decrease in deferred taxcash and cash equivalents and receivables, as well as an increase in other accrued liabilities and an increase in our current portion of debt, partially offset by a decrease in drafts and accounts payable, and an increase in net current assets held for sale related to our E.U. disposal group and U.K. disposal group. Consolidated working capital improved at March 31, 2021 compared to the prior year primarily due to an increase in cash and cash equivalents and inventory, partially offset by an increase in drafts and accounts payable. Consolidated working capital decreased at March 31, 2015 compared to March 31, 2014 primarily due to increasespayable and a decrease in drafts and accounts payable, partially offset by increases in receivables and inventories.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
receivables.
Our debt to capital ratio improved overincreased for the last two yearsyear ended March 31, 2022 primarily due to an increase in McKesson stockholders’ deficit driven by share repurchases, partially offset by net income for the year to date period. Our debt to capital ratio was also impacted by a decrease in total debt from the completion of a cash tender offer to redeem certain notes with a principal amount of $922 million and the redemption of our €600 million Euro-denominated notes both in July 2021, partially offset by the issuance of notes with a principal amount of $500 million in August 2021. Our debt to capital ratio increased for 2021 primarily due to a decrease in our debt.stockholders’ equity driven by net loss for the year and share repurchases.
InOn July 2015, the23, 2021, we raised our quarterly dividend was raised from $0.24$0.42 to $0.28$0.47 per common share for dividends declared on or after such date until further action by the Board. Dividends were $1.08$1.83 per share in 2016, $0.962022 and $1.67 per share in 2015 and $0.92 per share in 2014. The Company anticipates2021. We anticipate that itwe 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’sour future earnings, financial condition, capital requirements, and other factors. In 2016, 20152022 and 2014,2021, we paid total cash dividends of $244 million, $227$277 million and $214$276 million,. Additionally, as required under respectively.
Our redeemable noncontrolling interests primarily related to our consolidated subsidiary, McKesson Europe. At March 31, 2021, the carrying value was $1.3 billion and we owned approximately 78% of McKesson Europe’s outstanding common shares. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe had a right to put (“Put Right”) their shares at €22.99 per share, increased annually for interest in the amount of five percentage points above a base rate published semi-annually by the German Bundesbank, less any compensation amount or guaranteed dividend already paid by McKesson (“Put Amount”). During 2022 and 2021, we paid $1.0 billion and $49 million, respectively, to purchase 34.5 million and 1.8 million shares, respectively, of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders, which reduced the balance of our redeemable noncontrolling interests.
The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, valued at $287 million, were transferred from redeemable noncontrolling interests to noncontrolling interests. At March 31, 2022, we owned approximately 95% of McKesson Europe’s outstanding common shares.
Additionally, we are obligated to pay an annual recurring compensation amount of €0.83 per CelesioMcKesson Europe share (effective January 1, 2015)(the “Compensation Amount”) to the noncontrolling shareholders of Celesio.McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period in “Net income attributable to noncontrolling interests” in the Consolidated Statements of Operations. The Domination Agreement does not expire, but it may be terminated at the end of any fiscal year by giving at least six months’ advance notice.
Contractual Obligations:Our noncontrolling interest in McKesson Europe will be included in the sale of our E.U. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report. Refer to Financial Note 8, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding redeemable noncontrolling interests.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Material Cash Requirements:
The table and information below presents our significant financial obligations and commitments at as ofMarch 31, 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years |
| (In millions) | Total | | Within 1 | | Over 1 to 3 | | Over 3 to 5 | | After 5 |
| On balance sheet | | | | | | | | | |
Total debt (1) | $ | 5,879 | | | $ | 799 | | | $ | 1,001 | | | $ | 2,400 | | | $ | 1,679 | |
Operating lease obligations (2) | 1,815 | | | 328 | | | 578 | | | 403 | | | 506 | |
Other (3) | 144 | | | 19 | | | 29 | | | 30 | | | 66 | |
| | | | | | | | | |
| Off balance sheet | | | | | | | | | |
Interest on borrowings (4) | 1,085 | | | 164 | | | 252 | | | 199 | | | 470 | |
Purchase obligations (5) | 6,294 | | | 6,195 | | | 99 | | | — | | | — | |
Other (6) | 451 | | | 309 | | | 51 | | | 27 | | | 64 | |
| Total | $ | 15,668 | | | $ | 7,814 | | | $ | 2,010 | | | $ | 3,059 | | | $ | 2,785 | |
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| | | | Years |
| (In millions) | Total | | Within 1 | | Over 1 to 3 | | Over 3 to 5 | | After 5 |
| On balance sheet | | | | | | | | | |
Long-term debt (1) | $ | 8,147 |
| | $ | 1,612 |
| | $ | 2,550 |
| | $ | 5 |
| | $ | 3,980 |
|
Other (2) (3) | 643 |
| | 198 |
| | 269 |
| | 54 |
| | 122 |
|
| | | | | | | | | | |
| Off balance sheet | | | | | | | | | |
Interest on borrowings (4) | 2,725 |
| | 298 |
| | 456 |
| | 322 |
| | 1,649 |
|
Purchase obligations (5) | 4,750 |
| | 4,668 |
| | 68 |
| | 14 |
| | — |
|
Operating lease obligations (6) | 1,970 |
| | 363 |
| | 561 |
| | 377 |
| | 669 |
|
Other (7) | 340 |
| | 194 |
| | 18 |
| | 24 |
| | 104 |
|
| Total | $ | 18,575 |
| | $ | 7,333 |
| | $ | 3,922 |
| | $ | 796 |
| | $ | 6,524 |
|
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(1) | Represents maturities of the Company’s long-term obligations including an immaterial amount of capital lease obligations. |
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(2) | Includes 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. |
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(3) | Includes our estimated severance payments associated with the Cost Alignment Plan. |
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(4) | Primarily represents interest that will become due on our fixed rate long-term debt obligations. |
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(5) | 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 outsourcing service agreements. |
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(6) | Represents minimum rental payments for operating leases. |
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(7) | 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. |
(2)Represents undiscounted minimum operating lease obligations under non-cancelable operating leases having an initial remaining term over one year and is not adjusted for imputed interest. Refer to Financial Note 10, “Leases” to the consolidated financial statements included in this Annual Report for more information.
(3)Includes our estimated benefit payments for the unfunded benefit plans and minimum funding requirements for the pension plans.
(4)Represents interest that will become due on our fixed rate long-term debt obligations.
(5)Primarily relates to the expected purchase of goods and services, including inventory and capital commitments, from vendors in the normal course of business.
(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 obligationsmaterial cash requirements table above excludes the following obligations:
As of March 31, 2022, the Company accrued $8.3 billion related to the settlement of opioid-related litigation claims with governmental entities, as described in the “Trends and Uncertainties” section of this Financial Review and Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report. The majority of this amount relates to a global settlement payable in annual installments for up to 18 years pursuant to the schedule set forth in the agreement. We expect to pay $1.0 billion prior to March 31, 2023.
At March 31, 2016,2022, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $409 million.$1.0 billion. The ultimate amount and timing of any related future cash settlements cannot be predicted with reasonable certainty.
Our banks and insurance companies have issued $142$214 million of standby letters of credit and surety bonds at March 31, 2016.2022. These were issued on our behalf and are mostly related to our customer contracts and to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, pension obligations in Europe, and our workers’ compensation and automotive liability programs.
As of March 31, 2016, we have entered into agreements to acquire companies of which approximately $3.4 billion is anticipated to be paid in 2017; of this amount, $0.7 billion was paid in April 2017.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)(Concluded)
The carrying value of redeemable noncontrolling interests related to Celesio was $1.41 billion at March 31, 2016, which exceeded the maximum redemption value of $1.28 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 €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.
Additionally, we are obligated to pay an annual recurring compensation of €0.83 per Celesio share (the “Compensation Amount”) to the noncontrolling shareholders of Celesio under the Domination Agreement, which became effective in December 2014. The Compensation Amount is recognized ratably during the applicable annual period. 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.
Refer to Financial Note 10, “Noncontrolling Interests and Redeemable 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 from our credit facilities and commercial paper issuances. Funds necessary for future debt maturities and our other cash requirements, including any future payments that may be made related to our total estimated litigation liability of $8.3 billion as of March 31, 2022 for opioid-related claims, are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and other capital market transactions. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, are open and accessible to us should we decide to access those markets. Detailed information regarding our debt and financing activities is included in Financial Note 16,12, “Debt and Financing Activities,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.Report.
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in Financial Note 26,4, “Business Acquisitions and Divestitures,” and Financial Note 20, “Related Party Balances and Transactions,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.Report.
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 appearingincluded in this Annual Report on Form 10-K.Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. McKESSON CORPORATION
FINANCIAL REVIEW (Concluded)
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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, 2016, we had $35 million in outstanding debt with variable interest rates.
Our cash and cash equivalents balances earn interest at variable rates. At March 31, 2016,2022 and 2021, we had $4$3.5 billion and $6.3 billion, respectively, in cash and cash equivalents. The effect of a hypothetical 50 bpbasis points increase in the underlying interest rate on our cash and cash equivalents, net of short-term borrowings, and variable rate debt, would not have resulted in a favorablematerial impact to earnings in 2016 and 2015 of approximately $26 million and $19 million.2022 or 2021.
Foreign currency exchange rate risk:We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling, and Canadian dollar. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies.
We have certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross currencycross-currency swaps. The forward contracts and cross currencycross-currency swaps are designatedintended to reduce the income statement effects from fluctuations in foreign currency exchange rates and have been designated as cash flow hedges. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.
As of March 31, 20162022 and 2015,2021, 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 $131$122 million and $223 million.$267 million, respectively. 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 20,15, “Hedging Activities,” for more information on our foreign currency forward contracts and crosscross-currency swaps.
In July 2021, we announced our intention to exit our businesses in Europe. During 2022, we entered into an agreement to sell certain of our businesses in the European Union which is anticipated to close within the second half of fiscal year 2023. We also completed the sale of our Austrian business during 2022 and, on April 6, 2022, we completed the sale of our retail and distribution businesses in the United Kingdom. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information on these divestitures. Subsequent to the completion of these divestitures, our foreign currency swaps.exchange rate risk will be primarily limited to the Canadian dollar.
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.
McKESSON CORPORATION
Item 8.Financial Statements and Supplementary Data.
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Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
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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 (2013), 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, 2016.2022.
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, 2016.2022. This audit report appears on the following page 55 of this Annual Report on Form 10-K.
May 5, 2016
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|
| /s/ Brian S. Tyler |
/s/ John H. HammergrenBrian S. Tyler |
John H. Hammergren |
Chairman of the Board, President and Chief Executive Officer |
| (Principal Executive Officer) |
| | |
|
| /s/ Britt J. Vitalone |
/s/ James A. BeerBritt J. Vitalone |
James A. Beer |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
McKESSON CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of
McKesson Corporation
San Francisco, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of McKesson Corporation and subsidiaries (the “Company”) as of March 31, 20162022 and 2015, and2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three fiscal years in the period ended March 31, 2016. Our audits also included2022, and the consolidated financial statementrelated notes and the schedule listed in the Index at Item 15.15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2016,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (“COSO”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 theits 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 preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
Inthe financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, 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,and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Contingent Liabilities - Opioid Claims brought by United States (U.S.) Governmental Entities - Refer to Note 1 and Note 18 to the financial statements
Critical Audit Matter Description
The Company and its affiliates are defendants in all material respects, the information set forth therein. Also,many cases asserting claims related to distribution of controlled substances, including opioids. The Company is named as a defendant along with other pharmaceutical wholesale distributors, pharmaceutical manufacturers and retail pharmacy chains. The plaintiffs in our opinion,these actions include state attorneys general, county and municipal governments, hospitals, tribal nations, health and welfare funds, third-party payors and individuals.
On February 25, 2022, the Company maintained,and two other United States pharmaceutical distribution companies (collectively, "Distributors") determined that there is sufficient State and subdivision participation to proceed with an agreement ("Settlement") to settle a substantial majority of opioid-related lawsuits filed against the Distributors by U.S. states, territories and local governmental entities (collectively, "Settling Governmental Entities"). The Settlement became effective on April 2, 2022. If all conditions to the Settlement are satisfied, the Distributors would pay the Settling Governmental Entities up to approximately $19.5 billion over 18 years, with up to approximately $7.4 billion to be paid by the Company for its 38.1% portion. Although the Settlement terminated the substantial majority of opioid-related suits pending against the Company, a small number of subdivisions in participating states have opted not to participate in the Settlement, and those suits remain pending. The Company continues to prepare for trial in these pending matters, and believes that it has valid defenses to the claims pending against it, and it intends to vigorously defend against all such claims if acceptable settlement terms are not achieved.
When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its estimate for the ultimate loss. The Company reviews all loss 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. The Company also performs an assessment of loss contingencies where a loss is reasonably possible. If it is reasonably possible that a loss may have been incurred and the effect on the financial statements could be material, respects, effectivethe Company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the financial statements. For the year ended March 31, 2022, management believes that a loss from opioid claims is both probable and reasonably estimable, and accordingly, an $8.3 billion liability has been recorded by management, inclusive of claims brought by U.S. governmental entities, which represents the Company’s best estimate of future loss related to opioid litigation.
We identified the liabilities associated with opioid claims brought by both Settling Governmental Entities, as well as U.S. governmental entities who are not party to the Settlement, collectively “Governmental Entities,” as a critical audit matter because of the significant judgment in auditing management’s accounting for these matters. Such judgment led to an increased extent of effort, including the need to involve specialists. Specifically, auditing management’s assessment of the magnitude of the liability and the determination of whether there is a reasonably estimable range of loss in excess of the amount accrued, is subjective and requires significant judgment given the size and complexity of opioid claims brought by Governmental Entities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to liabilities arising from opioid claims brought by Governmental Entities included the following, among others:
•We tested the effectiveness of internal control over financial reportingcontrols related to liabilities arising from opioid claims brought by Governmental Entities, and approval of the accounting treatment and related disclosures.
•We inquired of the Company’s internal and external legal counsel, as well as executives and other members of management, to understand the basis for the Company’s conclusion that a loss related to opioid claims brought by Governmental Entities is probable and reasonably estimable, and that it is not possible to estimate a range of loss in excess of the amount accrued as of March 31, 2016, based on2022. In addition, we inspected responses to inquiry letters sent to both internal and external legal counsel as it relates to the criteria establishedterms of settlements with Governmental Entities. We also made inquiries of legal counsel regarding the status of discussions and legal proceedings with Governmental Entities who are not currently party to the Settlement.
•We evaluated management’s analysis of liabilities arising from opioid claims brought by Governmental Entities, including the methodology used by management to determine the probability of such loss and conclusion that it is not possible to estimate a range of loss in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsexcess of the Treadway Commission.
As discussed in Note 1 to the financial statements, the Company early adopted the Financial Accounting Standards Board Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes,amount accrued as of March 31, 20162022. We also evaluated the methodology used by management to estimate the most likely loss to be incurred by the Company as a result of these specific opioid claims.
•We examined Board of Directors meeting minutes, including relevant sub-committee meeting minutes, held inquiries with a director serving on a prospective basis.the sub-committee, and compared to internal and external counsel’s written responses to our inquiry letters.
•With the assistance of our specialists in accounting for loss contingencies, we evaluated the facts, evidence and the Company’s related accounting treatment for liabilities arising from opioid claims brought by Governmental Entities.
•We evaluated any events subsequent to March 31, 2022 that might impact management’s accounting treatment.
•We obtained written representations from executives and internal counsel of the Company.
•We examined the terms related to settlements with Governmental Entities.
•We evaluated the adequacy of the Company’s related disclosures for consistency with our testing.
Uncertain Tax Position - Opioid Claims brought by Governmental Entities - Refer to Note 1 and Note 7 to the financial statements
Critical Audit Matter Description
The Company has recorded charges and related tax benefit for opioid-related claims, inclusive of those brought by Governmental Entities. In order to account for the uncertainty associated with the ultimate realization of the tax benefit related to opioid claims, the Company recorded an uncertain tax position reserve. 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 net amount recognized by management is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized. The Company uses significant judgment in evaluating the technical tax merits of income tax benefits that qualify for recognition, including the determination of the amount that is more likely than not of being realized for U.S. federal and state income tax purposes.
We identified the Company’s uncertain tax position related to liabilities arising from opioid claims brought by Governmental Entities as a critical audit matter because of the challenges in auditing management’s estimate of the amount of income tax benefit that qualifies for recognition. Specifically, there is significant judgment associated with the assessment of the technical tax merits of such a settlement, including the related interpretation of applicable, newly-enacted tax laws and regulations. Auditing the uncertain tax position related to liabilities arising from opioid claims brought by Governmental Entities required a high degree of auditor judgment and an increased extent of effort, including the need to involve our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's uncertain tax position associated with liabilities arising from opioid claims brought by Governmental Entities included the following, among others:
•We tested the effectiveness of internal controls related to the Company’s assessment of the technical merits of its tax position, including the Company’s assessment as to the amount of benefit that is more likely than not to be realized upon settlement with a taxing authority that has full knowledge of all relevant information.
•With the assistance of our tax specialists, we evaluated the facts, evidence and the Company’s related income tax analysis for liabilities arising from opioid claims brought by Governmental Entities, including assumptions used by management to measure the related recognized and unrecognized tax benefits.
•We inquired of the Company’s internal and external legal counsel to understand the basis for the Company’s conclusion that a portion of the liabilities arising from opioid claims brought by Governmental Entities would be deductible based on the settlement terms, and expected documentation to be received from Governmental Entities regarding how settlement funds are used.
•We held inquiries with the Company’s internal and external income tax specialists related to the uncertain tax position for liabilities arising from opioid claims brought by Governmental Entities.
•We compared management's income tax assessment of this matter to the Company’s treatment of other recorded opioid charges to evaluate the consistency of the Company’s judgments related to the uncertain tax position.
•We evaluated any events subsequent to March 31, 2022 that might impact management’s accounting treatment.
•We obtained written representations from executives and internal counsel of the Company.
•We examined terms related to settlements of opioid claims brought by Governmental Entities.
•We evaluated the Company’s related disclosures for consistency with our testing and also searched for contradictory evidence by reading disclosures from peer companies, who are also party to the opioid litigation with Governmental Entities.
Goodwill - Refer to Note 1 and Note 11 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves comparing the carrying amount of each reporting unit to its fair value on the first day of the third fiscal quarter or whenever the Company believes a potential indicator of impairment requiring a more frequent assessment has occurred. The Company uses a combination of the income and market approaches to estimate reporting unit fair value. Under the market approach, fair value is estimated by comparing the business to similar businesses, or guideline companies whose equity securities are actively traded in public markets. Under the income approach, the Company uses a discounted cash flow (“DCF”) model where cash flows anticipated over future periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate discount rate that is commensurate with the risk inherent within the reporting unit. The rate used to discount to present value includes an unsystematic risk premium, which is intended to address uncertainty related to the reporting unit’s future cash flow projections. The goodwill balance was $9.5 billion as of March 31, 2022, of which $1.5 billion was allocated to the McKesson Canada reporting unit. The fair value of all reporting units exceeded their respective carrying amounts as of the measurement date and, therefore, no impairment was recognized.
We identified the estimation of the fair value of the McKesson Canada reporting unit used to evaluate the recoverability of goodwill as a critical audit matter because of the challenges auditing significant judgments used in the selection of a discount rate, including the unsystematic risk premium. In particular, the fair value estimate is sensitive to the unsystematic risk premium assumption, which is affected by potential additional risk of changes in the Canadian business and regulatory environments. Auditing management’s selected discount rate required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s selection of a discount rate, including determination of the unsystematic risk premium, for the McKesson Canada reporting unit, included the following, among others:
•We tested the effectiveness of internal controls related to management’s goodwill impairment evaluation, including those related to the selection of a discount rate and determination of an unsystematic risk premium.
•We evaluated management’s ability to accurately forecast operating results for the McKesson Canada reporting unit by comparing actual results to management’s historical forecasts, in order to consider the reasonableness and adequacy of management’s selected unsystematic risk premium.
•As part of our assessment of the unsystematic risk premium, we evaluated the reasonableness of strategic plans expected to be implemented during the forecast period by comparing the forecasts to:
•Actual results of historical strategic plans
•Internal communications to management and the Board of Directors
•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate, including the unsystematic risk premium, by developing a range of independent estimates, testing the mathematical accuracy of the calculation, and comparing to the discount rate selected by management.
|
| |
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| /s/ Deloitte & Touche LLP |
San Francisco, CaliforniaDallas, Texas |
May 5, 20169, 2022 |
We have served as the Company’s auditor since 1968.
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Revenues | $ | 263,966 | | | $ | 238,228 | | | $ | 231,051 | |
| Cost of sales | (250,836) | | | (226,080) | | | (219,028) | |
| Gross profit | 13,130 | | | 12,148 | | | 12,023 | |
| Selling, distribution, general, and administrative expenses | (10,537) | | | (8,849) | | | (9,182) | |
| Claims and litigation charges, net | (274) | | | (7,936) | | | (82) | |
| Goodwill impairment charges | — | | | (69) | | | (2) | |
| Restructuring, impairment, and related charges, net | (281) | | | (334) | | | (268) | |
| Total operating expenses | (11,092) | | | (17,188) | | | (9,534) | |
| Operating income (loss) | 2,038 | | | (5,040) | | | 2,489 | |
| Other income, net | 259 | | | 223 | | | 12 | |
| Equity earnings and charges from investment in Change Healthcare Joint Venture | — | | | — | | | (1,108) | |
| Loss on debt extinguishment | (191) | | | — | | | — | |
| Interest expense | (178) | | | (217) | | | (249) | |
| Income (loss) from continuing operations before income taxes | 1,928 | | | (5,034) | | | 1,144 | |
| Income tax benefit (expense) | (636) | | | 695 | | | (18) | |
| Income (loss) from continuing operations | 1,292 | | | (4,339) | | | 1,126 | |
| Loss from discontinued operations, net of tax | (5) | | | (1) | | | (6) | |
| Net income (loss) | 1,287 | | | (4,340) | | | 1,120 | |
| Net income attributable to noncontrolling interests | (173) | | | (199) | | | (220) | |
| Net income (loss) attributable to McKesson Corporation | $ | 1,114 | | | $ | (4,539) | | | $ | 900 | |
| | | | | |
| Earnings (loss) per common share attributable to McKesson Corporation | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | 7.26 | | | $ | (28.26) | | | $ | 4.99 | |
| Discontinued operations | (0.03) | | | — | | | (0.04) | |
| Total | $ | 7.23 | | | $ | (28.26) | | | $ | 4.95 | |
| Basic | | | | | |
| Continuing operations | $ | 7.35 | | | $ | (28.26) | | | $ | 5.01 | |
| Discontinued operations | (0.03) | | | — | | | (0.03) | |
| Total | $ | 7.32 | | | $ | (28.26) | | | $ | 4.98 | |
| | | | | |
| Weighted-average common shares outstanding | | | | | |
| Diluted | 154.1 | | | 160.6 | | | 181.6 | |
| Basic | 152.3 | | | 160.6 | | | 180.6 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Revenues | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
|
| Cost of Sales | (179,468 | ) | | (167,634 | ) | | (129,040 | ) |
| Gross Profit | 11,416 |
| | 11,411 |
| | 8,352 |
|
| Operating Expenses | | | | | |
| Selling, distribution and administrative expenses | (7,276 | ) | | (7,901 | ) | | (5,388 | ) |
| Research and development | (392 | ) | | (392 | ) | | (457 | ) |
| Restructuring charges | (203 | ) | | — |
| | — |
|
| Claim and litigation charges | — |
| | (150 | ) | | (68 | ) |
| Total Operating Expenses | (7,871 | ) | | (8,443 | ) | | (5,913 | ) |
| Operating Income | 3,545 |
| | 2,968 |
| | 2,439 |
|
| Other Income, Net | 58 |
| | 63 |
| | 32 |
|
| Interest Expense | (353 | ) | | (374 | ) | | (300 | ) |
| Income from Continuing Operations Before Income Taxes | 3,250 |
| | 2,657 |
| | 2,171 |
|
| Income Tax Expense | (908 | ) | | (815 | ) | | (757 | ) |
| Income from Continuing Operations | 2,342 |
| | 1,842 |
| | 1,414 |
|
| Loss from Discontinued Operations, Net of Tax | (32 | ) | | (299 | ) | | (156 | ) |
| Net Income | 2,310 |
| | 1,543 |
| | 1,258 |
|
| Net (Income) Loss Attributable to Noncontrolling Interests | (52 | ) | | (67 | ) | | 5 |
|
| Net Income Attributable to McKesson Corporation | $ | 2,258 |
| | $ | 1,476 |
| | $ | 1,263 |
|
| | | | | | |
Earnings (Loss) Per Common Share Attributable to McKesson Corporation | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | 9.84 |
| | $ | 7.54 |
| | $ | 6.08 |
|
| Discontinued operations | (0.14 | ) | | (1.27 | ) | | (0.67 | ) |
| Total | $ | 9.70 |
| | $ | 6.27 |
| | $ | 5.41 |
|
| Basic | | | | | |
| Continuing operations | $ | 9.96 |
| | $ | 7.66 |
| | $ | 6.19 |
|
| Discontinued operations | (0.14 | ) | | (1.29 | ) | | (0.68 | ) |
| Total | $ | 9.82 |
| | $ | 6.37 |
| | $ | 5.51 |
|
| | | | | | |
| Weighted Average Common Shares | | | | | |
| Diluted | 233 |
| | 235 |
| | 233 |
|
| Basic | 230 |
| | 232 |
| | 229 |
|
57
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | | | | | | |
| | Years Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Net income (loss) | $ | 1,287 | | | $ | (4,340) | | | $ | 1,120 | |
| | | | | |
| Other comprehensive income, net of tax | | | | | |
| Foreign currency translation adjustments | 60 | | | 184 | | | (66) | |
| Unrealized gains (losses) on cash flow hedges | 14 | | | (36) | | | 86 | |
| Changes in retirement-related benefit plans | 41 | | | 22 | | | 129 | |
| Other comprehensive income, net of tax | 115 | | | 170 | | | 149 | |
| | | | | |
| Comprehensive income (loss) | 1,402 | | | (4,170) | | | 1,269 | |
| Comprehensive income attributable to noncontrolling interests | (172) | | | (146) | | | (223) | |
| Comprehensive income (loss) attributable to McKesson Corporation | $ | 1,230 | | | $ | (4,316) | | | $ | 1,046 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Net Income | $ | 2,310 |
| | $ | 1,543 |
| | $ | 1,258 |
|
| | | | | | |
| Other Comprehensive Income (Loss), Net of Tax | | | | | |
| Foreign currency translation adjustments arising during the period | 113 |
| | (1,855 | ) | | 53 |
|
| |
|
| |
|
| |
|
|
| Unrealized gains (losses) on cash flow hedges arising during the period | 9 |
| | (10 | ) | | (6 | ) |
| |
|
| |
|
| |
|
|
| Retirement-related benefit plans | 50 |
| | (124 | ) | | 36 |
|
| Other Comprehensive Income (Loss), Net of Tax | 172 |
| | (1,989 | ) | | 83 |
|
| | | | | | |
| Comprehensive Income (Loss) | 2,482 |
| | (446 | ) | | 1,341 |
|
| Comprehensive (Income) Loss Attributable to Noncontrolling Interests | (72 | ) | | 212 |
| | (16 | ) |
| Comprehensive Income (Loss) Attributable to McKesson Corporation | $ | 2,410 |
| | $ | (234 | ) | | $ | 1,325 |
|
58
McKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts) | | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 3,532 | | | $ | 6,278 | |
| Receivables, net | 18,583 | | | 19,181 | |
| Inventories, net | 18,702 | | | 19,246 | |
| Assets held for sale | 4,516 | | | 12 | |
| Prepaid expenses and other | 898 | | | 665 | |
| Total current assets | 46,231 | | | 45,382 | |
| Property, plant, and equipment, net | 2,092 | | | 2,581 | |
| Operating lease right-of-use assets | 1,548 | | | 2,100 | |
| Goodwill | 9,451 | | | 9,493 | |
| Intangible assets, net | 2,059 | | | 2,878 | |
| Other non-current assets | 1,917 | | | 2,581 | |
| Total assets | $ | 63,298 | | | $ | 65,015 | |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY (DEFICIT) |
| Current liabilities | | | |
| Drafts and accounts payable | $ | 38,086 | | | $ | 38,975 | |
| | | |
| Current portion of long-term debt | 799 | | | 742 | |
| Current portion of operating lease liabilities | 297 | | | 390 | |
| Liabilities held for sale | 4,741 | | | 9 | |
| Other accrued liabilities | 4,543 | | | 3,987 | |
| Total current liabilities | 48,466 | | | 44,103 | |
| Long-term debt | 5,080 | | | 6,406 | |
| Long-term deferred tax liabilities | 1,418 | | | 1,411 | |
| Long-term operating lease liabilities | 1,366 | | | 1,867 | |
| Long-term litigation liabilities | 7,220 | | | 8,067 | |
| Other non-current liabilities | 1,540 | | | 1,715 | |
| Commitments and contingent liabilities (Note 18) | 0 | | 0 |
| Redeemable noncontrolling interests | — | | | 1,271 | |
| McKesson Corporation stockholders’ deficit | | | |
| Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding | — | | | — | |
| Common stock, $0.01 par value, 800 shares authorized, 275 and 273 shares issued at March 31, 2022 and 2021, respectively | 2 | | | 2 | |
| Additional paid-in capital | 7,275 | | | 6,925 | |
| Retained earnings | 9,030 | | | 8,202 | |
| Accumulated other comprehensive loss | (1,534) | | | (1,480) | |
| | | |
| Treasury shares, at cost, 130 and 115 shares at March 31, 2022 and 2021, respectively | (17,045) | | | (13,670) | |
| Total McKesson Corporation stockholders’ deficit | (2,272) | | | (21) | |
| Noncontrolling interests | 480 | | | 196 | |
| Total equity (deficit) | (1,792) | | | 175 | |
| Total liabilities, redeemable noncontrolling interests, and equity (deficit) | $ | 63,298 | | | $ | 65,015 | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| McKesson Corporation Stockholders’ Equity (Deficit) | | | | | | |
| Common
Stock | | Additional Paid-in Capital | | Other Capital | | Retained Earnings | | Accumulated Other
Comprehensive
Loss | | Treasury | | Noncontrolling
Interests | | Total
Equity (Deficit) | | |
| Shares | | Amount | | Common Shares | | Amount |
| Balances, March 31, 2019 | 271 | | | $ | 3 | | | $ | 6,435 | | | $ | (2) | | | $ | 12,409 | | | $ | (1,849) | | | (81) | | | $ | (8,902) | | | $ | 193 | | | $ | 8,287 | | | |
| Opening retained earnings adjustments: adoption of new accounting standards | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | | | — | | | 11 | | | |
| Balances, April 1, 2019 | 271 | | | 3 | | | 6,435 | | | (2) | | | 12,420 | | | (1,849) | | | (81) | | | (8,902) | | | 193 | | | 8,298 | | | |
| Issuance of shares under employee plans, net of forfeitures | 1 | | | — | | | 113 | | | — | | | — | | | — | | | — | | | (20) | | | — | | | 93 | | | |
| Share-based compensation | — | | | — | | | 115 | | | — | | | — | | | — | | | — | | | — | | | — | | | 115 | | | |
| Payments to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (154) | | | (154) | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 146 | | | — | | | — | | | — | | | 146 | | | |
| Net income | — | | | — | | | — | | | — | | | 900 | | | — | | | — | | | — | | | 178 | | | 1,078 | | | |
| Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | — | | | (14) | | | (1,934) | | | — | | | (1,934) | | | |
| Change Healthcare share exchange | — | | | — | | | — | | | — | | | — | | | — | | | (15) | | | (2,036) | | | — | | | (2,036) | | | |
| Cash dividends declared, $1.62 per common share | — | | | — | | | — | | | — | | | (294) | | | — | | | — | | | — | | | — | | | (294) | | | |
| Other | — | | | (1) | | | — | | | 2 | | | (4) | | | — | | | — | | | — | | | — | | | (3) | | | |
| Balances, March 31, 2020 | 272 | | | 2 | | | 6,663 | | | — | | | 13,022 | | | (1,703) | | | (110) | | | (12,892) | | | 217 | | | 5,309 | | | |
| Opening retained earnings adjustments: adoption of new accounting standard | — | | | — | | | — | | | — | | | (13) | | | — | | | — | | | — | | | — | | | (13) | | | |
| Balances, April 1, 2020 | 272 | | | 2 | | | 6,663 | | | — | | | 13,009 | | | (1,703) | | | (110) | | | (12,892) | | | 217 | | | 5,296 | | | |
| Issuance of shares under employee plans, net of forfeitures | 1 | | | — | | | 92 | | | — | | | — | | | — | | | — | | | (28) | | | — | | | 64 | | | |
| Share-based compensation | — | | | — | | | 151 | | | — | | | — | | | — | | | — | | | — | | | — | | | 151 | | | |
| Payments to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (177) | | | (177) | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 223 | | | — | | | — | | | — | | | 223 | | | |
| Net income (loss) | — | | | — | | | — | | | — | | | (4,539) | | | — | | | — | | | — | | | 156 | | | (4,383) | | | |
| Exercise of put right by noncontrolling shareholders of McKesson Europe AG | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | |
| Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (750) | | | — | | | (750) | | | |
| Cash dividends declared, $1.67 per common share | — | | | — | | | — | | | — | | | (270) | | | — | | | — | | | — | | | — | | | (270) | | | |
| Other | — | | | — | | | 16 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 18 | | | |
| Balances, March 31, 2021 | 273 | | | 2 | | | 6,925 | | | — | | | 8,202 | | | (1,480) | | | (115) | | | (13,670) | | | 196 | | | 175 | | | |
| Issuance of shares under employee plans, net of forfeitures | 2 | | | — | | | 220 | | | — | | | — | | | — | | | — | | | (71) | | | — | | | 149 | | | |
| Share-based compensation | — | | | — | | | 154 | | | — | | | — | | | — | | | — | | | — | | | — | | | 154 | | | |
| Payments to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (155) | | | (155) | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 116 | | | — | | | — | | | (4) | | | 112 | | | |
| Net income | — | | | — | | | — | | | — | | | 1,114 | | | — | | | — | | | — | | | 165 | | | 1,279 | | | |
| Exercise of put right by noncontrolling shareholders of McKesson Europe AG | — | | | — | | | 178 | | | — | | | — | | | (170) | | | — | | | — | | | — | | | 8 | | | |
| Repurchase of common stock | — | | | — | | | (204) | | | — | | | — | | | — | | | (15) | | | (3,304) | | | — | | | (3,508) | | | |
| Reclassification of McKesson Europe AG redeemable noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 287 | | | 287 | | | |
| Reclassification of recurring compensation to other accrued liabilities | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | (7) | | | |
| Cash dividends declared, $1.83 per common share | — | | | — | | | — | | | — | | | (279) | | | — | | | — | | | — | | | — | | | (279) | | | |
| Other | — | | | — | | | 2 | | | — | | | (7) | | | — | | | — | | | — | | | (2) | | | (7) | | | |
| Balances, March 31, 2022 | 275 | | | $ | 2 | | | $ | 7,275 | | | $ | — | | | $ | 9,030 | | | $ | (1,534) | | | (130) | | | $ | (17,045) | | | $ | 480 | | | $ | (1,792) | | | |
|
| | | | | | | |
| | March 31, |
| | 2016 | | 2015 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 4,048 |
| | $ | 5,341 |
|
| Receivables, net | 17,980 |
| | 15,914 |
|
| Inventories, net | 15,335 |
| | 14,296 |
|
| Prepaid expenses and other | 1,074 |
| | 1,119 |
|
| Total Current Assets | 38,437 |
| | 36,670 |
|
| Property, Plant and Equipment, Net | 2,278 |
| | 2,045 |
|
| Goodwill | 9,786 |
| | 9,817 |
|
| Intangible Assets, Net | 3,021 |
| | 3,441 |
|
| Other Noncurrent Assets | 3,041 |
| | 1,897 |
|
| Total Assets | $ | 56,563 |
| | $ | 53,870 |
|
| | | | |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY | | | |
| Current Liabilities | | | |
| Drafts and accounts payable | $ | 28,585 |
| | $ | 25,166 |
|
| Short-term borrowings | 7 |
| | 135 |
|
| Deferred revenue | 919 |
| | 1,078 |
|
| Deferred tax liabilities | — |
| | 1,820 |
|
| Current portion of long-term debt | 1,612 |
| | 1,529 |
|
| Other accrued liabilities | 3,948 |
| | 3,769 |
|
| Total Current Liabilities | 35,071 |
| | 33,497 |
|
| | | | |
| Long-Term Debt | 6,535 |
| | 8,180 |
|
| Long-Term Deferred tax liabilities | 2,734 |
| | 859 |
|
| Other Noncurrent Liabilities | 1,809 |
| | 1,863 |
|
| Commitments and Contingent Liabilities (Note 24) | — |
| | — |
|
| Redeemable Noncontrolling Interests | 1,406 |
| | 1,386 |
|
| 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, 2016 and 2015, 271 and 384 shares issued at March 31, 2016 and 2015 | 3 |
| | 4 |
|
| Additional Paid-in Capital | 5,845 |
| | 6,968 |
|
| Retained Earnings | 8,360 |
| | 12,705 |
|
| Accumulated Other Comprehensive Loss | (1,561 | ) | | (1,713 | ) |
| Other | (2 | ) | | (7 | ) |
| Treasury Shares, at Cost, 46 and 152 at March 31, 2016 and 2015 | (3,721 | ) | | (9,956 | ) |
| Total McKesson Corporation Stockholders’ Equity | 8,924 |
| | 8,001 |
|
| Noncontrolling Interests | 84 |
| | 84 |
|
| Total Equity | 9,008 |
| | 8,085 |
|
| Total Liabilities, Redeemable Noncontrolling Interests and Equity | $ | 56,563 |
| | $ | 53,870 |
|
59
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended March 31, 2016, 2015 and 2014
(In millions, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | McKesson Corporation Stockholders’ Equity | | | | |
| | Common Stock | | Additional Paid-in Capital | | Other Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury | | Noncontrolling Interests | | Total Equity |
| | Shares | | Amount | | Common Shares | | Amount |
| Balances, March 31, 2013 | 376 |
| | $ | 4 |
| | $ | 6,078 |
| | $ | 14 |
| | $ | 10,402 |
| | $ | (65 | ) | | (149 | ) | | $ | (9,363 | ) | | $ | — |
| | $ | 7,070 |
|
| Issuance of shares under employee plans | 5 |
| | — |
| | 177 |
| | | | | | | | (1 | ) | | (130 | ) | | | | 47 |
|
| Share-based compensation | | | | | 160 |
| | | | | | | | | | | | | | 160 |
|
| Tax benefit related to issuance of shares under employee plans | | | | | 92 |
| | | | | | | | | | | | | | 92 |
|
| Acquisition of Celesio | | | | | | | | | | |
|
| | | | | | 1,500 |
| | 1,500 |
|
| Conversion of Celesio convertible bonds | | | | | 33 |
| | | | | | | | | | | | 280 |
| | 313 |
|
| Other comprehensive income | | | | |
| | | | | | 62 |
| |
| |
| | 21 |
| | 83 |
|
| Net income (loss) |
| | | |
| | | | 1,263 |
| | | |
| |
| | (5 | ) | | 1,258 |
|
| Repurchase of common stock | | | | | 14 |
| | | | | | | | — |
| | (14 | ) | | | | — |
|
| Cash dividends declared, $0.92 per common share | | | | | | | | | (214 | ) | | | | | | | | | | (214 | ) |
| Other | | | | | (2 | ) | | 9 |
| | 2 |
| | | | | | | | | | 9 |
|
| Balances, March 31, 2014 | 381 |
| | $ | 4 |
| | $ | 6,552 |
| | $ | 23 |
| | $ | 11,453 |
| | $ | (3 | ) | | (150 | ) | | $ | (9,507 | ) | | $ | 1,796 |
| | $ | 10,318 |
|
| Issuance of shares under employee plans | 3 |
| | — |
| | 152 |
| | | | | | | | — |
| | (109 | ) | | | | 43 |
|
| Share-based compensation | | | | | 165 |
| | | | | | | | | | | | | | 165 |
|
| Tax benefit related to issuance of shares under employee plans | | | | | 105 |
| | | | | | | | | | | | | | 105 |
|
| Purchase of noncontrolling interests | | | | | (2 | ) | | | | | | | | | | | | (60 | ) | | (62 | ) |
| Reclassification of noncontrolling interests to redeemable noncontrolling interests | | | | | | | | | | | | | | | | | (1,500 | ) | | (1,500 | ) |
| Other comprehensive income | | | | | | | | | | | (1,710 | ) | | | | | | (174 | ) | | (1,884 | ) |
| Net income | | | | | | | | | 1,476 |
| | | | | | | | 5 |
| | 1,481 |
|
| Repurchase of common stock | | | | |
| | | | | | | | (2 | ) | | (340 | ) | | | | (340 | ) |
| Cash dividends declared, $0.96 per common share | | | | | | | | | (226 | ) | | | | | | | | | | (226 | ) |
| Other | | | | | (4 | ) | | (30 | ) | | 2 |
| | | | | | | | 17 |
| | (15 | ) |
| Balances, March 31, 2015 | 384 |
| | $ | 4 |
| | $ | 6,968 |
| | $ | (7 | ) | | $ | 12,705 |
| | $ | (1,713 | ) | | (152 | ) |
| $ | (9,956 | ) | | $ | 84 |
|
| $ | 8,085 |
|
| Issuance of shares under employee plans | 3 |
| | — |
| | 123 |
| | | | | | | | (1 | ) | | (109 | ) | | | | 14 |
|
| Share-based compensation | | | | | 130 |
| | | | | | | | | | | | | | 130 |
|
| Tax benefit related to issuance of shares under employee plans | | | | | 117 |
| | | | | | | | | | | | | | 117 |
|
| Other comprehensive income | | | | | | | | | | | 152 |
| | | | | | | | 152 |
|
| Net income | | | | | | | | | 2,258 |
| | | | | | | | 8 |
| | 2,266 |
|
| Repurchase of common stock | | | | | | | | | | | | | (9 | ) | | (1,504 | ) | | | | (1,504 | ) |
| Retirement of common stock | (116 | ) | | (1 | ) | | (1,493 | ) | | | | (6,354 | ) | | | | 116 |
| | 7,848 |
| | | | — |
|
| Cash dividends declared, $1.08 per common share | | | | | | |
| | (249 | ) | | | | | | | | | | (249 | ) |
| Other | | | | | | | 5 |
| | | | | | | | | | (8 | ) | | (3 | ) |
| Balances, March 31, 2016 | 271 |
| | $ | 3 |
| | $ | 5,845 |
| | $ | (2 | ) | | $ | 8,360 |
| | $ | (1,561 | ) | | (46 | ) | | $ | (3,721 | ) | | $ | 84 |
| | $ | 9,008 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| OPERATING ACTIVITIES | | | | | |
| Net income (loss) | $ | 1,287 | | | $ | (4,340) | | | $ | 1,120 | |
| Adjustments to reconcile to net cash provided by operating activities: | | | | | |
| Depreciation | 279 | | | 321 | | | 321 | |
| Amortization | 481 | | | 566 | | | 601 | |
| Goodwill and long-lived asset impairment charges | 175 | | | 242 | | | 139 | |
| Equity earnings and charges from investment in Change Healthcare Joint Venture | — | | | — | | | 1,084 | |
| Deferred taxes | 34 | | | (908) | | | (342) | |
| Credits associated with last-in, first-out inventory method | (23) | | | (38) | | | (252) | |
| Non-cash operating lease expense | 241 | | | 334 | | | 366 | |
| Loss (gain) from sales of businesses and investments | (132) | | | (9) | | | 33 | |
| European businesses held for sale | 1,509 | | | — | | | — | |
| Other non-cash items | 501 | | | 188 | | | 615 | |
| Changes in assets and liabilities, net of acquisitions: | | | | | |
| Receivables | (1,843) | | | 1,145 | | | (2,494) | |
| Inventories | (1,169) | | | (2,276) | | | (376) | |
| Drafts and accounts payable | 2,802 | | | 1,267 | | | 3,952 | |
| Operating lease liabilities | (356) | | | (362) | | | (377) | |
| Taxes | 243 | | | (166) | | | (8) | |
| Litigation liabilities | 199 | | | 8,067 | | | — | |
| Other | 206 | | | 511 | | | (8) | |
| Net cash provided by operating activities | 4,434 | | | 4,542 | | | 4,374 | |
| | | | | |
| INVESTING ACTIVITIES | | | | | |
| Payments for property, plant, and equipment | (388) | | | (451) | | | (362) | |
| Capitalized software expenditures | (147) | | | (190) | | | (144) | |
| Acquisitions, net of cash, cash equivalents, and restricted cash acquired | (6) | | | (35) | | | (133) | |
| Proceeds from sales of businesses and investments, net | 578 | | | 400 | | | 37 | |
| Other | (126) | | | (139) | | | 23 | |
| Net cash used in investing activities | (89) | | | (415) | | | (579) | |
| | | | | |
| FINANCING ACTIVITIES | | | | | |
| Proceeds from short-term borrowings | 11,192 | | | 6,323 | | | 21,437 | |
| Repayments of short-term borrowings | (11,192) | | | (6,323) | | | (21,437) | |
| Proceeds from issuances of long-term debt | 498 | | | 500 | | | — | |
| Repayments of long-term debt | (1,648) | | | (1,040) | | | (298) | |
| Payments for debt extinguishments | (184) | | | — | | | — | |
| Common stock transactions: | | | | | |
| Issuances | 220 | | | 92 | | | 113 | |
| Share repurchases | (3,516) | | | (742) | | | (1,934) | |
| Dividends paid | (277) | | | (276) | | | (294) | |
| Exercise of put right by noncontrolling shareholders of McKesson Europe AG | (1,031) | | | (49) | | | (3) | |
| Other | (383) | | | (178) | | | (318) | |
| Net cash used in financing activities | (6,321) | | | (1,693) | | | (2,734) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 55 | | | (61) | | | (19) | |
| Cash, cash equivalents, and restricted cash classified within Assets held for sale | (540) | | | — | | | — | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (2,461) | | | 2,373 | | | 1,042 | |
| Cash, cash equivalents, and restricted cash at beginning of year | 6,396 | | | 4,023 | | | 2,981 | |
| Cash, cash equivalents, and restricted cash at end of year | 3,935 | | | 6,396 | | | 4,023 | |
| Less: Restricted cash at end of year included in Prepaid expenses and other | (403) | | | (118) | | | (8) | |
| | | | | |
| Cash and cash equivalents at end of year | $ | 3,532 | | | $ | 6,278 | | | $ | 4,015 | |
| | | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
| Cash paid for: | | | | | |
| Interest, net | $ | 186 | | | $ | 220 | | | $ | 235 | |
| Income taxes, net of refunds | 359 | | | 379 | | | 368 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Operating Activities | | | | | |
| Net income | $ | 2,310 |
| | $ | 1,543 |
| | $ | 1,258 |
|
| Adjustments to reconcile to net cash provided by operating activities: | | | | | |
| Depreciation | 281 |
| | 306 |
| | 185 |
|
| Amortization | 604 |
| | 711 |
| | 550 |
|
| Deferred taxes | 64 |
| | 171 |
| | 17 |
|
| Share-based compensation expense | 123 |
| | 174 |
| | 160 |
|
| Gain from sales of businesses | (103 | ) | | — |
| | — |
|
| Impairment charges and impairment of equity investment | 8 |
| | 241 |
| | 80 |
|
| Charges associated with last-in-first-out inventory method | 244 |
| | 337 |
| | 311 |
|
| Other non-cash items | 108 |
| | 47 |
| | 130 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Receivables | (1,957 | ) | | (2,821 | ) | | (868 | ) |
| Inventories | (1,251 | ) | | (2,144 | ) | | (1,182 | ) |
| Drafts and accounts payable | 3,302 |
| | 4,718 |
| | 2,412 |
|
| Deferred revenue | (120 | ) | | (141 | ) | | (81 | ) |
| Taxes | (78 | ) | | (222 | ) | | 218 |
|
| Claim and litigation charges | — |
| | 150 |
| | 68 |
|
| Litigation settlement payments | — |
| | — |
| | (105 | ) |
| Other | 137 |
| | 42 |
| | (17 | ) |
| Net cash provided by operating activities | 3,672 |
| | 3,112 |
| | 3,136 |
|
| | | | | | |
| Investing Activities | | | | | |
Payments for property, plant and equipment
| (488 | ) | | (376 | ) | | (278 | ) |
| Capitalized software expenditures | (189 | ) | | (169 | ) | | (141 | ) |
| Acquisitions, net of cash and cash equivalents acquired | (40 | ) | | (170 | ) | | (4,634 | ) |
| Proceeds from sale of businesses and equity investment, net | 210 |
| | 15 |
| | 97 |
|
| Restricted cash for acquisitions | (939 | ) | | — |
| | 46 |
|
| Other | (111 | ) | | 23 |
| | (136 | ) |
| Net cash used in investing activities | (1,557 | ) | | (677 | ) | | (5,046 | ) |
| | | | | | |
| Financing Activities | | | | | |
| Proceeds from short-term borrowings | 1,561 |
| | 3,100 |
| | 6,080 |
|
| Repayments of short-term borrowings | (1,688 | ) | | (3,152 | ) | | (6,132 | ) |
| Proceeds from issuances of long-term debt | — |
| | 3 |
| | 4,124 |
|
| Repayments of long-term debt | (1,598 | ) | | (353 | ) | | (348 | ) |
| Common stock transactions: | | | | |
|
|
| Issuances | 123 |
| | 152 |
| | 177 |
|
| Share repurchases, including shares surrendered for tax withholding | (1,612 | ) | | (450 | ) | | (130 | ) |
| Dividends paid | (244 | ) | | (227 | ) | | (214 | ) |
| Other | 5 |
| | (41 | ) | | 62 |
|
| Net cash (used in) provided by financing activities | (3,453 | ) | | (968 | ) | | 3,619 |
|
| Effect of exchange rate changes on cash and cash equivalents | 45 |
| | (319 | ) | | 28 |
|
| Net (decrease) increase in cash and cash equivalents | (1,293 | ) | | 1,148 |
| | 1,737 |
|
| Cash and cash equivalents at beginning of year | 5,341 |
| | 4,193 |
| | 2,456 |
|
| Cash and cash equivalents at end of year | $ | 4,048 |
| | $ | 5,341 |
| | $ | 4,193 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid for: | | | | | |
| Interest | $ | 337 |
| | $ | 359 |
| | $ | 255 |
|
| Income taxes, net of refunds | $ | 923 |
| | $ | 866 |
| | $ | 508 |
|
| Non-cash item: | | | | | |
| Fair value of debt assumed on acquisitions | $ | — |
| | $ | — |
| | $ | (2,312 | ) |
| Conversion of Celesio’s convertible bonds to equity | $ | — |
| | $ | — |
| | $ | 313 |
|
61
McKESSON CORPORATION
FINANCIAL NOTES
1.Significant Accounting Policies | |
1. | Significant Accounting Policies |
Nature of Operations: McKesson Corporation (“McKesson,” or the “Company,” the “Registrant” or “we”) is a diversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. McKesson’s teams partner with biopharma companies, care providers, pharmacies, manufacturers, governments, and other similar pronouns) delivers a comprehensive offering of pharmaceuticalsothers to deliver insights, products, and medical supplies and provides services to help our customers improve the efficiencymake quality care more accessible and effectiveness of their healthcare operations. We manage our business through two operating segments, McKesson Distributionaffordable. The Company reports its financial results in 4 reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. The Company’s equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson Technology Solutions, as further described in the fourth quarter of 2020, has been included in Other for retrospective periods presented. Refer to Financial Note 27,21, “Segments of Business.Business,” for additional information.
Basis of Presentation: The consolidated financial statements and accompanying notes are prepared in accordance with U. S.United States (“U.S.”) generally accepted accounting principles (“GAAP”). The consolidated financial statements of McKesson include the financial statements of all wholly-owned subsidiaries and majority-owned or controlled companies. For those consolidated subsidiaries where ourthe Company’s ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net Income Attributableincome attributable to Noncontrolling Interests” onnoncontrolling interests” in the consolidated statementsConsolidated Statements of operations.Operations. All significant intercompany balances and transactions have been eliminated in consolidation.consolidation, including the intercompany portion of transactions with equity method investees.
We consider ourselvesThe Company considers itself to control an entity if we areit is the majority owner of and haveor has voting control over such entity. WeThe Company also assessassesses control through means other than voting rights (“variable interest entities” or “VIEs”) and determinedetermines which business entity is the primary beneficiary of the VIE. We consolidatevariable interest entity (“VIE”). The Company consolidates VIEs when it is determined that we areit is the primary beneficiary of the VIE. Investments in business entities in which we dothe Company does not have control but havehas 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 yearperiod 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 wethe Company to 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. The Company continues to evaluate the ongoing impacts, including the economic consequences, of the pandemic caused by the SARS-CoV-2 coronavirus (“COVID-19”). As COVID-19 further evolves, the Company’s accounting estimates and assumptions may change over time and may change materially in future periods.
Cash and Cash Equivalents: All highly liquid debt and money market instruments purchased with an 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 andAAA-rated U.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily 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 byand the U.S. government and an AAA rated prime money market fund denominated infunctional currencies of the Company’s foreign subsidiaries, including Euro, British pound sterling.
The remaining cashsterling, and cash equivalents are deposited with several financial institutions.Canadian dollars. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigateThe Company mitigates the risk of ourits short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Restricted Cash: Cash that is subject to legal restrictions or is unavailable for general operating purposes is classified as restricted cash and is included withinin “Prepaid expenses and other” and “Other Noncurrent Assets”non-current assets” in the consolidated balance sheets. At March 31, 2016, our restrictedConsolidated Balance Sheets. Restricted cash balance was $939 million, which represents cash paid into the escrow accounts for acquisitions that closed on April 1, 2016. There was no material restricted cash balance at March 31, 2015.2022 primarily consists of $395 million held in escrow related to obligations under settlement agreements for opioid-related claims of governmental entities, as discussed in more detail in Financial Note 18, “Commitments and Contingent Liabilities.” Additionally, restricted cash at March 31, 2022 and 2021 includes funds temporarily held on behalf of unaffiliated medical practice groups related to their COVID-19 business continuity borrowings. These amounts have been designated as restricted cash due to contractual provisions requiring their segregation from all other funds until utilized by the medical practices for a limited list of qualified activities. Corresponding deposit liabilities associated with these funds have been recorded by the Company within “Other accrued liabilities” in the Company’s Consolidated Balance Sheets at March 31, 2022 and 2021.
Marketable Securities Available-for-Sale: Equity Method Investments: Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. The Company evaluates its equity method investments for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the carrying value of the investment. If a loss in value has occurred that is deemed to be other-than-temporary, an impairment loss is recorded.
Receivables, Net and Allowances for Credit Losses: The Company’s receivables are presented net of an allowance for credit losses and primarily consist of trade accounts receivable from customers that result from the sale of goods and services. Receivables, net also includes other receivables, which primarily represent amounts due from suppliers.
We carry our marketable securities,are exposed to credit losses on accounts receivable balances. The Company estimates credit losses by considering historical credit losses, the current economic environment, customer credit ratings, legal disputes, or bankruptcies, as well as reasonable and supportable forecasts. Management reviews these factors quarterly to determine if any adjustments are needed to the allowance.
Trade accounts receivable represent the majority of the Company's financial assets, for which are available-for-sale, at fair valuean allowance for credit losses of $89 million and they are$198 million were included in prepaid expenses“Receivables, net” on the Consolidated Balance Sheets as of March 31, 2022 and other2021, respectively. Changes in the consolidated balance sheets. allowance for the year ended March 31, 2022, were primarily within the U.S Pharmaceutical and International segments.
The unrealized gains and losses, netfollowing table presents the components of the related tax effect, computed in marking these securities to market have been reported within stockholders’ equity. AtCompany’s receivables as of March 31, 20162022 and 2015, marketable securities were not material.2021:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2022 | | 2021 |
| Customer accounts | $ | 16,438 | | | $ | 17,106 | |
| Other | 2,289 | | | 2,325 | |
| Total receivables | 18,727 | | | 19,431 | |
| Allowances | (144) | | | (250) | |
| Receivables, net | $ | 18,583 | | | $ | 19,181 | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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: OurThe Company’s trade receivablesaccounts receivable are subject to a concentrationconcentrations of credit risk with customers primarily in our Distribution Solutionsits U.S. Pharmaceutical segment. During 2016,2022, sales to ourthe Company’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 52.4%52% of ourits total consolidated revenues.revenues and approximately 43% of total trade accounts receivable at March 31, 2022. Sales to ourthe Company’s largest customer, CVS Health Corporation (“CVS”), accounted for approximately 20.3%21% of ourits total consolidated revenues. At March 31, 2016, trade accounts receivable from our ten largest customers wererevenues in 2022 and comprised approximately 32%28% of total trade accounts receivable. Accounts receivable from CVS were approximately 18% of total trade accounts receivable.at March 31, 2022. As a result, ourthe Company’s sales and credit concentration is significant. We also haveThe Company has agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies, and other healthcare providers, as well as with government entities and agencies. The accounts receivables balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. A material default in payment, a material reduction in purchases from theseGPOs or any other large customers, or the loss of a large customer or customer groups could have a material adverse impact on ourthe Company’s financial condition, results of operations, and liquidity. In addition, trade accounts receivables are subject to a concentrationconcentrations 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 Company’s customer base as well as its geographic dispersion. We estimate the receivables
Inventories: Inventories consist of merchandise held 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, 2016 and 2015, financing receivables and the related allowance were not material to our consolidated financial statements.
Inventories: We reportresale. The Company reports inventories at the lower of cost or marketnet realizable value, except for inventories determined using the last-in, first-out (“LCM”LIFO”). Inventories for our Distribution Solutions segment consist method which are valued at the lower of merchandise held for resale. For our Distribution Solutions segment,LIFO cost or market. The LIFO method presumes that the most recent inventory purchases are the first items sold and the inventory cost under LIFO approximates market. The majority of the cost of domestic inventories is determined using the last-in, first-out (“LIFO”)LIFO method. The majority of the cost of inventories held in foreign and certain domestic locations is based on weighted average purchase prices using the first-in, first-out method (“FIFO”). Technology Solutions segment inventories consist of computer hardware with cost generally determined by the standard cost method which approximates average cost.and weighted-average purchase prices. Rebates, cash discounts, and other incentives received from vendors are recognized withinin cost of sales upon the sale of the related inventory.
At March 31, 2022 and 2021, total inventories, net were $18.7 billion and $19.2 billion, respectively, in the Company’s Consolidated Balance Sheets. The LIFO method was used to value approximately 74%63% and 73%58% of ourthe Company’s inventories at March 31, 20162022 and 2015.2021, respectively. If wethe Company had used the FIFOmoving average method of inventory valuation, which approximates current replacement costs, inventories would have been approximately $1,012$383 million and $768$406 million higher than the amounts reported at March 31, 20162022 and 2015,2021, respectively. These amounts are equivalent to ourthe Company’s LIFO reserves. OurThe Company’s LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. In 2016, 2015 and 2014, weThe Company recognized LIFO related expensescredits of $244$23 million, $337$38 million, and $311$252 million in cost2022, 2021, and 2020, respectively, in “Cost of sales within our consolidated statementssales” in its Consolidated Statements of operations.Operations. The lower LIFO credits in 2022 compared to 2021 and 2020 is primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. A LIFO expensecharge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory.
We believeThe Company believes that the moving average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, ourits LIFO inventory is valued at the lower of LIFO cost 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, 20162022 and 2015,2021, inventories at LIFO did not exceed market.
Shipping and Handling Costs: The Company includes costs to pack and deliver inventory to its customers in “Selling, distribution, general, and administrative expenses” in its Consolidated Statements of Operations. Shipping and handling costs of $1.1 billion was recognized in 2022, and $1.0 billion was recognized in each of 2021 and 2020.
Held for Sale: Assets and liabilities to be disposed of by sale (“disposal groups”) are classified as “held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The classification occurs when the disposal group is available for immediate sale and the sale is probable. These criteria are generally met when management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying amount or fair value less costs to sell, and long-lived assets included within the disposal group are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. Refer to Financial Note 2, “Held for Sale,” for additional information.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Shipping and Handling Costs: We include costs to pack and deliver inventory to our customers in selling, distribution and administrative expenses. Shipping and handling costs of $789 million, $819 million, $535 million were included in our selling, distribution and administrative expenses in 2016, 2015 and 2014.
Property, Plant, and Equipment: We state ourEquipment, Net: Property, plant, and equipment, net is stated at historical cost and depreciated under the straight-line method over the estimated useful life of each asset, which ranges from 15 to 30 years for building and improvements and 3 to 15 years for machinery, equipment, and other. Leasehold improvements and property, plant, and equipment, net under finance leases are amortized over their respective useful lives of the right-of-use (“PPE”ROU”) at costasset or over the term of the lease, whichever is shorter. Depreciation and depreciate them under the straight-line method at rates designed to distribute the cost of PPE over estimatedamortization begins when an asset is placed in service lives ranging from one to thirty years.and ready for its intended use. Repairs and maintenance costs are expensed as incurred. When certain events or changes in operating conditions occur,circumstances indicate that the carrying amount of an asset or asset group may not be recoverable, an impairment assessment may be performed on the recoverability of the carrying amounts.
The following table presents the components of the Company’s property, plant, and equipment, net as of March 31, 2022 and 2021:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2022 | | 2021 |
| Land | $ | 104 | | | $ | 156 | |
| Building and improvements | 1,331 | | | 1,745 | |
| Machinery, equipment, and other | 2,338 | | | 2,512 | |
| Construction in progress | 313 | | | 382 | |
| Total property, plant, and equipment | 4,086 | | | 4,795 | |
| Accumulated depreciation and amortization | (1,994) | | | (2,214) | |
| Property, plant, and equipment, net | $ | 2,092 | | | $ | 2,581 | |
Total depreciation expense for property, plant, and equipment, net and amortization of the ROU assets of finance leases was $312 million, $344 million, and $335 million for the years ended March 31, 2022, 2021, and 2020, respectively.
Leases: The Company leases facilities and equipment primarily under operating leases. The Company recognizes lease 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. As a practical expedient, the Company does not separate lease components from non-lease components, such as common area maintenance, utilities, and repairs and maintenance. Remaining terms for facility leases generally range from one to 15 years, while remaining terms for equipment leases generally range from one to five years. Most real property leases contain renewal options (typically for five-year increments). Generally, the renewal option periods are not included within the lease term as the Company is not reasonably certain to exercise that right at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating ROU assets and operating lease liabilities are recognized at the lease commencement date. ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease liabilities are recognized based on the present value of the future lease payments over the lease term, discounted at the Company’s incremental borrowing rate as the implicit rate in the lease is not readily determinable for most of the Company’s leases. The Company estimates the discount rate as its incremental borrowing rate based on qualitative factors including Company specific credit rating, lease term, general economics, and the interest rate environment. For existing leases that commenced prior to the adoption of the amended leasing guidance, the Company determined the discount rate on April 1, 2019 using the full lease term. Operating lease liabilities are recorded in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” and the corresponding lease assets are recorded in “Operating lease right-of-use assets” in the Company’s Consolidated Balance Sheets. Finance lease assets are included in “Property, plant, and equipment, net” and finance lease liabilities are included in “Current portion of long-term debt” and “Long-term debt” in the Company’s Consolidated Balance Sheets. As a practical expedient, short-term leases with an initial term of 12 months or less are excluded from the Consolidated Balance Sheets and charges from these leases are expensed as incurred.
As a lessor, the Company primarily leases certain owned equipment, classified as direct financing or sales-type leases, to physician practices.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Refer to Financial Note 10, “Leases,” for additional information on the Company’s leases.
Goodwill: Goodwill is tested for impairment on an annual basis in the fourththird quarter orand more frequently if indicators forof potential impairment exist. Impairment testing is conducted at the reporting unit level, which is generally defined as a component,an operating segment or one level below our Distribution Solutions and Technology Solutionsan operating segments,segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that unit.results.
The first step inCompany applies the goodwill testing requires us to compareimpairment test by comparing the estimated fair value of a reporting unit to its carrying value. This step may be performed utilizing either a qualitative or quantitative assessment. Ifvalue and recording an impairment charge equal to the amount of excess carrying value of the reporting unit is lower than itsabove 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 performedif any, but not to measureexceed 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 ofallocated to 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.unit.
To estimate the fair value of ourits reporting units, we usethe Company generally uses a combination of the market approach and the income approach. Under the market approach, we estimateit estimates 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 useit uses a discounted cash flow (“DCF”) model in which cash flows anticipated over severalfuture 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 associatedthat is commensurate with the business.risk inherent within the reporting unit. 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. In addition, we comparethe Company compares the aggregate of the reporting units’ fair valuevalues to the Company’s market capitalization as a further corroboration of the fair values. TheGoodwill testing requires a complex series of assumptions and judgmentjudgments 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 ourthe Company’s 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-eight24 years. We reviewThe Company reviews intangible assets for impairment at an asset group level 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 group over its estimated 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 capitalizeThe Company capitalizes costs of software held for internal use during the application development stage of a project and amortizeamortizes those costs using the straight-line method over their estimated useful lives, ranging from onenot to tenexceed 10 years. As of March 31, 20162022 and 2015,2021, capitalized software held for internal use was $435$320 million and $513 million, respectively, net of accumulated amortization of $1,130$1.4 billion, and is included in “Other non-current assets” in the Consolidated Balance Sheets. The decrease in capitalized software held for internal use is primarily due to the planned exit of the Company’s European businesses which resulted in an impairment of certain internal-use software that will not be utilized in the future and classification of certain software as held for sale, as discussed in Note 2, “Held for Sale.” Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Amortization expense for capitalized software held for internal use was $116 million, $117 million, and $1,112$129 million for the years ended March 31, 2022, 2021, and was included in other assets in the consolidated balance sheets.2020, respectively.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Insurance Programs: Under our The Company maintains insurance programs we seek to obtainthrough its wholly-owned captive insurance subsidiaries (“Captives”) from which it obtains coverage for catastrophicvarious exposures, including certain exposures arising from the opioid-related claims of governmental entities against the Company as discussed in more detail in Financial Note 18, “Commitments and Contingent Liabilities,” as well as those risks required to be insured by law or contract. It is ourthe Company’s policy to retain a significant portion of certain losses, primarilyincluding those related to workers’ compensation and comprehensive general, product, and vehicle liability. Provisions for losses expected under theseinsurance programs are recorded based upon ouron the Company’s 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. The Captives receive direct premiums, which are eliminated on consolidation against the Company’s premium costs within “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations.
Revenue Recognition:
Distribution Solutions
Revenues for our Distribution Solutions segment are Revenue is recognized when persuasive evidencean entity satisfies a performance obligation by transferring control of an arrangement exists, product is delivered and title passes to the customera promised good or when services have been rendered and there are no further obligations to the customer, the price is fixed or determinable, and collection of the amounts are reasonably assured.
Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarilyservice to a limited number of large customers who warehouse their own products. We order bulk product fromcustomer in an amount that reflects the manufacturer, receive and processconsideration to which the product primarily through our central distribution facility and deliver the bulk product (generally in the same form as received from the manufacturer) directly to our customers’ warehouses. We also record revenues for direct store deliveries of shipments from the manufacturer to our customers. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of loss for collection from customers as well as delivery or return of the product, are responsible for fulfillment and other customer service requirements, or the transactions have several but not all of these indicators.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy generally allows customers to return products only if they can be resold for value or returned to suppliers for credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from customers were approximately $3.1 billion in 2016, $2.7 billion in 2015 and $1.9 billion in 2014. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, they are excluded from revenues.
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 (“Saas”) or SaaS-based solutions and providing claims processing, outsourcing and professional services. Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements. Perpetual software arrangements are recognized at the time of delivery or under the percentage-of-completion method if the arrangements require significant production, modification or customization of the software. Contracts accounted for under the percentage-of-completion method are generally measured based on the ratio of labor hours incurred to date to total estimated labor hoursentity expects 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 accrueentitled 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 performedthat good 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.
service.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
SaaS-based subscription, contentRevenues generated from the distribution of pharmaceutical and transaction processing fees are generally marketed under annualmedical products represent the majority of the Company’s revenues. The Company orders product from the manufacturer, receives and multi-year agreementscarries the product at its central distribution facilities, and delivers the product directly to its customers’ warehouses, hospitals, or retail pharmacies. The distribution business primarily generates revenue from a contract related to a confirmed purchase order with a customer in a distribution arrangement. Revenue is recognized when control of goods is transferred to the customer which occurs upon the Company’s delivery to the customer or upon customer pick-up. The Company also earns revenues from a variety of other sources including its retail, services, and technology businesses. Retail revenues are recognized ratably overat 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. Outsourcingpoint of sale. Service revenues, including technology service revenues, are recognized aswhen services are rendered. Revenues derived from distribution and retail business at the service is performed.
We also offer certain products on an application service provider basis, making our software functionality available on a remote hosting basispoint of sale, and revenues derived from our data centers. The data centers provide systemservices represent approximately 98% and administrative support, as well as hosting services. Revenue on products sold on an application service provider basis is recognized on a monthly basis over the term2% of total revenues for each of the contract beginning onyears ended March 31, 2022, 2021, and 2020.
Revenues are recorded gross when the service start dateCompany is the principal in the transaction, has the ability to direct the use of products hosted.
This segment engagesthe goods or services prior to transfer to a customer, is responsible for fulfilling the promise to its customer, has latitude 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 toestablishing prices, and controls the separate elements based on their relative selling price and recognized in accordancerelationship with the revenue recognition criteria applicable to each element. Relative selling price is determined based on VSOEcustomer. The Company records its revenues net 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 elementssales taxes. Revenues 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 servicesmeasured based on the price charged when sold separately,amount of consideration that the Company expects to receive, reduced by estimates for return allowances, discounts, and for maintenance services, based on renewal rates offered to customers. Revenuerebates using historical data. Sales returns from customers were approximately $3.2 billion in 2022 and $3.1 billion in each of 2021 and 2020. Assets for the software elementright to recover products from customers and the associated refund liabilities for return allowances were not material as of March 31, 2022 and 2021. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs. The Company records deferred revenues when payments are received or due in advance of its performance. Deferred revenues are primarily from the Company’s services arrangements and are recognized as revenues over the periods when services are performed.
The Company had no material contract assets, contract liabilities, or deferred contract costs recorded in its Consolidated Balance Sheets as of March 31, 2022 and 2021. The Company generally expenses costs to obtain a contract as incurred when the amortization period 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.less than one year.
Supplier Incentives: Fees for serviceservices and other incentives received from suppliers, relating to the purchase or distribution of inventory, are considered product discounts and are generally reported as a reduction to cost of sales. We consider these fees and other incentives to represent product discounts and as a result, the amounts are recognized within cost of sales upon the sale of the related inventory.
Supplier Reserves: We establishThe Company establishes reserves against amounts due from suppliers relating to various fees for services and price and rebate incentives, including deductions taken against payments otherwise due to them.it. 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 evaluateThe Company evaluates the amounts due from suppliers on a continual basis and adjustadjusts the reserve estimates when appropriate based on changes in factualfacts and circumstances. All adjustmentsAdjustments to supplier reserves are generally included in cost of sales.sales unless consideration from the vendor is in exchange for distinct goods or services or for pass-through rebate purchases. The ultimate outcome of any outstanding claims may be different than ourthe Company’s estimate. As of March 31, 2016 and 2015The supplier reserves were $144 million and $167 million. All of the supplier reserves at March 31, 2016 and 2015primarily pertain to our Distribution Solutionsthe Company’s U.S. Pharmaceutical segment.
Income Taxes: We account The Company accounts 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.statements or the tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement. Deferred taxes are not provided
Interest Expense: Interest expense primarily includes interest for the Company’s long-term debt obligations, commercial paper, net interest settlements of interest rate swaps, and the amortization of deferred issuance costs and original issue discounts on undistributed earnings of our foreign operations that are considered to be permanently reinvested.
debt.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Foreign Currency Translation: The reporting currency of the Company and its subsidiaries is the U.S. dollar. OurIts foreign subsidiaries generally consider their local currency to be their functional currency. Foreign currency-denominated assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at year-endperiod-end exchange rates, andwhile revenues and expenses are translated at average exchange rates during the corresponding period and stockholders’ equity (deficit) accounts are primarily translated at historical exchange rates. Foreign currency translation adjustments are included in other“Other comprehensive income, or lossnet of tax” in the statementsConsolidated Statements of consolidated comprehensive income,Comprehensive Income (Loss), and the cumulative effect is included in the stockholders’ equity (deficit) section of the consolidated balance sheets.Consolidated Balance Sheets. Realized gains and losses from currency exchange transactions are recorded in operating expenses“Selling, distribution, general, and administrative expenses” in the consolidated statementsConsolidated Statements of operationsOperations and were not material to our consolidated results of operations in 2016, 20152022, 2021, or 2014. We release2020. The Company releases cumulative translation adjustmentadjustments from stockholders’ equity into net incomeearnings as a gain or loss only upon a complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. WeIt also releasereleases all or a pro ratapro-rata portion of the cumulative translation adjustmentadjustments into net incomeearnings upon the sale of an equity method investment that is a foreign entity. entity or has a foreign component.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of foreign currency exchange and interest rate exposures and are recorded onin the consolidated balance sheetsConsolidated 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 asin earnings. The Company uses foreign currency-denominated notes and cross-currency swaps to hedge a charge or creditportion of its net investment in its foreign subsidiaries. It uses cash flow hedges primarily to earnings.reduce the effects of foreign currency exchange rate risk related to intercompany loans denominated in non-functional currencies. If the derivativefinancial instrument is designated as a cash flow hedge or net investment hedge, the effective portions of changes in the fair value of the derivative are included in other“Other comprehensive income, or lossnet of tax” in the statementsConsolidated Statements of consolidated comprehensive income,Comprehensive Income (Loss), and the cumulative effect is included in the stockholders’ equity (deficit) section of the consolidated balance sheets.Consolidated Balance Sheets. The cumulative changes in fair value are reclassified to the consolidated statementssame line as the hedged item in the Consolidated Statements of operationsOperations when the hedged item affects earnings. We periodically evaluateThe Company evaluates hedge effectiveness at inception and on an ongoing basis, and ineffective portions of changes in the fair value of cash flow hedges and net investment hedges are recognized as a charge or credit to earnings.in earnings following the date when ineffectiveness was identified. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change included in earnings. Refer to Financial Note 15, “Hedging Activities,” for additional information.
Comprehensive Income: Income (Loss): Comprehensive income (loss) consists of two components,components: net income (loss) and other comprehensive income.income (loss). Other comprehensive income (loss) refers to revenue, expenses, andas well as gains and losses that under GAAP are recorded as an element of stockholders’ equity (deficit) but are excluded from net income. Ourearnings. The Company’s other comprehensive income (loss) primarily consists of foreign currency translation adjustments from those subsidiaries where the local currency is the functional currency, including gains and losses on net investment hedges, as well as unrealized gains and losses on cash flow hedges as well asandunrealized gains and losses on retirement-related benefit plans.
Noncontrolling Interests and Redeemable Noncontrolling Interests: Noncontrolling interests represent the portion of profit or loss, net assets, and comprehensive income or loss that is not allocable to McKesson Corporation. In 2016 and 2015, netNet income attributable to noncontrolling interests primarily represents guaranteed dividends andincludes recurring compensation that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe AG (“McKesson Europe”), formerly known as Celesio AG, under the domination and profit and loss transfer agreement. Net income attributable to noncontrolling interests also includes third-party equity interests in the Company’s consolidated entities including Vantage Oncology Holdings, LLC (“Celesio”Vantage”). and ClarusONE Sourcing Services LLP (“ClarusONE”), which was established between McKesson and Walmart, Inc in 2017. 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.stockholders’ equity (deficit) in the Company’s Consolidated Balance Sheets. Refer to Financial Note 10, “Noncontrolling8, “Redeemable Noncontrolling Interests and Redeemable Noncontrolling Interests,” for moreadditional information.
Share-Based Compensation: We account The Company accounts for all share-based compensation transactions using a fair-value based measurement method.at fair value. 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 share-based compensation expense recognized has beenis classified in the consolidated statementsConsolidated Statements of operations or capitalized on the consolidated balance sheetsOperations in the same manner as cash compensation paid to ourthe Company’s employees. Refer to Financial Note 5, “Share-Based Compensation,” for additional information.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Loss Contingencies: We are The Company is subject to various claims, including, but not limited to, claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations, and other matters arising out of the normal conduct of ourits business. When a loss is considered probable and reasonably estimable, we recordthe Company records a liability in the amount of ourits 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 the loss or a range of possible loss. When a material loss is reasonably possible or probable, but a reasonable estimate cannot be made, disclosure of the proceeding is provided. The Company recognizes legal fees as incurred when the legal services are provided.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 reviewThe Company reviews all material contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or a 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 itRefer to Financial Note 18, “Commitments and Contingent Liabilities,” for additional information related to ongoing controlled substances claims to which the Company is possiblea party.
Restructuring Charges: Employee severance costs are generally recognized when payments are probable and amounts are reasonably estimable. Costs related to reasonably estimate a rangecontracts without future benefit or contract termination are recognized at fair value at the earlier of potential lossthe contract termination or the cease-use dates. Other exit-related costs are expensed as incurred. Refer to Financial Note 3, “Restructuring, Impairment, and boundaries of high and low estimate.Related Charges, Net,” for additional information.
Business Combinations: We account The Company accounts for acquired businessesbusiness combinations using the acquisition method of accounting which requires that once control is obtained of a business, 100%whereby the identifiable assets and liabilities of the assets acquired and liabilities assumed, including amounts attributed tobusiness, as well as any noncontrolling interests, beinterest in the acquired business, are recorded at their estimated fair values as of the date that the Company obtains control of acquisition at their respective fair values.the acquired business. Any purchase consideration in 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, wethe Company typically useuses a method that is a form or variation of the income method. This method starts withapproach, whereby a forecast of all of the expected future net cash flows for each asset. These cash flowsattributable to the asset are then adjusteddiscounted to present value by applying an appropriateusing a risk-adjusted discount rate that reflects the risk factors associated with the cash flow streams.rate. Some of the more significant estimates and assumptions inherent in the income method or other methodsapproach 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 andexpected useful life.
Treasury Stock: We record purchases of treasury stock at cost, which is reflected as a reduction to stockholders’ equity in the competitive trends impactingCompany’s Consolidated Balance Sheets. Incremental direct costs to purchase treasury stock are included in the asset, including considerationcost of any technical, legal, regulatory, or economic barriersthe shares acquired. Treasury stock also includes shares withheld to entry. Determiningsatisfy the useful lifetax obligations of an intangible asset also requires judgment as different typesrecipients of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.share-based compensation.
Recently Adopted Accounting Pronouncements
Deferred Income Taxes: In November 2015, amended guidance was issued for the balance sheet classification of deferred income taxes. The amended guidance requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The amended guidance would have been effective for us commencing in the first quarter of 2018, however, early adoption was permitted. We early adopted this amended guidance in the fourth quarter of 2016 on a prospective basis. As a result, we reclassified current net deferred tax liabilities of approximately $2 billion on our consolidated balance sheet as of March 31, 2016. Our March 31, 2015 balances were not retrospectively adjusted. The adoption of this guidance had no impact on our condensed consolidated statements of earnings, comprehensive income or cash flows. This amended guidance only resulted in a change in presentation of our deferred income taxes on our consolidated balance sheet as of March 31, 2016.
Discontinued Operations:In the first quarter of 2016, we2022, the Company prospectively adopted amendedAccounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The guidance for reportingalso simplifies and clarifies certain other aspects of discontinued operations and disclosures of disposals of components. The amended guidance revises the criteria for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Refer to Financial Note 5, “Divestiture of Businesses,” for more information regarding the impact of this amended guidance on our consolidated financial statements.
Cumulative Translation Adjustment: In the first quarter of 2015, we adopted amended guidance for a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The amended guidance requires the release of any cumulative translation adjustment into net income only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. Also, it requires the release of all or a pro rata portion of the cumulative translation adjustment to net income in the case of sale of an equity method investment that is a foreign entity.taxes. The adoption of this amended guidance did not have a material effectimpact on ourthe Company’s consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
statements or disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
Share-Based Payments: In March 2016, amended guidance wasThere were no recently issued for employee share-based payment awards. The amended guidance makes several modifications related to the accounting for forfeitures, employer tax withholding on share-based compensation and excess tax benefits or deficiencies. The amended guidance also clarifies the statement of cash flows presentation for share-based awards. The amended guidance is effective for us prospectively commencing in the first quarter of 2018. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Investments: In March 2016, amended guidance was issued to simplify the transition to the equity method of accounting. This standard eliminates the requirementstandards that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings. The amended guidance is effective for us prospectively commencing in the first quarter of 2018. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Derivatives and Hedging: In March 2016, amended guidance was issued for derivative instrument novations. The amendments clarify that a novation, a change in the counterparty, to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationships provided all other hedge accounting criteria continue to be met. The amended guidance is effective for us commencing in the first quarter of 2018, The amended guidance allows for either prospective or modified retrospective adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Leases: In February 2016, amended guidance was issued for lease arrangements. The amended standard will require recognition on the balance sheet for all leases with terms longer than 12 months: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The amended guidance is effective for us commencing in the first quarter of 2020, on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Financial Instruments: In January 2016, amended guidance was issued that requires equity investments to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. This guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The investments that are accounted for under the equity method of accounting or result in consolidation of the investee are excluded from the scope of this amended guidance. The amended guidance will become effective for us commencing in the first quarter of 2019 and will be adopted through a cumulative-effect adjustment. Early adoption is not permitted except for certain provisions. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Business Combinations: In September 2015, amended guidance was issued for an acquirer’s accounting for measurement-period adjustments. The amended guidance eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively and instead requires that measurement-period adjustments be recognized during the period in which it determines the adjustment. In addition, the amended guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amended guidance is effective for us prospectively commencing in the first quarter of 2017. Early adoption is permitted. We do not expect the adoption of this amended guidance tocould have a material effect on our consolidatedimpact to the Company’s financial statements.
Inventory: In July 2015, amended guidance was issued forposition, results of operations, cash flows, or notes to the subsequent measurement of inventory. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The requirement would replace the current lower of cost or market evaluation. Accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail method. The amended guidance will become effective for us commencing in the first quarter of 2018. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
statements upon their adoption.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
2. Held for Sale
Fair Value Measurement: In May 2015, amended guidance was issuedJuly 2021, the Company announced its intention to exit its businesses in Europe (“European Divestiture Activities”). These activities, further described below, constitute the majority of the assets and liabilities classified as held for sale as of March 31, 2022. Total assets and liabilities that limits disclosureshave met the classification as held for sale were $4.5 billion and removes the requirement to categorize investments$4.7 billion, respectively, as of March 31, 2022 and $12 million and $9 million, respectively, as of March 31, 2021, primarily included within the Company’s International segment. The Company determined that the disposal groups classified as held for sale do not meet the criteria for classification as discontinued operations. During the year ended March 31, 2022, the Company recorded charges totaling $1.6 billion, primarily to remeasure the assets and liabilities of the disposal groups to fair value hierarchy ifless costs to sell. These charges were largely driven by declines in the British pound sterling and the Euro. During the years ended March 31, 2021 and 2020, the Company recorded losses of $58 million and $275 million, respectively, related to the contribution of a majority of its German pharmaceutical wholesale business to a joint venture with Walgreens Boots Alliance (“WBA”) which was completed on November 1, 2020. These charges in each year were recorded within “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations.
European Divestiture Activities
On July 5, 2021, the Company entered into an agreement to sell certain of its businesses in the European Union (“E.U.”) located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, along with its German headquarters and wound-care business, part of a shared services center in Lithuania, and its ownership stake in a joint venture in the Netherlands (“E.U. disposal group”) to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.4 billion) adjusted for certain items, including cash, net debt, and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG (“McKesson Europe”) at the transaction closing date. The transaction is anticipated to close within the second half of fiscal year 2023, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals, as applicable.
During the year ended March 31, 2022, the Company recorded charges totaling $438 million to remeasure the E.U. disposal group to fair value less costs to sell. These charges also included impairments of individual assets, such as certain internal-use software that will not be utilized in the future, prior to adjusting the E.U. disposal group as a whole. The remeasurement adjustment includes net losses of $151 million related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. The charges were recorded within “Selling, distribution, general, and administrative expenses” in the Consolidated Statement of Operations. The Company’s measurement of the fair value of the investment is measured usingE.U. disposal group was based on the net asset value per share practical expedient. The amended guidance will become effective for us commencingtotal consideration expected to be received by the Company as outlined in the first quartertransaction agreement. Certain components of 2017. Early adoption is permitted. This amended guidance is primarily expected to affect our annual disclosures related to our pension benefits. We do not expect the adoptiontotal consideration included fair value measurements that fall within Level 3 of this amended guidance to have a material effect on our consolidated financial statements.
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 do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Debt Issuance Costs: In April 2015, amended guidance was issued for the balance sheet presentation of debt issuance costs. The amended guidance requires debt issuance costs related to a recognized debt liability to 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. In August 2015, a clarification was added to this amended guidance that debt issuance costs related to line-of-credit arrangements can continue to be deferred and presented as an asset on the balance sheet. The amended guidance will become effective for us commencing in the first quarter of 2017. Early adoption is permitted. We do not expect the adoption of this amended 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 do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Revenue Recognition: In May 2014, amended guidance was issued for recognizing revenue from contracts with customers. The amended guidance eliminates industry specific guidance and applies to all companies. Revenues will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. The amended guidance also requires additional quantitative and qualitative disclosures. In March 2016, amended guidance was issued to clarify implementation guidance on principal versus agent considerations. In April 2016, another amended guidance was issued to permit an entity, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good. The April 2016 amendment also provided clarifications on determining whether a promised license provides a customer with a right to use or a right to access an entity’s intellectual property. These amended standards are all effective for us commencing in the first quarter of 2019 and allow for either full retrospective adoption or modified retrospective adoption. Early adoption is permitted but not prior to our first quarter of 2018. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
fair value hierarchy.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The total assets and liabilities of the E.U. disposal group that have met the classification of held for sale in the Company’s Consolidated Balance Sheet are as follows:
| | | | | |
| (In millions) | March 31, 2022 |
| Assets | |
| Current assets | |
| Receivables, net | $ | 1,322 | |
| Inventories, net | 809 | |
| Prepaid expenses and other | 72 | |
| Property, plant, and equipment, net | 304 | |
| Operating lease right-of-use assets | 224 | |
| Intangible assets, net | 267 | |
| Other non-current assets | 328 | |
Remeasurement of assets of businesses held for sale to fair value less costs to sell (1) | (302) | |
| Total assets held for sale | $ | 3,024 | |
| |
2.Liabilities | Business Combinations |
| Current liabilities | |
| Drafts and accounts payable | $ | 1,826 | |
| Current portion of long-term debt | 4 | |
| Current portion of operating lease liabilities | 33 | |
| Other accrued liabilities | 473 | |
| Long-term debt | 11 | |
| Long-term deferred tax liabilities | 55 | |
| Long-term operating lease liabilities | 180 | |
| Other non-current liabilities | 138 | |
| Total liabilities held for sale | $ | 2,720 | |
Acquisition of Celesio AG
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, 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(1)Excludes charges related to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries aroundimpairment of individual assets, which are primarily comprised of a $113 million impairment of internally developed software recorded directly against the world. The acquisition of Celesio expanded our global geographic area. Financial results for continuing operations of 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.
Included in the purchase price allocation were acquired identifiable intangibles of $2.3 billion, the fair value of which was primarily determined by applying the income approach using unobservable inputs for projected cash flows and discount rates. These inputs are considered Level 3 under the fair value measurements and disclosure guidance. The fairgross value of the debt acquired was determined by quoted market pricesassets impacted.
On November 1, 2021, the Company announced an agreement to sell its retail and distribution businesses in the United Kingdom (“U.K. disposal group”) to Aurelius Elephant Limited. In April 2022, the Company entered into an amendment to the agreement for a less active market and other observable inputs from available market information, which are consideredpurchase price of £110 million (or, approximately $144 million), including certain adjustments. During the year ended March 31, 2022, the Company recorded charges totaling $1.2 billion, primarily consisting of adjustments to be Level 2 inputs underremeasure the U.K. disposal group to fair value measurementsless costs to sell. The remeasurement adjustments include a $734 million loss related to the accumulated other comprehensive income balances associated with the U.K. disposal group, driven by declines in the British pound sterling. The charges were recorded within “Selling, distribution, general, and disclosure guidance.administrative expenses” in the Consolidated Statement of Operations. The fair valueCompany’s measurement of the noncontrolling interests for the Celesio common shares that were not acquired by McKesson was $1,505 million and was determined by a quoted market price that is considered to be a Level 1 input under the fair value measurements and disclosure guidance.
The excess of the purchase price and the noncontrolling interests over the fair value of the acquired net assets of $4.2 billion has been allocated to goodwill, which primarily reflectsU.K. disposal group was based on the expected future benefits to be realized upon integrating the business. Most of the goodwill is nottotal consideration expected to be deductible for tax purposes.
Refer to Financial Note 10, “Noncontrolling Interests and Redeemable Noncontrolling Interests” for information onreceived by the domination and profit and loss transfer agreement entered into between McKesson and Celesio during fiscal 2015.
Other Acquisitions
In July 2015, we entered into an agreement to purchase the pharmacy business of J Sainsbury Plc (“Sainsbury”) basedCompany as outlined in the United Kingdom (“U.K.”). Under the termstransaction agreement. Certain components of the agreement, on February 29, 2016, we made an advance cash payment of $174 million representing the full purchasetotal consideration which is included in “Other Noncurrent Assets”fair value measurements that fall within our consolidated balance sheet at March 31, 2016. The advance payment bears interest at an annual rate of 3.3%, compounded daily, from February 29, 2016 until the closingLevel 3 of the transaction.fair value hierarchy. The interest will be paid to us in fulltransaction closed on the closing date. The U.K. business is currently being reviewed by the U.K. CompetitionApril 6, 2022 and, Markets Authority (the “U.K. CMA”). We anticipate obtaining U.K. CMA clearance during the first quarter of 2017. Once completed, this acquisition will further enhance our retail pharmacy service capabilities in the U.K. Uponat closing the acquired Sainsbury business will be included in our International pharmaceutical distributionbuyer assumed and services business within our Distribution Solutions segment.
In September 2015, we entered into an agreementrepaid a note payable to purchase the pharmaceutical distribution businessCompany of UDG Healthcare Plc (“UDG”) based in Ireland and the U.K. During the fourth quarter of 2016, we paid the net purchase consideration of $412 million into an escrow account, which is included in “Other Noncurrent Assets” within our consolidated balance sheet at March 31, 2016. The acquisition was completed on April 1, 2016. The acquired UDG business primarily provides pharmaceutical and other healthcare products to retail and hospital pharmacies. The acquisition of UDG will expand our offerings and strengthen our market position in Ireland and the U.K. The U.K. business is currently being reviewed by the U.K. CMA and as a result, we have limited control over this portion of the acquired business. We anticipate obtaining U.K. CMA clearance during the second half of 2017. Upon closing, financial results for this acquisition will be included in our International pharmaceutical distribution and services business within our Distribution Solutions segment.
approximately $118 million.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The total assets and liabilities of the U.K. disposal group that have met the classification of held for sale in the Company’s Consolidated Balance Sheet are as follows:
| | | | | |
| (In millions) | March 31, 2022 |
| Assets | |
| Current assets | |
| Cash and cash equivalents | $ | 531 | |
| Receivables, net | 931 | |
| Inventories, net | 563 | |
| Prepaid expenses and other | 50 | |
| Property, plant, and equipment, net | 91 | |
| Operating lease right-of-use assets | 270 | |
| Intangible assets, net | 117 | |
| Other non-current assets | 88 | |
| Remeasurement of assets of businesses held for sale to fair value less costs to sell | (1,159) | |
| Total assets held for sale | $ | 1,482 | |
| |
| Liabilities | |
| Current liabilities | |
| Drafts and accounts payable | $ | 1,593 | |
| |
| Current portion of operating lease liabilities | 50 | |
| Other accrued liabilities | 59 | |
| |
| Long-term deferred tax liabilities | 16 | |
| Long-term operating lease liabilities | 262 | |
| Other non-current liabilities | 38 | |
| Total liabilities held for sale | $ | 2,018 | |
On April 1, 2016, we acquired Vantage Oncology Holdings LLC (“Vantage”)January 31, 2022, the Company completed the sale of its Austrian business to Quadrifolia Management GmbH in a management-led buyout for a purchase price of €244 million (or, approximately $276 million), which is headquartered in Manhattan Beach, California. Vantage provides comprehensive oncology management services, including radiation oncology, medical oncology,certain adjustments. The Company divested net assets of the Austrian business of $272 million, primarily within the International segment, and other integrated cancer care services, through over 51 cancer treatment facilities in 13 states. The net purchase considerationthe buyer assumed a note payable to the Company of $527 million was paid into an escrow account prior to year end, and is included in “Other Noncurrent Assets” within our consolidated balance sheet at March 31, 2016. Also on April 1, 2016, we acquired Biologics, Inc. (“Biologics”) for gross purchase consideration of $700approximately $63 million which was funded from cash on hand. Biologics is the largest independent oncology-focused specialty pharmacypaid to McKesson in the U.S.,fourth quarter of 2022. During the year ended March 31, 2022, the Company recognized a loss of $32 million which is headquarteredwas recorded within “Selling, distribution, general, and administrative expenses” in Cary, North Carolina.the Consolidated Statement of Operations.
German Pharmaceutical Wholesale Joint Venture
On November 1, 2020, the Company completed a transaction with WBA whereby the majority of its German pharmaceutical wholesale business was contributed to a newly formed joint venture in which McKesson had a 30% noncontrolling interest.
Transaction consideration for the contribution included a receivable amount of $41 million, primarily related to working capital and net debt adjustments from WBA, which was received in the first quarter of 2022, and the 30% interest in the newly formed joint venture. At the transaction date, the carrying value of the equity investment in the joint venture was recorded at its fair value, which was measured using inputs that fell within Level 3 of the fair value hierarchy. The financial resultscarrying value of Vantage and Biologics will be included within our Distribution Solutions segment from the date of acquisition. These acquisitions will collectively enhance our specialty pharmaceutical distribution scale and oncology-focused pharmacy offerings, solutions for manufacturers and payers, and expandinvestment in the scope of our community-based oncology and practice management services.
In March 2016, we entered into an agreement to purchase Rexall Health from Katz Group for $3 billion Canadian dollars (or, approximately $2.3 billion U.S. dollars using the currency exchange ratio of 0.77 Canadian dollar to 1 U.S. dollarjoint venture was nil as of March 31, 2016). Rexall Health, which operates approximately 470 retail pharmacies2021. The Company accounted for its interest in Canada, particularly in Ontario and Western Canada, will enhance our Canadian pharmaceutical supply chain.the joint venture as an equity method investment within the International segment. The acquisition is subject to regulatory approval and expected to close during the second half of calendar year 2016. Upon closing, the acquired business will be included within our Distribution Solutions segment.
During the last three years, wejoint venture also completedassumed a number of other acquisitions within our Distribution Solutions segment. 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. Restructuring
On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives that will be substantially implemented priornote payable to the endCompany in the amount of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms,approximately $291 million as well as the disposal and abandonment of certain non-core businesses. As a result of the Cost Alignment Plan, we expecttransaction date, which was paid to record total pre-tax charges of approximately $270 million to $290 million, of which $229 million of pre-tax charges were recorded during the fourth quarter of 2016. Estimated remaining charges primarily consist of exit-related costs and accelerated depreciation and amortization, which are largely attributed to our Distribution Solutions segment.
Company in 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In conjunction with the contribution, the Company recorded losses of $58 million and $275 million, respectively, in the years ended March 31, 2021 and 2020, which included adjustments to remeasure the assets and liabilities held for sale to fair value less costs to sell. These charges were included within “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations. The Company’s measurement of the fair value of the German pharmaceutical wholesale business disposal group was based on estimates of total consideration to be received by the Company as outlined in the contribution agreement between the Company and WBA.
3. Restructuring, Impairment, and Related Charges, Net
The Company recorded restructuring, impairment, and related charges, net, of $281 million, $334 million, and $268 million in 2022, 2021, and 2020, respectively. These charges are included in “Restructuring, impairment, and related charges, net” in the Consolidated Statements of Operations. In addition, for our Cost Alignment Plan duringthe years ended March 31, 2021 and 2020, certain charges related to restructuring initiatives were included in “Cost of sales” in the Consolidated Statements of Operations and were not material.
Restructuring Initiatives
During the first quarter of 2022, the Company approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily included the rationalization of the Company’s office space in North America. Where the Company ceased using office space, it exited the portion of the facility no longer used. It also retained and repurposed certain other office locations. The Company recorded charges of $124 million for the year ended March 31, 2022, primarily related to lease right-of-use and other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization. This initiative was substantially complete in 2022 after which immaterial charges will continue to be incurred through the termination date of certain leases.
During the first quarter of 2021, the Company committed to an initiative within the United Kingdom (“U.K.”), which is included in the Company’s International segment, to further drive operational changes in technologies and business processes, efficiencies, and cost savings. The initiative included reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. Charges incurred for this initiative were not material for the year ended March 31, 2022 and were $57 million for the year ended March 31, 2021, primarily related to asset impairments and accelerated depreciation expense as well as employee severance and other employee-related costs. This initiative was substantially complete in 2022 and remaining costs the Company expects to record under this initiative are not material.
During the fourth quarter of 20162019, the Company committed to certain programs to continue its operating model and cost optimization efforts. The Company continues to implement centralization of certain functions and outsourcing through an expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of business operations, related headcount reductions, the further closures of retail pharmacy stores in Europe, and closures of other facilities. The Company recorded charges of $62 million and $72 million in 2021 and 2020, respectively, consisting primarily of employee severance, accelerated depreciation expense, and project consulting fees. This initiative was substantially complete in 2021 and remaining costs the Company recorded under this initiative were not material.
As previously announced on November 30, 2018, the Company relocated its corporate headquarters, effective April 1, 2019, from San Francisco, California to Irving, Texas to improve efficiency, collaboration, and cost competitiveness. As a result, the Company recorded charges of $28 million and $44 million in 2021 and 2020, respectively, consisting primarily of employee retention expenses, severance, long-lived asset impairments, and accelerated depreciation. The relocation was substantially complete in January 2021 and remaining costs the Company recorded under this initiative, primarily relating to lease costs, were not material.
On April 25, 2018, the Company announced a strategic growth initiative intended to drive long-term incremental profit growth and to increase operational efficiency. The initiative consisted of multiple growth priorities and plans to optimize the Company’s operating models and cost structures primarily through centralization, cost management, and outsourcing of certain administrative functions. As part of the growth initiative, the Company committed to implement certain actions including a reduction in workforce, facility consolidation, and store closures. This set of initiatives was substantially complete by the end of 2020 and charges in 2021 were not material. The Company recorded charges of $15 million in 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2022
Restructuring, impairment, and related charges, net for the year ended March 31, 2022 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2022 |
| (In millions) | U.S. Pharmaceutical | | Prescription Technology Solutions | | Medical-Surgical Solutions | | International | | Corporate | | Total |
| Severance and employee-related costs, net | $ | 8 | | | $ | 1 | | | $ | (1) | | | $ | 8 | | | $ | (7) | | | $ | 9 | |
Exit and other-related costs (1) | 9 | | | 4 | | | 5 | | | 33 | | | 46 | | | 97 | |
Asset impairments and accelerated depreciation (2) | 18 | | | 20 | | | 5 | | | 35 | | | 61 | | | 139 | |
| Total | $ | 35 | | | $ | 25 | | | $ | 9 | | | $ | 76 | | | $ | 100 | | | $ | 245 | |
(1)Exit and other-related costs consist of accruals for costs to be incurred without future economic benefits, project consulting fees, and other exit costs expensed as incurred. For the Company’s International segment, costs primarily relate to optimization programs in Canada, exit-related actions for the Company’s European Divestiture Activities, and programs for operating model and cost optimization efforts in the U.K. as described above. For Corporate, primarily represents costs related to the transition to the partial remote work model described above and various other initiatives.
(2)Costs primarily relate to the transition to the partial remote work model described above.
Fiscal 2021
Restructuring, impairment, and related charges, net for the year ended March 31, 2021 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2021 |
| (In millions) | U.S. Pharmaceutical | | Prescription Technology Solutions | | Medical-Surgical Solutions | | International (1) | | Corporate (2) | | Total |
| Severance and employee-related costs, net | $ | 10 | | | $ | 4 | | | $ | (1) | | | $ | 22 | | | $ | 69 | | | $ | 104 | |
Exit and other-related costs (3) | 11 | | | — | | | 4 | | | 17 | | | 27 | | | 59 | |
| Asset impairments and accelerated depreciation | — | | | — | | | 1 | | | 46 | | | 9 | | | 56 | |
| Total | $ | 21 | | | $ | 4 | | | $ | 4 | | | $ | 85 | | | $ | 105 | | | $ | 219 | |
(1)Primarily represents costs associated with the operating model and cost optimization efforts described above.
(2)Represents costs associated with the operating model cost optimization efforts and the relocation of the Company’s headquarters described above in addition to various other initiatives.
(3)Exit and other-related costs primarily include project consulting fees.
|
| | | | | | | | | | | | | | | |
| (In millions) | Distribution Solutions | | Technology Solutions | | Corporate | | Total |
Severance and employee-related costs, net (1) | $ | 147 |
| | $ | 44 |
| | $ | 16 |
| | $ | 207 |
|
| Exit-related costs | 3 |
| | 1 |
| | 1 |
| | 5 |
|
Asset impairments and accelerated depreciation and amortization (2) | 11 |
| | 6 |
| | — |
| | 17 |
|
| Total | $ | 161 |
| | $ | 51 |
| | $ | 17 |
| | $ | 229 |
|
| | | | | | | | |
| Cost of Sales | $ | 5 |
| | $ | 21 |
| | $ | — |
| | $ | 26 |
|
| Operating Expenses | 156 |
| | 30 |
| | 17 |
| | 203 |
|
| Total | $ | 161 |
| | $ | 51 |
| | $ | 17 |
| | $ | 229 |
|
| | | | | |
(1) | Severance and employee-related costs, net, include charges of $117 million and $90 million, for a total of $207 million, for a reduction in workforce and business process initiatives. |
| |
(2) | Asset impairments and accelerated depreciation and amortization charges primarily include impairments for capitalized software projects and software licenses due to abandonments. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2020
Restructuring, impairment, and related charges, net for the year ended March 31, 2020 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2020 |
| (In millions) | U.S. Pharmaceutical (1) | | Prescription Technology Solutions | | Medical-Surgical Solutions (2) | | International (3) | | Corporate (4) | | Total |
| Severance and employee-related costs, net | $ | 12 | | | $ | (1) | | | $ | 4 | | | $ | 2 | | | $ | 30 | | | $ | 47 | |
Exit and other-related costs (5) | 1 | | | — | | | 19 | | | 13 | | | 46 | | | 79 | |
| Asset impairments and accelerated depreciation | 10 | | | — | | | 1 | | | 6 | | | 13 | | | 30 | |
| Total | $ | 23 | | | $ | (1) | | | $ | 24 | | | $ | 21 | | | $ | 89 | | | $ | 156 | |
(1)Represents costs associated with dispositions and costs related to the relocation of the Company’s corporate headquarters described above.
(2)Primarily represents costs associated with the growth initiative described above.
(3)Primarily represents costs associated with the operating model and cost optimization efforts described above.
(4)Represents costs associated with the growth initiative, operating model cost optimization efforts, and with the relocation of the Company’s corporate headquarters described above.
(5)Exit and other-related costs primarily include project consulting fees.
The following table summarizes the activity related to the restructuring liabilities associated with the Cost Alignment PlanCompany’s restructuring initiatives for the quarter and yearyears ended March 31, 2016:2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | U.S. Pharmaceutical | | Prescription Technology Solutions | | Medical-Surgical Solutions | | International | | Corporate | | Total |
| Balance, March 31, 2020 | $ | 29 | | | $ | 1 | | | $ | 22 | | | $ | 66 | | | $ | 39 | | | $ | 157 | |
| Restructuring, impairment, and related charges, net | 21 | | 4 | | | 4 | | | 85 | | | 105 | | | 219 |
| Non-cash charges | — | | | — | | | (1) | | | (46) | | | (9) | | | (56) | |
| Cash payments | (31) | | | (1) | | | (21) | | | (31) | | | (75) | | | (159) | |
| Other | — | | | — | | | (1) | | | (8) | | | (1) | | | (10) | |
Balance, March 31, 2021 (1) | 19 | | | 4 | | | 3 | | | 66 | | | 59 | | | 151 | |
| Restructuring, impairment, and related charges, net | 35 | | | 25 | | | 9 | | | 76 | | | 100 | | | 245 | |
| Non-cash charges | (18) | | | (20) | | | (5) | | | (35) | | | (61) | | | (139) | |
| Cash payments | (18) | | | (6) | | | (6) | | | (28) | | | (29) | | | (87) | |
| Other | (7) | | | — | | | — | | | (23) | | | (10) | | | (40) | |
Balance, March 31, 2022 (2) | $ | 11 | | | $ | 3 | | | $ | 1 | | | $ | 56 | | | $ | 59 | | | $ | 130 | |
(1) As of March 31, 2021, the total reserve balance was $151 million, of which $99 million was recorded in “Other accrued liabilities” and $52 million was recorded in “Other non-current liabilities” in the Company’s Consolidated Balance Sheets.
(2) As of March 31, 2022, the total reserve balance was $130 million, of which $58 million was recorded in “Other accrued liabilities,” $36 million was recorded in “Liabilities held for sale,” and $36 million was recorded in “Other non-current liabilities” in the Company’s Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter and Year Ended March 31, 2016 | | |
| (In millions) | | Balance March 31, 2015 | | Net restructuring charges recognized | | Non-cash charges | | Cash Payments | | Other | | Balance March 31, 2016 (1) |
| 2016 Cost Alignment Plan | | | | | | | | | | | | |
| Distribution Solutions | | $ | — |
| | $ | 161 |
| | $ | (4 | ) | | $ | (1 | ) | | $ | — |
| | $ | 156 |
|
| Technology Solutions | | — |
| | 51 |
| | (3 | ) | | — |
| | (3 | ) | | 45 |
|
| Corporate | | — |
| | 17 |
| | 5 |
| | — |
| | (1 | ) | | 21 |
|
| Total 2016 Cost Alignment Plan | | $ | — |
| | $ | 229 |
| | $ | (2 | ) | | $ | (1 | ) | | $ | (4 | ) | | $ | 222 |
|
| | | | | |
(1) | The reserve balances as of March 31, 2016 include $172 million recorded in other accrued liabilities and $50 million recorded in other noncurrent liabilities in our consolidated balance sheet. |
| |
4. | Asset Impairments and Product Alignment Charges |
In 2014, we recorded pre-tax charges totaling $57 million in our Technology Solutions segment. 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.
| |
5. | Divestiture of Businesses |
During the second quarter of 2016, we sold our ZEE Medical business within our Distribution Solutions segment for total proceeds of $134 million and recorded a pre-tax gain of $52 million ($29 million after-tax) from this sale.
During the first quarter of 2016, we also sold our nurse triage business within our Technology Solutions segment for net sale proceeds of $84 million and recorded a pre-tax gain of $51 million ($38 million after-tax) from the sale.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Long-Lived Asset Impairments
Fiscal 2022
In 2022, the Company recognized charges totaling $36 million to impair certain long-lived assets within the International segment related to the Company’s operations in Denmark and its retail pharmacy businesses in Canada. The Company used an income approach (a DCF method) and a market approach to estimate the fair value of the long-lived assets.
Fiscal 2021
In2021, the Company recognized charges of $115 million to impair certain long-lived assets within the Company’s International segment. These divestiturescharges primarily related to long-lived assets associated with the Company’s retail pharmacy businesses in Canada and Europe and were due to declines in estimated future cash flows partially driven by a revised outlook regarding the impacts of COVID-19. The Company used both an income approach and a market approach to estimate the fair value of the long-lived assets.
Fiscal 2020
In 2020, the Company recognized charges of $82 million to impair certain long-lived and intangible assets for its retail pharmacy business in Europe within the Company’s International segment. These charges related primarily to intangible assets associated with pharmacy licenses within the U.K. retail business due to a decline in estimated future cash flows driven by additional U.K. government reimbursement reductions communicated in the third quarter of 2020. The Company used a combination of an income approach and a market approach to estimate the fair value of the long-lived and intangible assets.
In 2020, the Company performed an interim impairment test of long-lived and intangible assets for its Rexall Health retail business, within the Company's International segment, due to the decline in the estimated future cash flows primarily driven by lower than expected growth in both prescription volume and sales of non-prescription goods. As a result, the Company recognized a charge of $30 million to impair certain long-lived and intangible assets, primarily customer relationships. The Company used an income approach for estimating the fair value of the long-lived and intangible assets.
4. Business Acquisitions and Divestitures
Acquisitions
During 2022, 2021, and 2020, the Company did not meetcomplete any material acquisitions. For the criteria to qualify as discontinued operations underthree years presented, the amended accounting guidance, which became effectiveCompany completed several de minimis acquisitions within its operating segments. Financial results for usthe Company’s business acquisitions have been included in the firstCompany’s consolidated financial statements since their respective acquisition dates. Purchase prices for business acquisitions have been allocated based on estimated fair values at the respective acquisition dates. Goodwill recognized for business acquisitions is generally not expected to be deductible for tax purposes. However, if the assets of another company are acquired, the goodwill may be deductible for tax purposes.
Divestitures
In July 2021, the Company announced its intention to exit its businesses in Europe. In 2022, the Company entered into agreements to sell the E.U. disposal group and U.K. disposal group and completed the previously announced sale of its Austrian business, as described in Financial Note 2, “Held for Sale.” In 2021, the Company contributed the majority of its German pharmaceutical wholesale business to a newly formed joint venture with WBA as discussed in Financial Note 2, “Held for Sale,” and, in 2022, sold its interest in the joint venture to WBA, as described in Financial Note 6, “Other Income, Net.” In 2020, the Company completed the separation of the Change Healthcare JV, as described below.
Investment in the Change Healthcare Joint Venture
In the fourth quarter of 2016.2017, the Company contributed the majority of its McKesson Technology Solutions businesses to form a joint venture, the Change Healthcare JV, under a contribution agreement between McKesson and Change Healthcare Inc. (“Change”) and others, including shareholders of Change. In exchange for the contribution, the Company initially owned approximately 70% of the joint venture, with the remaining equity ownership of approximately 30% held by Change. The Change Healthcare JV was jointly governed by McKesson and shareholders of Change.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On June 27, 2019, common stock and certain other securities of Change began trading on the NASDAQ (“IPO”). Change was a holding company and did not own any material assets or have any operations other than its interest in the Change Healthcare JV. On July 1, 2019, upon the completion of its IPO, Change contributed net cash proceeds it received from its offering of common stock to the Change Healthcare JV in exchange for additional membership interests of the Change Healthcare JV (“LLC Units”). As a result, McKesson’s equity interest in the Change Healthcare JV was diluted from approximately 70% to approximately 58.5%. Accordingly, pre-tax gainsin the second quarter of 2020, the Company recognized a dilution loss of $246 million, primarily representing the difference between its proportionate share of the IPO proceeds and the dilution effect on the investment’s carrying value. This amount was included in “Equity earnings and charges from both divestitures were recordedinvestment in operating expenses within continuing operationsChange Healthcare Joint Venture” in the Company’s Consolidated Statement of our consolidated statements of operations. Pre and after-tax income of these businesses were not materialOperations for the year ended March 31, 2016.2020.
In the second quarter of 2020, the Company recorded an other-than-temporary impairment (“OTTI”) charge of $1.2 billion to its investment in the Change Healthcare JV, representing the difference between the carrying value of the Company’s investment and the fair value derived from the corresponding closing price of Change’s common stock at September 30, 2019. This charge was included in “Equity earnings and charges from investment in Change Healthcare Joint Venture” in the Company’s Consolidated Statement of Operations for the year ended March 31, 2020.
Separation of the Change Healthcare Joint Venture On March 10, 2020, the Company completed the separation of its interest in the Change Healthcare JV. The separation was affected through the split-off of PF2 SpinCo, Inc. (“SpinCo”), a wholly-owned subsidiary of the Company that held all of the Company’s interest in the Change Healthcare JV, to certain of the Company’s stockholders through an exchange offer (“Split-off”), followed by the merger of SpinCo with and into Change, with Change surviving the merger (“Merger”).
In connection with the Split-off, on March 9, 2020, the Company distributed all 176.0 million outstanding shares of common stock of SpinCo to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson common stock which now are held as treasury stock on the Company’s Consolidated Balance Sheets. Refer to Financial Note 19, “Stockholders' Equity (Deficit),” for more information. Following consummation of the exchange offer, on March 10, 2020, SpinCo was merged with and into Change Healthcare, and each share of SpinCo common stock converted into 1 share of Change common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. The Split-off and the Merger are intended to be generally tax-free transactions for U.S. federal income tax purposes. Following the Split-off, the Company does not beneficially own any of Change’s outstanding securities. In the fourth quarter of 2020, the Company recognized a net gain of $414 million related to the transaction which is included under the caption “Equity earnings and charges from investment in Change Healthcare Joint Venture” in the Company’s Consolidated Statement of Operations for the year ended March 31, 2020. The net gain was calculated as follows:
| | | | | |
6.(In millions, except per share data) | Share-Based Compensation |
| Fair value of McKesson common stock accepted (15.4 million shares at $131.97 per share on March 9, 2020) | $ | 2,036 | |
| Investment in the Change Healthcare JV at exchange date | (2,096) | |
Reversal of deferred tax liability (1) | 521 | |
| Release of accumulated other comprehensive loss attributable to the joint venture | (24) | |
| Less: Transaction costs incurred | (23) | |
| Net gain on split-off of the Change Healthcare JV | $ | 414 | |
We provide(1)Under the agreement with the Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, there may be changes in future periods to the amount reversed as the relevant periods are audited by tax authorities. Any such change is not expected to have a material impact on the Company’s consolidated financial statements.
Equity Method Investment in the Change Healthcare Joint Venture
Until the separation of the Company’s interest in the Change Healthcare JV, this investment was accounted for using the equity method of accounting. Effective April 1, 2019, the Change Healthcare JV adopted the amended revenue recognition guidance and, in the first quarter of 2020, the Company recorded its proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net of tax, in the Company’s opening retained earnings.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Excluding the OTTI and transaction-related items described above, the Company recorded its proportionate share of loss from its investment in the Change Healthcare JV of $119 million in 2020, which includes transaction and integration expenses incurred by the Change Healthcare JV and basis differences between the joint venture and McKesson, including amortization of fair value adjustments primarily representing incremental intangible amortization and removal of profit associated with the recognition of deferred revenue. This amount was recorded under the caption “Equity earnings and charges from investment in Change Healthcare Joint Venture” in the Company’s Consolidated Statement of Operations for the year ended March 31, 2020.
Related Party Transactions
In connection with the formation of the Change Healthcare JV, McKesson, the Change Healthcare JV, and certain shareholders of Change entered into various ancillary agreements, including a transition services agreement (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other agreements. The Advisory Agreement was terminated in 2020 and fees incurred or earned from the agreement were not material for 2020. Fees incurred or earned from the TSA were not material in 2022 nor 2021 and were $22 million in 2020.
Under the TRA, McKesson had the ability to adjust the manner in which certain depreciation or amortization deductions are allocated among Change and McKesson. McKesson exercised its right under the agreement and allocated certain depreciation and amortization deductions to Change for the tax year ended March 31, 2020.
After McKesson’s separation of its interest in the Change Healthcare JV, the aforementioned TRA agreement requires the Change Healthcare JV to pay McKesson 85% of the net cash tax savings realized, or deemed to be realized, by Change resulting from the depreciation or amortization allocated to Change by McKesson. The receipt of any payments from the Change Healthcare JV under the TRA is dependent upon Change benefiting from this depreciation or amortization in future tax return filings. This creates uncertainty over the amount, timing, and probability of the gain recognized. As such, the Company accounts for the TRA as a gain contingency, with 0 receivable recognized as of March 31, 2022 or 2021.
5. Share-Based Compensation
The Company provides share-based compensation to ourits employees, officers, and non-employee directors, including stock options, an employee stock purchase plan, restricted stock units (“RSUs”), performance-based restricted stock units (“PeRSUs”PSUs”), stock options, and total shareholder return unitsan employee stock purchase plan (“TSRUs”ESPP”) (collectively, “share-based awards”). Most of ourthe 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 estimateThe Company estimates 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 compensationCompensation expense recognized has beenis classified in the consolidated statementsConsolidated Statements of operations or capitalized in the consolidated balance sheetsOperations in the same manner as cash compensation paid to ourthe Company’s employees. There was no material share-based compensation expense capitalized as part of the cost of an asset in 2016, 2015 and 2014.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
Restricted stock unit awards (1) | $ | 148 | | | $ | 137 | | | $ | 104 | |
| Stock options | 2 | | | 4 | | | 7 | |
| Employee stock purchase plan | 11 | | | 10 | | | 8 | |
| Share-based compensation expense | 161 | | | 151 | | | 119 | |
Tax benefit for share-based compensation expense (2) | (35) | | | (23) | | | (18) | |
| Share-based compensation expense, net of tax | $ | 126 | | | $ | 128 | | | $ | 101 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
Restricted stock unit awards (1) | $ | 88 |
| | $ | 137 |
| | $ | 126 |
|
| Stock options | 22 |
| | 24 |
| | 22 |
|
| Employee stock purchase plan | 13 |
| | 13 |
| | 12 |
|
Share-based compensation expense (2) | 123 |
| | 174 |
| | 160 |
|
Tax benefit for share-based compensation expense (3) | (41 | ) | | (61 | ) | | (55 | ) |
| Share-based compensation expense, net of tax | $ | 82 |
| | $ | 113 |
| | $ | 105 |
|
| |
(1) | Includes compensation expense recognized for RSUs, PeRSUs and TSRUs. Our TSRUs were awarded beginning in 2015. |
| |
(2) | 2016 includes non-cash credits of $14 million representing the reversal of previously recognized share-based compensation, which was recorded due to employee terminations associated with the March 2016 restructuring plan.(2)Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of compensation expense is not tax-deductible. Income tax expense for 2022, 2021, and 2020 included discrete income tax expense of $10 million, $2 million, and $2 million, respectively. |
| |
(3) | Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax compensation expense is not tax-deductible. |
Stock Plans
In July 2013, ourthe Company’s stockholders approved the 2013 Stock Plan to replace the 2005 Stock Plan. TheseUnder these stock plans, provide ourthe Company may issue restricted stock, RSUs, PSUs, stock options, and other share-based awards to selected 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.directors. The 2013 Stock Plan reserves 30 million shares plus the remaining number ofunused reserved shares reserved but unused under the 2005 Stock Plan. As of March 31, 2016, 292022, 19 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We 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:
|
| | | | | |
| | Years Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Expected stock price volatility | 21% | | 22% | | 22% |
| Expected dividend yield | 0.4% | | 0.6% | | 0.7% |
| Risk-free interest rate | 1.4% | | 1.3% | | 0.7% |
| Expected life (in years) | 4 | | 4 | | 4 |
The following is a summary of stock options outstanding at March 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Number of Options Outstanding at Year End (In millions) | | Weighted- Average Remaining Contractual Life (Years) | | Weighted- Average Exercise Price | | Number of Options Exercisable at Year End (In millions) | | Weighted- Average Exercise Price |
| $ | 40.46 |
| – | $ | 140.19 |
| | 3 | | 2 | | $ | 83.62 |
| | 2 | | $ | 78.01 |
|
| 140.20 |
| – | 239.93 |
| | 1 | | 6 | | 206.58 |
| | — | | 180.24 |
|
| | | | | 4 | | | | | | 2 | | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes stock option activity during 2016:
|
| | | | | | | | | | | |
| (In millions, except per share data) | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (2) |
| Outstanding, March 31, 2015 | 5 | | $ | 95.01 |
| | 4 | | $ | 539 |
|
| Granted | 1 | | 236.77 |
| | | | |
| Cancelled | (1) | | 149.19 |
| | | | |
| Exercised | (1) | | 63.75 |
| | | | |
| Outstanding, March 31, 2016 | 4 | | $ | 118.95 |
| | 3 | | $ | 201 |
|
| | | | | | | | |
Vested and expected to vest (1) | 3 | | $ | 118.21 |
| | 3 | | $ | 200 |
|
| Vested and exercisable, March 31, 2016 | 2 | | 85.15 |
| | 2 | | 173 |
|
| |
(1) | The number of options expected to vest takes into account an estimate of expected forfeitures. |
| |
(2) | The intrinsic value is calculated as the difference between the period-end market price of the Company’s common stock and the exercise price of “in-the-money” options. |
The following table provides data related to stock option activity:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions, except per share data) | 2016 | | 2015 | | 2014 |
| Weighted-average grant date fair value per stock option | $ | 44.04 |
| | $ | 35.49 |
| | $ | 21.45 |
|
| Aggregate intrinsic value on exercise | $ | 107 |
| | $ | 153 |
| | $ | 144 |
|
| Cash received upon exercise | $ | 47 |
| | $ | 76 |
| | $ | 111 |
|
| Tax benefits realized related to exercise | $ | 42 |
| | $ | 60 |
| | $ | 55 |
|
| Total fair value of stock options vested | $ | 18 |
| | $ | 20 |
| | $ | 24 |
|
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 20 |
| | $ | 22 |
| | $ | 29 |
|
| Weighted-average period in years over which stock option compensation cost is expected to be recognized | 2 |
| | 2 |
| | 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 datewhich vest over a period of grant. Total compensation expense for RSUs under our stock plans isgenerally three to four years as determined by the productCompensation Committee at the time of grant. The fair value of the number of shares that are expected to vest andaward is determined based on the grant date market price of the Company’s common stock. The Compensation Committee determinesstock on the grant date and the related compensation expense is recognized over the vesting terms at the time of grant. These awards generally vest in three to four years. We recognize expense for RSUsperiod on a straight-line basis over the requisite service period.basis.
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, 2016,2022, approximately 146 thousand57,000 RSUs for ourthe Company’s directors are vested.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
PeRSUsPSUs are RSUs for which the number of RSUs awarded is conditional upon the attainment of one or moremarket and performance objectives over a specified period. Each year, the Compensation Committee approves the target number of PeRSUs representing the base number of awards that could be granted if performance goals are attained. PeRSUs are accounted for as variable awards until the performance goals are reached at which time the grant date is established. Total compensation expense for PeRSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company’s common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PeRSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted and classified as RSUs and accounted for on that basis. We recognize compensation expense for these awards on a straight-line basis over the requisite aggregate service period of generally four years.
TSRUs replaced PeRSUs for our executive officers beginning in 2015. The number of vested TSRUsPSUs is assessed at the end of a three-year performance period and is conditioned upon attainment of ameeting certain earnings per share targets, average return on invested capital, and for certain participants, total shareholder return metric relative to a peer group of companies. We usecompanies and, for special PSUs granted in 2019, meeting certain cumulative operating profit metrics. The Company uses the Monte Carlo simulation model to measure the fair value of TSRUs. TSRUsthe total shareholder return portion of the PSUs. The earnings per share portion of the PSUs is measured at the grant date market price. PSUs have a requisite service period of approximatelygenerally three years. Expense is attributed to the requisite service period on a straight-line basis based on the fair value of the TSRUs.PSUs, adjusted for the performance modifier at the end of each reporting period. For TSRUsPSUs that are designated as equity awards, the fair value is measured at the grant date. For TSRUs that are eligible for cash settlement and designated as liability awards, we measure the fair value at the end of each reporting period and also adjust a corresponding liability on our balance sheet for changes in fair value.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The weighted-average assumptions used to estimatein the fair value of TSRUsMonte Carlo valuations are as follows:
| | | | Years Ended March 31, | | Years Ended March 31, |
| | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| Expected stock price volatility | 18% | | 21% | Expected stock price volatility | 35 | % | | 36 | % | | 30 | % |
| Expected dividend yield | 0.4% | | 0.5% | Expected dividend yield | 0.9 | % | | 1.1 | % | | 1.3 | % |
| Risk-free interest rate | 0.9% | | 0.7% | Risk-free interest rate | 0.3 | % | | 0.2 | % | | 2.2 | % |
| Expected life (in years) | 3 | | 3 | Expected life (in years) | 3 | | 3 | | 3 |
The following table summarizes activity for restricted stock unit award activityawards (RSUs and PSUs) during 2016:2022:
| | | (In millions, except per share data) | Shares | | Weighted- Average Grant Date Fair Value Per Share | (In millions, except per share data) | Shares | | Weighted-
Average
Grant Date Fair
Value Per Share |
| Nonvested, March 31, 2015 | 4 | | $ | 129.57 |
| |
| Nonvested, March 31, 2021 | | Nonvested, March 31, 2021 | 3 | | | $ | 142.13 | |
| Granted | 1 | | 240.35 |
| Granted | 1 | | | 200.64 | |
| Cancelled | (1) | | 159.17 |
| Cancelled | — | | | 142.40 | |
| Vested | (1) | | 89.44 |
| Vested | (1) | | | 141.16 | |
| Nonvested, March 31, 2016 | 3 | | $ | 176.59 |
| |
| Nonvested, March 31, 2022 | | Nonvested, March 31, 2022 | 3 | | | $ | 160.47 | |
The following table provides data related to restricted stock unit award activity:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Total fair value of shares vested | $ | 144 | | | $ | 79 | | | $ | 67 | |
| Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax | $ | 165 | | | $ | 147 | | | $ | 155 | |
| Weighted-average period in years over which restricted stock unit award cost is expected to be recognized | 2 | | 2 | | 3 |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Total fair value of shares vested | $ | 104 |
| | $ | 126 |
| | $ | 184 |
|
| Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax | $ | 144 |
| | $ | 206 |
| | $ | 236 |
|
| Weighted-average period in years over which restricted stock unit award cost is expected to be recognized | 2 |
| | 2 |
| | 2 |
|
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. The Company did 0t grant any stock options during the years ended March 31, 2022, 2021, and 2020.
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. The Company uses the Black-Scholes options-pricing model to estimate the fair value of its 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 following is a summary of stock options outstanding at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Range of Exercise
Prices | | Number of
Options
Outstanding
at Year End
(In millions) | | Weighted-
Average
Remaining
Contractual
Life (Years) | | Weighted-
Average
Exercise Price | | Number of
Options
Exercisable at
Year End
(In millions) | | Weighted-
Average
Exercise Price |
| $123.98 | — | $159.00 | | 1 | | | 3 | | $ | 150.35 | | | 1 | | | $ | 152.20 | |
| 159.00 | — | 237.86 | | — | | | 1 | | 201.56 | | | — | | | 201.56 | |
| | | | 1 | | | | | | | 1 | | | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes stock option activity during 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share data) | Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term (Years) | | Aggregate Intrinsic Value (2) |
| Outstanding, March 31, 2021 | 2 | | | $ | 183.29 | | | 2 | | $ | 36 | |
| Granted | — | | | — | | | | | |
| Cancelled | — | | | 207.92 | | | | | |
| Exercised | (1) | | | 190.96 | | | | | |
| Outstanding, March 31, 2022 | 1 | | | $ | 175.23 | | | 2 | | $ | 114 | |
Vested and expected to vest (1) | 1 | | | $ | 175.23 | | | 2 | | $ | 114 | |
| Vested and exercisable, March 31, 2022 | 1 | | | 178.48 | | | 2 | | 101 | |
(1)The number of options expected to vest takes into account an estimate of expected forfeitures.
(2)The intrinsic value is calculated as the difference between the period-end market price of the Company’s common stock and the exercise price of “in-the-money” options.
The following table provides data related to stock option activity:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions, except per share data) | 2022 | | 2021 | | 2020 |
| Weighted-average grant date fair value per stock option | $ | — | | | $ | — | | | $ | — | |
| Aggregate intrinsic value on exercise | $ | 28 | | | $ | 5 | | | $ | 17 | |
| Cash received upon exercise | $ | 157 | | | $ | 38 | | | $ | 66 | |
| Tax benefits realized related to exercise | $ | 5 | | | $ | 4 | | | $ | 4 | |
| Total fair value of stock options vested | $ | 5 | | | $ | 10 | | | $ | 16 | |
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | — | | | $ | 2 | | | $ | 6 | |
| Weighted-average period in years over which stock option compensation cost is expected to be recognized | 0 | | 2 | | 2 |
Employee Stock Purchase Plan (“ESPP”)
The Company has an ESPP under which 21 million shares have been authorized for issuance. The ESPP allows eligible employees to purchase shares of ourthe Company’s common stock through payroll deductions. The deductions occur over three-monththree-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 averageweighted-average shares outstanding. These amounts have not been significant.significant for all the years presented. The Company recognizes costs for employer matching contributions as ESPP expense over the relevant purchase period. Shares issued under the ESPP were not material in 2016, 2015,2022, 2021, and 2014.2020. At March 31, 2016, 42022, 2 million shares remain available for issuance.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | 2015 | 2014 |
| Interest income | $ | 18 |
| | $ | 20 |
| | $ | 16 |
|
Equity in earnings, net (1) | 15 |
| | 12 |
| | — |
|
Other, net (1) | 25 |
| | 31 |
| | 16 |
|
| Total | $ | 58 |
| | $ | 63 |
| | $ | 32 |
|
Other income, net consists of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Interest income | $ | 10 | | | $ | 12 | | | $ | 49 | |
Equity in earnings, net (1) | 43 | | | 48 | | | 36 | |
Net gains on investments in equity securities (2) | 98 | | | 133 | | | 17 | |
Actuarial gains (losses) from pension plans (3) | 5 | | | — | | | (127) | |
Other, net (4) | 103 | | | 30 | | | 37 | |
| Total | $ | 259 | | | $ | 223 | | | $ | 12 | |
(1)Primarily recorded within the Company’s International segment.
(2)Represents net realized and unrealized gains on the Company’s investments in equity securities of certain U.S. growth stage companies in the healthcare industry. These net gains primarily relate to mark-to-market adjustments for investments which are measured at fair value based on changes in the observable price of the securities and realized gains on disposal of certain of these investments. Refer to Financial Note 16, “Fair Value Measurements” and Financial Note 21, “Segments of Business” for more information.
(3)The year ended March 31, 2020 includes $116 million from the termination of the U.S. defined benefit pension plan and $11 million related to a settlement from the executive benefit retirement plan for a retired executive. Refer to Financial Note 14, “Pension Benefits” for more information.
(4)Includes a gain of $42 million for the year ended March 31, 2022 as part of the completed sale of the Company’s 30% interest in its German pharmaceutical wholesale joint venture to WBA. Other, net for all periods presented also includes income recognized from finance charges to customers primarily for late fees.
7. Income Taxes
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Income (loss) from continuing operations before income taxes | | | | | |
| U.S. | $ | 1,944 | | | $ | (6,019) | | | $ | 216 | |
| Foreign | (16) | | | 985 | | | 928 | |
| Income (loss) from continuing operations before income taxes | $ | 1,928 | | | $ | (5,034) | | | $ | 1,144 | |
| | | | | |
(1) | Primarily recorded within our Distribution Solutions segment. |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Income from continuing operations before income taxes | | | | | |
| U.S. | $ | 2,319 |
| | $ | 1,893 |
| | $ | 1,554 |
|
| Foreign | 931 |
| | 764 |
| | 617 |
|
| Total income from continuing operations before income taxes | $ | 3,250 |
| | $ | 2,657 |
| | $ | 2,171 |
|
FINANCIAL NOTES (Continued)
Income tax expense (benefit) related to continuing operations consists of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Current | | | | | |
| Federal | $ | 233 | | | $ | (15) | | | $ | 170 | |
| State | 129 | | | 47 | | | 48 | |
| Foreign | 240 | | | 181 | | | 142 | |
| Total current | 602 | | | 213 | | | 360 | |
| | | | | |
| Deferred | | | | | |
| Federal | 88 | | | (562) | | | (204) | |
| State | (16) | | | (204) | | | (105) | |
| Foreign | (38) | | | (142) | | | (33) | |
| Total deferred | 34 | | | (908) | | | (342) | |
| Income tax expense (benefit) | $ | 636 | | | $ | (695) | | | $ | 18 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Current | | | | | |
| Federal | $ | 658 |
| | $ | 453 |
| | $ | 484 |
|
| State | 96 |
| | 90 |
| | 64 |
|
| Foreign | 90 |
| | 101 |
| | 193 |
|
| Total current | 844 |
| | 644 |
| | 741 |
|
| | | | | | |
| Deferred | | | | | |
| Federal | 95 |
| | 195 |
| | 24 |
|
| State | 42 |
| | 53 |
| | 10 |
|
| Foreign | (73 | ) | | (77 | ) | | (18 | ) |
| Total deferred | 64 |
| | 171 |
| | 16 |
|
| Income tax expense | $ | 908 |
| | $ | 815 |
| | $ | 757 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
During 2016, 2015 and 2014,The Company reported an income tax expense related to continuing operations was $908 million, $815 million and $757 million, which included net discrete tax benefits(benefit) rate of $42 million and $33 million in 2016 and 2015 and net discrete tax expenses of $94 million in 2014. Discrete tax benefits in 2016 included a $19 million benefit related to enacted tax law changes in foreign jurisdictions and a $25 million benefit due to the reversal of a tax reserve related to the treatment of share-based compensation expense in an intercompany cost-sharing agreement. Discrete tax benefit in 2015 included a $55 million benefit related to an agreement reached with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to years 2003 through 2006. 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.
Our reported income tax rates were 27.9%33.0%, 30.7%(13.8)%, and 34.9%1.6% in 2016, 20152022, 2021, and 2014. The fluctuations2020. Fluctuations in ourthe Company’s reported income tax rates are primarily due to non-cash charges related to remeasuring the value of certain of its European businesses to fair value less costs to sell in 2022, the impact of opioid-related claims, including charges of $8.1 billion ($6.8 billion after-tax) in 2021, the impact of the Change Healthcare joint venture divestiture in 2020, and changes within our businessin the mix including varying proportions of income attributable to foreign countries that have lower income tax rates and discrete items.earnings between various taxing jurisdictions.
The reconciliation between our effectiveof income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate onof 21.0% to income from continuing operations and statutory tax ratebefore income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Income tax expense (benefit) at federal statutory rate | $ | 405 | | | $ | (1,057) | | | $ | 240 | |
| State income taxes, net of federal tax benefit | 83 | | | (206) | | | (41) | |
| Tax effect of foreign operations | (186) | | | (77) | | | (81) | |
| Unrecognized tax benefits and settlements | (26) | | | 41 | | | (7) | |
| | | | | |
| Opioid-related litigation and claims | 38 | | | 715 | | | — | |
| Net tax benefit on intellectual property transfer | — | | | (105) | | | — | |
Tax-free gain on investment exit (1) | — | | | — | | | (87) | |
| E.U. disposal transaction loss | 345 | | | — | | | — | |
| | | | | |
| Capital loss carryback | — | | | — | | | (19) | |
Other, net (2) | (23) | | | (6) | | | 13 | |
| Income tax expense (benefit) | $ | 636 | | | $ | (695) | | | $ | 18 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Income tax expense at federal statutory rate | $ | 1,137 |
| | $ | 930 |
| | $ | 760 |
|
| State income taxes net of federal tax benefit | 92 |
| | 81 |
| | 57 |
|
| Foreign income taxed at various rates | (295 | ) | | (247 | ) | | (177 | ) |
| Canadian litigation | (8 | ) | | — |
| | 122 |
|
| Controlled substance distribution reserve | — |
| | 58 |
| | — |
|
| Unrecognized tax benefits and settlements | (6 | ) | | 10 |
| | (6 | ) |
| Tax credits | (18 | ) | | (10 | ) | | (6 | ) |
| Other, net | 6 |
| | (7 | ) | | 7 |
|
| Income tax expense | $ | 908 |
| | $ | 815 |
| | $ | 757 |
|
At March 31, 2016, undistributed earnings of our foreign operations totaling $5,831 million(2)The Company’s effective tax rates were considered to be permanently reinvested. No deferred tax liability has been recognized on the basis difference createdimpacted by such earnings since it is our intention to utilize those earnings in the foreign operations as well as to fund certainother favorable U.S. federal permanent differences including research and development activitiescredits of $4 million, $5 million, and $7 million in 2022, 2021, and 2020.
During the year ended March 31, 2022, the Company recorded non-deductible, non-cash pre-tax charges of $438 million primarily to remeasure the E.U. disposal group to fair value less costs to sell, and $1.2 billion to remeasure the U.K. disposal group, as described in Financial Note 2, “Held 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.
Sale.”
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company’s reported income tax rates for 2021 and 2020 were unfavorably impacted by non-deductible, non-cash charges of $58 million and $275 million, respectively, primarily to remeasure the carrying value of assets and liabilities held for sale related to the formation of a new German pharmaceutical wholesale joint venture within the Company’s International segment. Refer to Financial Note 2, “Held for Sale,” for more information.
The Company’s reported income tax rates for 2022 and 2021 were impacted by the charge for pending and future opioid-related claims of $274 million ($237 million after-tax) and $8.1 billion ($6.8 billion after-tax), respectively, as described further in Financial Note 18, “Commitments and Contingent Liabilities.”
During 2021, the Company sold intellectual property between wholly-owned legal entities within McKesson that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets which was not subject to income tax in its local jurisdiction; such gains were eliminated upon consolidation. The acquiring entities of the intellectual property were entitled to amortize the purchase price of the assets for tax purposes. In accordance with ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” discrete tax benefits of $105 million was recognized for 2021, with a corresponding increase to a deferred tax assets for the temporary difference arising from the buyer’s excess tax basis.
On March 10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare JV as described in Financial Note 4, “Business Acquisitions and Divestitures.” The Company’s reported income tax expense rate for 2020 was favorably impacted by this transaction given that it was intended to generally be a tax-free split-off for U.S. federal income tax purposes. In the fourth quarter of 2020, the Company recognized a net gain for financial reporting purposes of $414 million related to the separation transaction.
Deferred tax balances consisted of the following:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2022 | | 2021 |
| Assets | | | |
| Receivable allowances | $ | 49 | | | $ | 69 | |
| Opioid-related litigation and claims | 755 | | | 724 | |
| Compensation and benefit related accruals | 285 | | | 305 | |
| Net operating loss and credit carryforwards | 739 | | | 974 | |
| Lease obligations | 422 | | | 539 | |
| Other | 83 | | | 115 | |
| Subtotal | 2,333 | | | 2,726 | |
| Less: valuation allowance | (726) | | | (864) | |
| Total assets | 1,607 | | | 1,862 | |
| Liabilities | | | |
| Inventory valuation and other assets | (1,993) | | | (1,939) | |
| Fixed assets and systems development costs | (184) | | | (196) | |
| Intangibles | (233) | | | (411) | |
| Lease right-of-use assets | (401) | | | (505) | |
| Other | (17) | | | (37) | |
| Total liabilities | (2,828) | | | (3,088) | |
| Net deferred tax liability | $ | (1,221) | | | $ | (1,226) | |
| | | |
| Long-term deferred tax asset | $ | 197 | | | $ | 185 | |
| Long-term deferred tax liability | (1,418) | | | (1,411) | |
| Net deferred tax liability | $ | (1,221) | | | $ | (1,226) | |
|
| | | | | | | |
| | March 31, |
| (In millions) | 2016 | | 2015 |
| Assets | | | |
| Receivable allowances | $ | 110 |
| | $ | 83 |
|
| Deferred revenue | 77 |
| | 72 |
|
| Compensation and benefit related accruals | 710 |
| | 681 |
|
| Net operating loss and credit carryforwards | 367 |
| | 316 |
|
| Other | 275 |
| | 266 |
|
| Subtotal | 1,539 |
| | 1,418 |
|
| Less: valuation allowance | (267 | ) | | (229 | ) |
| Total assets | 1,272 |
| | 1,189 |
|
| Liabilities | | | |
| Inventory valuation and other assets | (2,619 | ) | | (2,333 | ) |
| Fixed assets and systems development costs | (326 | ) | | (324 | ) |
| Intangibles | (981 | ) | | (1,073 | ) |
| Other | (21 | ) | | (61 | ) |
| Total liabilities | (3,947 | ) | | (3,791 | ) |
| Net deferred tax liability | $ | (2,675 | ) | | $ | (2,602 | ) |
| | | | |
Current net deferred tax asset (1) | $ | — |
| | $ | 27 |
|
Current net deferred tax liability (1) | — |
| | (1,820 | ) |
| Long-term deferred tax asset | 59 |
| | 50 |
|
| Long-term deferred tax liability | (2,734 | ) | | (859 | ) |
| Net deferred tax liability | $ | (2,675 | ) | | $ | (2,602 | ) |
| | | | | |
(1) | Upon the adoption of the amended accounting guidance, we reclassified current net deferred tax liabilities and current net deferred tax assets as noncurrent on our consolidated balance sheet as of March 31, 2016. Our March 31, 2015 balances were not retrospectively reclassified. |
We assessMcKESSON CORPORATION
FINANCIAL NOTES (Continued)
Excluded from the amounts above were $48 million of net deferred tax liabilities which were classified as held for sale for European divestitures at March 31, 2022, as discussed in Financial Note 2, “Held for Sale.”
The Company assesses the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowance wasallowances were approximately $267$726 million and $229$864 million in 20162022 and 2015. The increase of $38 million in valuation allowances in the current year2021, respectively, and primarily relate primarily to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. The decrease in the valuation allowance of $138 million in the current year relates primarily to classification of deferred tax balances as held for sale for European divestitures, as discussed in Financial Note 2, “Held for Sale,” partially offset by the net operating losses incurred and deferred tax movements in certain tax jurisdictions for which no tax benefit was recognized.
We haveThe Company has federal, state, and foreign net operating loss carryforwards of $35$303 million,, $1,790 million $3.9 billion, and $889 million.$1.5 billion at March 31, 2022, respectively. Federal and state net operating losses will expire at various dates from 20172023 through 2036.2042. Substantially all of ourits foreign net operating losses have indefinite lives.
We received reassessments from In addition, the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2013. During 2016, we reached an agreement to settle the transfer pricing matter for years 2003 through 2013 and recorded a net discrete tax benefitCompany has foreign capital loss carryforwards of $8 million.
We are subject to the continuous examination of our income tax returns by the IRS and other authorities. The IRS is currently examining our U.S. corporation income tax returns for 2007 through 2009 and may issue a Revenue Agent Report during the first quarter of 2017. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
$785 million with indefinite lives.
The following table summarizes the activity related to ourthe Company’s gross unrecognized tax benefits for the last three years:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Unrecognized tax benefits at beginning of period | $ | 1,754 | | | $ | 958 | | | $ | 1,052 | |
| Additions based on tax positions related to prior years | 14 | | | 53 | | | 20 | |
| Reductions based on tax positions related to prior years | (131) | | | (5) | | | (168) | |
| Additions based on tax positions related to current year | 14 | | | 755 | | | 82 | |
| Reductions based on settlements | (20) | | | (8) | | | (8) | |
| Reductions based on the lapse of the applicable statutes of limitations | (102) | | | (12) | | | (13) | |
| Exchange rate fluctuations | (6) | | | 13 | | | (7) | |
| Unrecognized tax benefits at end of period | $ | 1,523 | | | $ | 1,754 | | | $ | 958 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Unrecognized tax benefits at beginning of period | $ | 616 |
| | $ | 647 |
| | $ | 560 |
|
| Additions based on tax positions related to prior years | 116 |
| | 62 |
| | 106 |
|
| Reductions based on tax positions related to prior years | (62 | ) | | (18 | ) | | (23 | ) |
| Additions based on tax positions related to current year | 28 |
| | 27 |
| | 23 |
|
| Reductions based on settlements | (141 | ) | | (65 | ) | | (4 | ) |
| Reductions based on the lapse of the applicable statutes of limitations | (6 | ) | | (12 | ) | | (7 | ) |
| Exchange rate fluctuations | 4 |
| | (25 | ) | | (8 | ) |
| Unrecognized tax benefits at end of period | $ | 555 |
| | $ | 616 |
| | $ | 647 |
|
As of March 31, 2016, we2022, the Company had $555 million$1.5 billion of unrecognized tax benefits, of which $380 million$1.3 billion would reduce income tax expense and the effective tax rate, if recognized. The decrease in unrecognized tax benefits in 2022 compared to 2021 is primarily attributable to statute of limitation expirations in various taxing jurisdictions and the reclassification of $23 million of unrecognized tax benefits as held for sale for European divestitures, as discussed in Financial Note 2, “Held for Sale.” The increase in unrecognized tax benefits in 2021 compared to 2020 is primarily attributable to uncertainty in connection with the deductibility of opioid-related litigation and claims. Because many uncertainties associated with any potential settlement arrangements or other resolutions of opioid claims including provisions related to deductibility have not been finalized, the actual amount of the tax benefit related to uncertain tax positions may differ from these estimates. Refer to Financial Note 18, “Commitments and Contingent Liabilities,” for more information.
During the next twelve months, it is reasonably possible that audit resolutionsthe Company’s unrecognized tax benefit may decrease by as much as $170 million due to settlements of tax examinations and the expiration of statutesstatute of limitations could potentially reduce our unrecognized tax benefits by up to $125 million.expirations in the U.S. federal and state jurisdictions and in foreign jurisdictions. However, this amount may change as we continuethe Company continues to have ongoing negotiations with various taxing authorities throughout the year.
We reportThe Company reports interest and penalties on income taxes as income tax expense. WeIt recognized income tax expense of $12$8 million, $9 million, and $23 million in 2016, income tax benefit of $24 million in 20152022, 2021, and income tax expense of $48 million in 2014, related to2020, respectively, representing interest and penalties, in our consolidated statementsits 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.Operations. As of March 31, 20162022 and 2015, we had2021, it accrued $77$108 million and $122$101 million, cumulatively, in interest and penalties on unrecognized tax benefits.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. We are subject to audit byThe Internal Revenue Service (“IRS”) is currently examining the IRSCompany’s U.S. corporation income tax returns for fiscal years 2007 through the current fiscal year. We are2018 and 2019. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 20062014 through the current fiscal year.
| |
9. | Discontinued Operations |
Brazil Distribution Business
DuringUndistributed earnings of the fourth quarterCompany’s foreign operations of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business, which we acquired through our February 2014 acquisition of Celesio, from our Distribution Solutions segment. Accordingly, the results of operations and cash flows of this business are classified as discontinued operations for all periods presented in our consolidated financial statements.
During the fourth quarter of 2015, we recorded $241 million of non-cash pre-tax ($235 million after-tax) impairment charges to reduce the carrying value of this Brazilian distribution business to its estimated fair value less costs 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 sheetapproximately $5.0 billion were considered indefinitely reinvested at March 31, 2015. Cumulative2022. Following enactment of the 2017 Tax Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the U.S. could be subject to applicable foreign currency translation losses of $17 million were included inwithholding taxes and state income taxes. The Company may remit foreign earnings to the assessment of this business’ carrying value for purposes of calculatingU.S. to the impairment charge. Cumulative foreign currency translation losses, net ofextent it is tax were included in Accumulated Other Comprehensive Income on our consolidated balance sheet at March 31, 2015.
On January 31, 2016, we entered into an agreementefficient to sell our Brazilian pharmaceutical distribution business to a third party. The sale is expecteddo so. It does not expect the tax impact from remitting these earnings to be completed during the first half of 2017, subject to regulatory approvalmaterial.
8. Redeemable Noncontrolling Interests and customary closing conditions. We expect to recognize an after-tax charge of approximately $80 million to $100 million upon the disposition of the business within discontinued operations as a result of settlement of certain indemnification matters.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Technology Solutions Businesses
In 2014, we committed to a plan to sell our International Technology and our Hospital Automation businesses from our Technology Solutions segment. As required, in 2014, 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 was not recognized from the date these businesses were classified as held for sale. During the third quarter of 2014, we completed the sale of our Hospital Automation business 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.
During the first quarter of 2015, we decided to retain the workforce business within our International Technology business. This business consists of workforce management solutions for the National Health Service in the United Kingdom. We reclassified the workforce business, which had been designated as a discontinued operation since the first quarter of 2014, to continuing operations in the first quarter of 2015. As a result, during the first quarter of 2015, we recorded non-cash pre-tax charges of $34 million ($27 million after-tax) primarily associated with depreciation and amortization expense for 2014 when the business was classified as held for sale. The non-cash charge was recorded in our consolidated statement of operations primarily in cost of sales.
During the second quarter of 2015, we completed the sale of a software business within our International Technology business and recorded a pre-tax and after-tax loss of $6 million.
A summary of results of discontinued operations is as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Revenues | $ | 1,603 |
| | $ | 2,196 |
| | $ | 637 |
|
| | | | | | |
| Loss from discontinued operations | $ | (24 | ) | | $ | (321 | ) | | $ | (177 | ) |
| Loss on sale | — |
| | (6 | ) | | (5 | ) |
| Loss from discontinued operations before income tax | (24 | ) | | (327 | ) | | (182 | ) |
| Income tax (expense) benefit | (8 | ) | | 28 |
| | 26 |
|
| Loss from discontinued operations, net of tax | $ | (32 | ) | | $ | (299 | ) | | $ | (156 | ) |
A summary of carrying amounts of major classes of assets and liabilities included as part of discontinued operations is as follow:
|
| | | | | | | |
| | March 31, |
| (In millions) | 2016 | | 2015 |
| Receivables, net | $ | 289 |
| | $ | 314 |
|
| Inventories, net | 266 |
| | 254 |
|
| Other assets | 80 |
| | 92 |
|
Total assets of discontinued operations (1) | 635 |
| | 660 |
|
| Drafts and account payable | 264 |
| | 209 |
|
| Short-term borrowings | 142 |
| | 126 |
|
| Other liabilities | 254 |
| | 328 |
|
Total liabilities of discontinued operations (1) | $ | 660 |
| | $ | 663 |
|
(1) Assets and liabilities of discontinued operations are included under the captions “Prepaid expenses and other” and “Other accrued liabilities” within our consolidated balance sheets.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| |
10. | Noncontrolling Interests and Redeemable Noncontrolling Interests |
Domination and Profit and Loss Transfer Agreement
On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary, Celesio Holdings Deutschland GmbH & Co. KGaA (“Celesio Holdings,” formerly known as McKesson Deutschland GmbH & Co. KGaA or Dragonfly GmbH & Co. KGaA), entered into the domination and profit and loss transfer agreement (the “Domination Agreement”). 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. All litigation relating to the registration of the Domination Agreement has been resolved with no adverse impact on the effectiveness of the Domination Agreement or McKesson’s ability to direct the activities of Celesio.
Upon the effectiveness of the Domination Agreement, Celesio subordinated its management to McKesson and undertook to transfer all of its annual profits to McKesson, and McKesson undertook to compensate any annual losses incurred by Celesio and to grant, subject to a potential court review, the noncontrolling shareholders of Celesio (i) an annual recurring compensation of €0.83 per Celesio share (“Compensation Amount”), (ii) a one-time dividend for Celesio’s fiscal year ended December 31, 2014 of €0.83 per Celesio share reduced accordingly for any dividend paid by Celesio in relation to its fiscal year ended December 31, 2014 (“Guaranteed Dividend”) and (iii) a right to put (“Put Right”) their Celesio shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semiannually, less any Compensation Amount or Guaranteed Dividend already paid in respect of the relevant time period (“Put Amount”). The Domination Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.
Under the Domination Agreement, the noncontrolling shareholders of Celesio ceased to participate in their percentage ownership of Celesio’s profits and losses, but instead became entitled to receive the one-time Guaranteed Dividend in December 2014 and the Compensation Amount from January 2015. As a result, during 2016 and 2015, we recorded a total attribution of net income to the noncontrolling shareholders of Celesio of $44 million and $62 million. All amounts were recorded in our consolidated statement of operations within the caption, “Net Income Attributable to Noncontrolling Interests” and the corresponding liability balance was recorded within other accrued liabilities on our consolidated balance sheet.
Appraisal Proceedings
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of Celesio initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court to challenge the 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, Celesio Holdings would be required to make certain additional payments for any shortfall to all Celesio noncontrolling shareholders who previously received the Guaranteed Dividend, Compensation Amount and/or Put Amount. The Put Right specified in the Domination Agreement may be exercised until two months after the announcement regarding the end of the Appraisal Proceedings. In addition, if the Domination Agreement is terminated, the Put Right may be exercised for a two-month period after the date of termination.
Redeemable Noncontrolling Interests
The Company’s redeemable noncontrolling interests primarily related to its consolidated subsidiary, McKesson Europe. Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share. As a result, during 2022, 2021, and 2020, the Company recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $8 million, $43 million, and $42 million, respectively. All amounts were recorded in “Net income attributable to noncontrolling interests” in the Company’s Consolidated Statements of Operations and the corresponding liability balance was recorded in “Other accrued liabilities” in the Company’s Consolidated Balance Sheets.
Upon the effectiveness ofUnder the Domination Agreement, the noncontrolling shareholders of McKesson Europe had a right to put (“Put Right”) their noncontrolling 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 semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson with respect to the relevant time period (“Put Amount”).
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of McKesson Europe initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court to challenge the adequacy of the Put Amount, annual recurring compensation amount, and/or the guaranteed dividend. During the pendency of the Appraisal Proceedings, such amount was paid as specified in the Domination Agreement. On September 19, 2018, that court ruled that the Put Amount shall be increased by €0.51 resulting in an adjusted Put Amount of €23.50. The annual recurring compensation amount and/or the guaranteed dividend remained unadjusted. Noncontrolling shareholders of McKesson Europe appealed this decision. McKesson Europe Holdings GmbH & Co. KGaA also appealed the decision. On April 12, 2021, the Company received notice that the Stuttgart Court of Appeals ruled that the Put Amount remained at €22.99, thereby rejecting the lower court’s increase, and the recurring compensation remained at €0.83 per share.
Exercises of the Put Right reduced the balance of redeemable noncontrolling interests. The redeemable noncontrolling interest was adjusted each period for the proportion of other comprehensive income or loss, primarily due to changes in foreign currency exchange rates, attributable to the noncontrolling shareholders.
During 2022 and 2021, the Company paid $1.0 billion and $49 million, respectively, to purchase 34.5 million and 1.8 million shares, respectively, of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders. This decreased the carrying value of the noncontrolling interests by $983 million and $49 million, respectively, and the Company recorded the associated effect of the increase in Celesio became redeemablethe Company’s ownership interest of $178 million and $3 million, respectively, as a resultan increase to McKesson stockholders’ additional paid-in capital. During 2020, there were no material exercises of the Put Right. Accordingly,The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, with a carrying value of $287 million, were transferred from “Redeemable noncontrolling interests relatedinterests” to Celesio“Noncontrolling interests” in the Consolidated Balance Sheet.
Prior to the expiration of $1.5 billion was reclassified from “Total Equity” to “Redeemable Noncontrolling Interests” on our consolidated balance sheet during the third quarter of 2015. ThePut Right, the balance of the redeemable noncontrolling interests iswas 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, 2016 and 2015,2021, the carrying value of redeemable noncontrolling interests of $1.41 billion and $1.39$1.3 billion exceeded the maximum redemption value of $1.28$1.2 billion and $1.21 billion. At March 31, 2016 and 2015, wethe Company owned approximately 76%78% of Celesio’sMcKesson Europe’s outstanding common shares.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Noncontrolling Interests
Noncontrolling interests represent third-party equity interests in the Company’s consolidated entities primarily related to ClarusONE Sourcing Services LLP, and Vantage Oncology Holdings, LLC. As discussed above, after June 15, 2021, noncontrolling interests also include minority shareholder equity interests in McKesson Europe. Noncontrolling interests in the Company’s Consolidated Balance Sheets were $480 million and $196 million at March 31, 2022 and 2021, respectively.
At March 31, 2022, the Company owned approximately 95% of McKesson Europe’s outstanding common shares. The Company’s noncontrolling interest in McKesson Europe will be included in the sale of the E.U. disposal group, as discussed in Financial Note 2, “Held for Sale.” During 2022, 2021, and 2020, the Company allocated a total of $165 million, $156 million, and $178 million of net income to noncontrolling interests, respectively.
Changes in redeemable noncontrolling interests and redeemable noncontrolling interests for the years ended March 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | |
| (In millions) | |
Noncontrolling
Interests | | Redeemable
Noncontrolling
Interests |
| Balance, March 31, 2019 | | $ | 193 | | | $ | 1,393 | |
| Net income attributable to noncontrolling interests | | 178 | | | 42 | |
| Other comprehensive income | | — | | | 3 | |
| Reclassification of recurring compensation to other accrued liabilities | | — | | | (42) | |
| Payments to noncontrolling interests | | (154) | | | — | |
| Other | | — | | | 6 | |
| Balance, March 31, 2020 | | 217 | | | 1,402 | |
| Net income attributable to noncontrolling interests | | 156 | | | 43 | |
| Other comprehensive loss | | — | | | (79) | |
| Reclassification of recurring compensation to other accrued liabilities | | — | | | (43) | |
| Payments to noncontrolling interests | | (177) | | | — | |
| Exercises of Put Right | | — | | | (49) | |
| Other | | — | | | (3) | |
| Balance, March 31, 2021 | | 196 | | | 1,271 | |
| Net income attributable to noncontrolling interests | | 165 | | | 8 | |
| Other comprehensive income (loss) | | (4) | | | 3 | |
| Reclassification of recurring compensation to other accrued liabilities | | (7) | | | (8) | |
| Payments to noncontrolling interests | | (155) | | | — | |
| Exercises of Put Right | | — | | | (983) | |
| Reclassification of McKesson Europe redeemable noncontrolling interests | | 287 | | | (287) | |
| Other | | (2) | | | (4) | |
| Balance, March 31, 2022 | | $ | 480 | | | $ | — | |
9. Earnings (Loss) Per Common Share
|
| | | | | | |
| (In millions) | Noncontrolling interests | Redeemable Noncontrolling Interests |
| Balance, March 31, 2014 | $ | 1,796 |
| $ | — |
|
Net income attributable to noncontrolling interests (1) | 5 |
| 62 |
|
| Other comprehensive loss | (174 | ) | (105 | ) |
Purchase of noncontrolling interests (2) (3) (4) | (60 | ) | (9 | ) |
Reclassification from Total Equity to Redeemable Noncontrolling Interests (5) | (1,500 | ) | 1,500 |
|
| Reclassification of guaranteed dividends and recurring compensation to other accrued liabilities | — |
| (62 | ) |
| Other | 17 |
| — |
|
| Balance, March 31, 2015 | 84 |
| 1,386 |
|
Net income attributable to noncontrolling interests (1) | 8 |
| 44 |
|
| Other comprehensive loss | — |
| 20 |
|
| Reclassification of recurring compensation to other accrued liabilities | — |
| (44 | ) |
| Other | (8 | ) | — |
|
| Balance, March 31, 2016 | $ | 84 |
| $ | 1,406 |
|
| |
(1) | Redeemable noncontrolling interests for 2015 include the Guaranteed Dividend of $50 million and the Compensation Amount of $12 million, and for 2016 include the Compensation Amount of $44 million. |
| |
(2) | Includes $35 million decrease in noncontrolling interests resulting from the April 2014 completion of McKesson’s tender offer for approximately 1 million additional Celesio shares.
|
| |
(3) | Includes $25 million decrease in noncontrolling interests resulting from the July 2014 purchase of the remaining ownership interests in a wholesale distributor in Brazil.
|
| |
(4) | Decrease in redeemable noncontrolling interests reflects the exercise of the Put Right by the noncontrolling shareholders of Celesio. |
| |
(5) | Includes net foreign currency losses of $138 million attributable to noncontrolling interests. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| |
11. | Earnings Per Common Share |
Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted averageweighted-average number of common shares outstanding during the reporting period. DilutedThe computation of diluted earnings (loss) per common share are computedis similar to that of basic earnings (loss) per common share, except that itthe former reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
The computations for basic and diluted earnings per common share are as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions, except per share amounts) | 2016 | | 2015 | | 2014 |
| Income from continuing operations | $ | 2,342 |
| | $ | 1,842 |
| | $ | 1,414 |
|
| Net (income) loss attributable to noncontrolling interests | (52 | ) | | (67 | ) | | 5 |
|
| Income from continuing operations attributable to McKesson | 2,290 |
| | 1,775 |
| | 1,419 |
|
| Loss from discontinued operations, net of tax | (32 | ) | | (299 | ) | | (156 | ) |
| Net income attributable to McKesson | $ | 2,258 |
| | $ | 1,476 |
| | $ | 1,263 |
|
| | | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 230 |
| | 232 |
| | 229 |
|
| Effect of dilutive securities: | | | | | |
| Options to purchase common stock | 1 |
| | 1 |
| | 1 |
|
| Restricted stock units | 2 |
| | 2 |
| | 3 |
|
| Diluted | 233 |
| | 235 |
| | 233 |
|
| | | | | | |
Earnings (loss) per common share attributable to McKesson: (1) | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | 9.84 |
| | $ | 7.54 |
| | $ | 6.08 |
|
| Discontinued operations | (0.14 | ) | | (1.27 | ) | | (0.67 | ) |
| Total | $ | 9.70 |
| | $ | 6.27 |
| | $ | 5.41 |
|
| Basic | | | | | |
| Continuing operations | $ | 9.96 |
| | $ | 7.66 |
| | $ | 6.19 |
|
| Discontinued operations | (0.14 | ) | | (1.29 | ) | | (0.68 | ) |
| Total | $ | 9.82 |
| | $ | 6.37 |
| | $ | 5.51 |
|
| |
(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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Diluted loss per common share for the year ended March 31, 2021 was calculated by excluding all dilutive securities from the denominator of the share computation due to their anti-dilutive effects. Approximately 2 million, 1 millionnil and 2 million of potentially dilutive securities for 2022 and 2020, respectively, were excluded from the computationscomputation of diluted net earnings per common share, in 2016, 2015 and 2014, as they were anti-dilutive.
The computations for basic and diluted earnings or loss per common share are as follows: | | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions, except per share amounts) | 2022 | | 2021 | | 2020 |
| Income (loss) from continuing operations | $ | 1,292 | | | $ | (4,339) | | | $ | 1,126 | |
| Net income attributable to noncontrolling interests | (173) | | | (199) | | | (220) | |
| Income (loss) from continuing operations attributable to McKesson | 1,119 | | | (4,538) | | | 906 | |
| Loss from discontinued operations, net of tax | (5) | | | (1) | | | (6) | |
| Net income (loss) attributable to McKesson | $ | 1,114 | | | $ | (4,539) | | | $ | 900 | |
| | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 152.3 | | | 160.6 | | | 180.6 | |
| Effect of dilutive securities: | | | | | |
| Stock options | 0.2 | | | — | | | — | |
Restricted stock units (1) | 1.6 | | | — | | | 1.0 | |
| Diluted | 154.1 | | | 160.6 | | | 181.6 | |
| | | | | |
Earnings (loss) per common share attributable to McKesson: (2) | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | 7.26 | | | $ | (28.26) | | | $ | 4.99 | |
| Discontinued operations | (0.03) | | | — | | | (0.04) | |
| Total | $ | 7.23 | | | $ | (28.26) | | | $ | 4.95 | |
| Basic | | | | | |
| Continuing operations | $ | 7.35 | | | $ | (28.26) | | | $ | 5.01 | |
| Discontinued operations | (0.03) | | | — | | | (0.03) | |
| Total | $ | 7.32 | | | $ | (28.26) | | | $ | 4.98 | |
12. Receivables, Net(1)Includes dilutive effect from restricted stock units and performance-based stock units.
(2)Certain computations may reflect rounding adjustments.
10. Leases
|
| | | | | | | |
| | March 31, |
| (In millions) | 2016 | | 2015 |
| Customer accounts | $ | 14,519 |
| | $ | 13,117 |
|
| Other | 3,711 |
| | 2,965 |
|
| Total | 18,230 |
| | 16,082 |
|
| Allowances | (250 | ) | | (168 | ) |
| Net | $ | 17,980 |
| | $ | 15,914 |
|
Other receivablesIn the first quarter of 2020, the Company adopted amended guidance for leases using the modified retrospective method. Upon adoption of this amended guidance, the Company recorded $2.2 billion of operating lease liabilities, $2.1 billion of operating lease ROU assets, and a cumulative-effect adjustment of $69 million to opening retained earnings as of April 1, 2019. The adjustment to opening retained earnings included impairment charges of $89 million, net of tax, to the ROU assets primarily include amounts due from suppliersrelated to previously impaired long-lived assets at the retail pharmacies in the Company’s U.K. and customer unbilled receivables.Canadian businesses, partially offset by the derecognition of an existing deferred gain on the Company’s sale-leaseback transaction related to its former corporate headquarters building. The allowances are primarilyCompany also elected to adopt the transition package of practical expedients provided within the amended guidance which eliminated the requirements to reassess lease identification, lease classification, and initial direct costs for estimated uncollectible accounts.
leases which commenced before April 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated statements of operations and cash flows.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Lessee
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | |
| | |
| March 31, | |
| (In millions, except lease term and discount rate) | 2022 | | 2021 | |
Operating leases (1) | | | | |
Operating lease right-of-use assets (2) | $ | 1,548 | | | $ | 2,100 | | |
| | | | |
| Current portion of operating lease liabilities | $ | 297 | | | $ | 390 | | |
| Long-term operating lease liabilities | 1,366 | | | 1,867 | | |
Total operating lease liabilities (3) | $ | 1,663 | | | $ | 2,257 | | |
| | | | |
| Finance leases | | | | |
| Property, plant and equipment, net | $ | 206 | | | $ | 237 | | |
| | | | |
| Current portion of long-term debt | $ | 25 | | | $ | 22 | | |
| Long-term debt | 185 | | | 206 | | |
| Total finance lease liabilities | $ | 210 | | | $ | 228 | | |
| | | | |
Weighted-average remaining lease term (Years) (4) | | | | |
| Operating leases | 6.9 | | 7.8 | |
| Finance leases | 8.8 | | 10.1 | |
| | | | |
Weighted-average discount rate (4) | | | | |
| Operating leases | 2.47 | % | | 2.53 | % | |
| Finance leases | 2.50 | % | | 2.71 | % | |
(1)As discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” the Company rationalized its office space, including certain property leases, in North America during 2022. Where the Company ceased using office space, it exited the portion of the facility no longer used and repurposed other office locations which resulted in changes to certain lease agreements. This initiative did not have a material financial impact to the Company’s operating lease ROU assets and liabilities.
(2)Excludes operating lease right-of-use assets of approximately $494 million as of March 31, 2022 related to the European divestiture activities discussed in more detail in Financial Note 2, “Held for Sale.” These amounts were included under the caption “Assets held for sale” in the Consolidated Balance Sheet as of March 31, 2022. Amortization of these assets ceased upon classification as held for sale.
(3)Excludes current and long-term operating lease liabilities of approximately $83 million and $442 million, respectively, as of March 31, 2022 related to the European divestiture activities discussed in more detail in Financial Note 2, “Held for Sale.” These amounts were included under the caption “Liabilities held for sale” in the Consolidated Balance Sheet as of March 31, 2022.
(4)Lease terms and discount rates as of March 31, 2022 exclude leases classified as held for sale in the Consolidated Balance Sheet related to the European divestiture activities discussed in more detail in Financial Note 2, “Held for Sale.”
| | | | | |
13. | Property, Plant and Equipment, Net |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | |
| | March 31, |
| (In millions) | 2016 | | 2015 |
| Land | $ | 228 |
| | $ | 207 |
|
| Building, machinery, equipment and other | 3,556 |
| | 3,237 |
|
| Total property, plant and equipment | 3,784 |
| | 3,444 |
|
| Accumulated depreciation | (1,506 | ) | | (1,399 | ) |
| Property, plant and equipment, net | $ | 2,278 |
| | $ | 2,045 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
| Short-term lease cost | $ | 43 | | | $ | 32 | | | $ | 29 | |
| Operating lease cost | 431 | | | 465 | | | 459 | |
| | | | | |
| Finance lease cost: | | | | | |
| Amortization of right-of-use assets | 33 | | | 23 | | | 14 | |
| Interest on lease liabilities | 5 | | | 6 | | | 5 | |
| Total finance lease cost | 38 | | | 29 | | | 19 | |
| | | | | |
Variable lease cost (1) | 127 | | | 125 | | | 125 | |
| Sublease income | (41) | | | (36) | | | (33) | |
Total lease cost (2) | $ | 598 | | | $ | 615 | | | $ | 599 | |
| | | | | |
| | | | | |
(1) These amounts include payments for maintenance, taxes, payments affected by the consumer price index, and other similar metrics and payments contingent on usage.
(2) These amounts were primarily recorded in “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | |
| Years Ended March 31, | |
| (In millions) | 2022 | | 2021 | | 2020 | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | $ | (356) | | | $ | (362) | | | $ | (377) | | |
| Operating cash flows from finance leases | — | | | (4) | | | (3) | | |
| Financing cash flows from finance leases | (31) | | | (31) | | | (18) | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
Operating leases (1) | $ | 286 | | | $ | 321 | | | $ | 2,378 | | |
| Finance leases | 32 | | | 75 | | | 166 | | |
| | | | | | |
| | | | | | |
(1) The amount for the year ended March 31, 2020 includes the transition adjustment of $2.1 billion for operating lease right-of-use assets recorded as of April 1, 2019 upon adoption of the amended leasing guidance included in ASU 2016-02, Leases.
| | | | | |
14. | Goodwill and Intangible Assets, Net |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Maturities of lease liabilities as of March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| (In millions) | Operating Leases | | Finance Leases | | Total |
| 2023 | $ | 328 | | | $ | 29 | | | $ | 357 | |
| 2024 | 310 | | | 29 | | | 339 | |
| 2025 | 268 | | | 27 | | | 295 | |
| 2026 | 223 | | | 25 | | | 248 | |
| 2027 | 180 | | | 24 | | | 204 | |
| Thereafter | 506 | | | 103 | | | 609 | |
Total lease payments (1) | 1,815 | | | 237 | | | 2,052 | |
| Less imputed interest | (152) | | | (27) | | | (179) | |
| Present value of lease liabilities | $ | 1,663 | | | $ | 210 | | | $ | 1,873 | |
(1)Total lease payments are not reduced by minimum sublease income of $201 million which are due under future noncancellable subleases.
As of March 31, 2022, the Company entered into additional leases primarily for facilities that have not yet commenced with future lease payments of $285 million that are not reflected in the table above. These operating leases will commence between 2023 and 2024 with noncancellable lease terms of five to 15 years.
Lessor
The Company leases certain owned equipment, classified as direct financing or sales-type leases, to physician practices. As of March 31, 2022 and 2021, the total lease receivable was $298 million, respectively, with a weighted-average remaining lease term of approximately seven years. Interest income from these leases was not material for the years ended March 31, 2022, 2021, and 2020.
11. Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | U.S. Pharmaceutical | | Prescription Technology Solutions | | Medical-Surgical Solutions | | International | | Total |
| Balance, March 31, 2020 | $ | 3,924 | | | $ | 1,540 | | | $ | 2,453 | | | $ | 1,443 | | | $ | 9,360 | |
| Goodwill acquired | — | | | — | | | — | | | 5 | | | 5 | |
| Acquisition accounting, transfers, and other adjustments | — | | | 2 | | | — | | | — | | | 2 | |
| Other changes/disposals | (1) | | | — | | | — | | | — | | | (1) | |
| Impairment charges | — | | | — | | | — | | | (69) | | | (69) | |
| Foreign currency translation adjustments, net | 40 | | | — | | | — | | | 156 | | | 196 | |
| Balance, March 31, 2021 | 3,963 | | | 1,542 | | | 2,453 | | | 1,535 | | | 9,493 | |
| Goodwill acquired | — | | | — | | | — | | | 5 | | | 5 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Foreign currency translation adjustments, net | (40) | | | — | | | — | | | (7) | | | (47) | |
| Balance, March 31, 2022 | $ | 3,923 | | | $ | 1,542 | | | $ | 2,453 | | | $ | 1,533 | | | $ | 9,451 | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | |
| (In millions) | Distribution Solutions | | Technology Solutions | | Total |
| Balance, March 31, 2014 | $ | 8,078 |
| | $ | 1,849 |
| | $ | 9,927 |
|
| Goodwill acquired | 93 |
| | — |
| | 93 |
|
| Amount reclassified to assets held-for-sale | (14 | ) | | (1 | ) | | (15 | ) |
| Acquisition accounting, transfers and other adjustments | 625 |
| | — |
| | 625 |
|
| Foreign currency translation adjustments, net | (788 | ) | | (25 | ) | | (813 | ) |
| Balance, March 31, 2015 | $ | 7,994 |
| | $ | 1,823 |
| | $ | 9,817 |
|
| Goodwill acquired | 21 |
| | — |
| | 21 |
|
| Acquisition accounting, transfers and other adjustments | 8 |
| | — |
| | 8 |
|
| Goodwill disposed | (59 | ) | | (27 | ) | | (86 | ) |
| Foreign currency translation adjustments, net | 23 |
| | 3 |
| | 26 |
|
| Balance, March 31, 2016 | $ | 7,987 |
| | $ | 1,799 |
| | $ | 9,786 |
|
The Company evaluates goodwill for impairment as of October 1 on an annual basis each year and at an interim date if indicators of potential impairment exist. Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit.
The fair value of the reporting units was determined using a combination of an income approach based on a DCF model and a market approach based on appropriate valuation multiples observed for the reporting unit’s guideline public companies. Fair value estimates result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by management as of the measurement date. Any material changes in key assumptions, including failure to improve operations of certain retail pharmacy stores, additional government reimbursement reductions, deterioration in the financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry, or other unanticipated events and circumstances, may affect such estimates. The discount rates are the weighted-average cost of capital measuring the reporting unit’s cost of debt and equity financing weighted by the percentage of debt and percentage of equity in a company’s target capital. The unsystematic risk premium is an input factor used in calculating the discount rate that specifically addresses uncertainty related to the reporting unit’s future cash flow projections. Fair value assessments of the reporting unit are considered a Level 3 measurement due to the significance of unobservable inputs developed using company-specific information.
The annual impairment testing performed for 2022, 2021, and 2020 did not indicate any impairment of goodwill.
In the second quarter of 2021, the Company implemented a new segment reporting structure which resulted in 4 reportable segments: U.S. Pharmaceutical, RxTS, Medical-Surgical Solutions, and International. These reportable segments encompass all operating segments of the Company. This segment change prompted changes in multiple reporting units across the Company. As a result, goodwill included in impacted reporting units was reallocated using a relative fair value approach and assessed for impairment both before and after the reallocation.
The Company recorded a goodwill impairment charge of $69 million in 2021 as the estimated fair value of the Europe Retail Pharmacy reporting unit was lower than its reassigned carrying value based on changes in the composition of the Europe Retail Pharmacy reporting unit within the International segment. This charge was recorded in “Goodwill impairment charges” in the Consolidated Statements of Operations. At March 31, 2021, the balance of goodwill for the reporting units in Europe was approximately nil and the remaining balance of goodwill in the International segment primarily relates to one of its reporting units in Canada.
Refer to Financial Note 16, “Fair Value Measurements,” for more information on these nonrecurring fair value measurements. As of March 31, 20162022 and 2015, the2021, accumulated goodwill impairment losses in the Company’s International segment were $36 million in our Technology Solutions segment.$0.7 billion and $3.6 billion, respectively. Most of the goodwill impairment for these reporting units was generally not deductible for income tax purposes.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Intangible Assets
Information regarding intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
| (Dollars in millions) | Weighted-
Average
Remaining
Amortization
Period
(Years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | 12 | | $ | 2,777 | | | $ | (1,691) | | | $ | 1,086 | | | $ | 3,739 | | | $ | (2,269) | | | $ | 1,470 | |
| Service agreements | 9 | | 1,085 | | | (573) | | | 512 | | | 1,081 | | | (513) | | | 568 |
| Pharmacy licenses | — | | | — | | | — | | | — | | | 497 | | (244) | | | 253 |
| Trademarks and trade names | 12 | | 819 | | | (386) | | | 433 | | | 925 | | (394) | | | 531 |
| Technology | 1 | | 128 | | | (116) | | | 12 | | | 150 | | (122) | | | 28 |
| Other | 9 | | 187 | | | (171) | | | 16 | | | 254 | | (226) | | | 28 |
| Total | | | $ | 4,996 | | | $ | (2,937) | | | $ | 2,059 | | (1) | $ | 6,646 | | | $ | (3,768) | | | $ | 2,878 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2016 | | March 31, 2015 |
| (Dollars in millions) | Weighted Average Remaining Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer lists | 7 | | $ | 2,652 |
| | $ | (1,324 | ) | | $ | 1,328 |
| | $ | 2,683 |
| | $ | (1,116 | ) | | $ | 1,567 |
|
| Service agreements | 14 | | 959 |
| | (269 | ) | | 690 |
| | 957 |
| | (215 | ) | | 742 |
|
| Pharmacy licenses | 25 | | 857 |
| | (121 | ) | | 736 |
| | 874 |
| | (65 | ) | | 809 |
|
| Trademarks and trade names | 14 | | 314 |
| | (96 | ) | | 218 |
| | 315 |
| | (82 | ) | | 233 |
|
| Technology | 2 | | 195 |
| | (182 | ) | | 13 |
| | 213 |
| | (184 | ) | | 29 |
|
| Other | 3 | | 163 |
| | (127 | ) | | 36 |
| | 162 |
| | (101 | ) | | 61 |
|
| Total | | | $ | 5,140 |
| | $ | (2,119 | ) | | $ | 3,021 |
| | $ | 5,204 |
| | $ | (1,763 | ) | | $ | 3,441 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amortization expense of(1)Excludes net intangible assets of approximately $384 million related to the European divestiture activities discussed in more detail in Financial Note 2, “Held for Sale.” This amount was $431 million, $494 millionincluded under the caption “Assets held for sale” in the Consolidated Balance Sheet as of March 31, 2022. Amortization of these assets ceased upon classification as held for sale in the second and $319 million for 2016, 2015 and 2014. Estimated annual amortization expensethird quarters of intangible assets is as follows: $355 million, $337 million, $308 million, $281 million and $262 million for 2017 through 2021, and $1,478 million thereafter. 2022.
All intangible assets were subject to amortization as of March 31, 20162022 and 2015.2021. Amortization expense of intangible assets was $332 million, $422 million, and $462 million for 2022, 2021, and 2020, respectively. Estimated annual amortization expense of intangible assets is as follows: $225 million, $214 million, $208 million, $177 million, and $171 million for 2023 through 2027, and $1.1 billion thereafter.
Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” for more information on intangible asset impairment charges recorded in 2022, 2021, and 2020.
| | | | | |
15. | Capitalized Software Held for Sale, Net |
Changes in the carrying amount of capitalized software held for sale, net, which is included in other assets in the consolidated balance sheets, were as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Balance, at beginning of period | $ | 91 |
| | $ | 103 |
| | $ | 126 |
|
| Amounts capitalized | 30 |
| | 34 |
| | 40 |
|
| Amortization expense | (37 | ) | | (40 | ) | | (50 | ) |
| Impairment charges | — |
| | — |
| | (12 | ) |
| Disposal | (5 | ) | | — |
| | — |
|
| Foreign currency translations adjustments, net | (1 | ) | | (6 | ) | | (1 | ) |
| Balance, at end of period | $ | 78 |
| | $ | 91 |
| | $ | 103 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
12. Debt and Financing Activities
| |
16. | Debt andFinancing Activities
|
Long-term debt consisted of the following:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2022 | | 2021 |
U.S. Dollar notes (1) (2) | | | |
| 2.70% Notes due December 15, 2022 | $ | 400 | | | $ | 400 | |
| 2.85% Notes due March 15, 2023 | 360 | | | 400 | |
| 3.80% Notes due March 15, 2024 | 918 | | | 1,100 | |
| 0.90% Notes due December 3, 2025 | 500 | | | 500 | |
| 1.30% Notes due August 15, 2026 | 498 | | | — | |
| 7.65% Debentures due March 1, 2027 | 150 | | | 167 | |
| 3.95% Notes due February 16, 2028 | 343 | | | 600 | |
| 4.75% Notes due May 30, 2029 | 196 | | | 400 | |
| 6.00% Notes due March 1, 2041 | 217 | | | 282 | |
| 4.88% Notes due March 15, 2044 | 255 | | | 411 | |
Foreign currency notes (1) (3) | | | |
| 0.63% Euro Notes due August 17, 2021 | — | | | 704 | |
| 1.50% Euro Notes due November 17, 2025 | 662 | | | 700 | |
| 1.63% Euro Notes due October 30, 2026 | 554 | | | 587 | |
| 3.13% Sterling Notes due February 17, 2029 | 582 | | | 627 | |
| | | |
Lease and other obligations (4) | 244 | | | 270 | |
| Total debt | 5,879 | | | 7,148 | |
| Less: Current portion | 799 | | | 742 | |
| Total long-term debt | $ | 5,080 | | | $ | 6,406 | |
|
| | | | | | | |
| | March 31, |
| (In millions) | 2016 | | 2015 |
U.S. Dollar notes (1) | | | |
| Floating Rate Notes due September 10, 2015 | $ | — |
| | $ | 400 |
|
| 0.95% Notes due December 4, 2015 | — |
| | 500 |
|
| 3.25% Notes due March 1, 2016 | — |
| | 600 |
|
| 5.70% Notes due March 1, 2017 | 500 |
| | 500 |
|
| 1.29% Notes due March 10, 2017 | 700 |
| | 700 |
|
| 1.40% Notes due March 15, 2018 | 500 |
| | 499 |
|
| 7.50% Notes due February 15, 2019 | 350 |
| | 349 |
|
| 2.28% Notes due March 15, 2019 | 1,100 |
| | 1,100 |
|
| 4.75% Notes due March 1, 2021 | 599 |
| | 599 |
|
| 2.70% Notes due December 15, 2022 | 400 |
| | 400 |
|
| 2.85% Notes due March 15, 2023 | 400 |
| | 400 |
|
| 3.80% Notes due March 15, 2024 | 1,100 |
| | 1,100 |
|
| 7.65% Debentures due March 1, 2027 | 175 |
| | 175 |
|
| 6.00% Notes due March 1, 2041 | 493 |
| | 493 |
|
| 4.88% Notes due March 15, 2044 | 800 |
| | 800 |
|
Foreign currency notes (2) | | | |
| 4.00% Bonds due October 18, 2016 | 403 |
| | 388 |
|
| 4.50% Bonds due April 26, 2017 | 583 |
| | 563 |
|
| | | | |
| Lease and other obligations | 44 |
| | 143 |
|
| Total debt | 8,147 |
| | 9,709 |
|
| Less current portion | (1,612 | ) | | (1,529 | ) |
| Total long-term debt | $ | 6,535 |
| | $ | 8,180 |
|
| |
(1) | Interest on these notes is payable semiannually each year. These notes are unsecured and unsubordinated obligations of the Company. |
| |
(2) | Interest on these Euro-denominated bonds is due annually each year. |
(2)Interest on these U.S. dollar notes is payable semi-annually.
(3)Interest on these foreign currency notes is payable annually.
(4)Excludes current and long-term debt of approximately $4 million and $11 million, respectively, as of March 31, 2022 related to the European divestiture activities discussed in more detail in Financial Note 2, “Held for Sale.” These amounts were included under the caption “Liabilities held for sale” in the Consolidated Balance Sheet as of March 31, 2022.
Long-Term Debt
OurThe Company’s long-term debt includes both U.S. dollar and foreign currency denominatedcurrency-denominated borrowings. At March 31, 20162022 and March 31, 2015, $8,147 million2021, $5.9 billion and $9,709 million$7.1 billion, respectively, of total debt werewas outstanding, of which $1,612$799 million and $1,529$742 million, wererespectively, was included under the captionin “Current portion of long-term debt” within our consolidated balance sheets.in the Company’s Consolidated Balance Sheets.
On March 5, 2014, we issued floating rate notesAugust 12, 2021, the Company completed a public offering of 1.30% Notes due September 10, 2015August 15, 2026 (the “2026 Notes”) in an aggregatea 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”).$500 million. Interest on the 20172026 Notes is payable semi-annually on March 10February 15th and September 10August 15th of each year. Interestyear, commencing on the 2019 Notes, the 2024 Notes and the 2044 Notes is payable on MarchFebruary 15, and September 15 of each year. We utilized the net proceeds2022. Proceeds received from thethis note issuance, of these notes (each note constitutes a “Series”) of $4,068 million, net of discounts and offering expenses, to repaywere $495 million. The Company utilized the borrowings under our 2014 Bridge Loan, as further described below.net proceeds from this note for general corporate purposes.
On December 3, 2020, the Company completed a public offering of 0.90% Notes due December 3, 2025 (the “2025 Notes”) in a principal amount of $500 million. Interest on the 2025 Notes is payable semi-annually on June 3rd and December 3rd of each year, commencing on June 3, 2021. Proceeds received from this note issuance, net of discounts and offering expenses, were $496 million. The Company utilized the net proceeds from this note for general corporate purposes.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Each Seriesnote, which constitutes a “Series,” is an unsecured and unsubordinated obligation of the Company and ranks equally with all of the Company’s existing and, from time-to-time, future unsecured and unsubordinated indebtedness outstanding. Each Series is governed by materially similar indentures and officers’ certificate specifying certain terms of each Series.certificates. Upon 30 daysrequired notice to holders of a Series, wenotes with fixed interest rates, the Company may redeem that Seriesthose notes 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.prices. In the event of the occurrence of both (1) a change of control of the Company and (2) a downgrade of a Series below an investment grade rating by each of Fitch Ratings,Inc., 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 wethe Company may not incur liens, enter into sale and leaseback transactions or consolidate, merge or sell all or substantially all of our assets.its assets, incur liens, or enter into sale-leaseback transactions exceeding specific terms, without the lenders’ consent. The indentures also contain customary events of default provisions.
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 similarOn July 17, 2021, the Company redeemed its 0.63% €600 million (or, approximately $709 million) total principal Euro-denominated notes, originally due on August 17, 2021, prior 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 borrowingsmaturity. The notes were redeemed at par value using funds drawn on our Accounts Receivable Sales Facility and cash on hand. On AprilDecember 1, 2020, the Company redeemed its 4.75% $323 million total principal of notes due on March 1, 2021 prior to maturity. On November 30, 2014,2020, the commitments underCompany retired its 3.65% $700 million total principal of notes upon maturity. These notes were redeemed using cash on hand and the 2014 Bridge Loan automatically terminated upon the settlementproceeds of the notes offering discussed above. In 2020, the Company repaid at maturity its €250 million Floating Rate Euro Notes due February 12, 2020.
Tender Offer
On July 23, 2021, the Company completed a cash tender offersoffer for a portion of its existing outstanding (i) 2.85% Notes due 2023, (ii) 3.80% Notes due 2024, (iii) 7.65% Debentures due 2027, (iv) 3.95% Notes due 2028, (v) 4.75% Notes due 2029, (vi) 6.00% Notes due 2041, and (vii) 4.88% Notes due 2044 (collectively referred to herein as the remaining common shares“Tender Offer Notes”). In connection with the tender offer, the Company paid an aggregate consideration of Celesio. During$1.1 billion to redeem $922 million principal amount of the time itnotes at a redemption price equal to 100% of the principal amount and premiums of $182 million, plus accrued and unpaid interest of $14 million. The redemption of the Tender Offer Notes was outstanding,accounted for as a debt extinguishment. As a result of the 2014 Bridge Loan borrowings bore interest at 1.39% per annum, basedredemption, the Company incurred a pre-tax loss on debt extinguishment of $191 million in the London Interbank Offered Rate plus a margin based onyear ended March 31, 2022, which included premiums of $182 million as well as the Company’s credit rating. Interest expense for 2014 included a totalwrite-off of $46 million ofunamortized debt issuance costs and transaction 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.incurred totaling $9 million.
Other Information
Scheduled futureprincipal payments of long-term debt are $1,612$799 million in 2017, $1,0922023, $966 million in 2018, $1,4582024, $35 million in 2019, $3 million2025, $1.2 billion in 2020, $2 million2026, $1.2 billion in 20212027, and $3,980 million$1.7 billion thereafter.
In 2016, we repaid our $400 million floating rate notes due September 10, 2015 at maturity, $500 million 0.95% notes due December 4, 2015 at maturity and $600 million 3.25% notes due March 1, 2016 at maturity. In 2014, we repaid our $350 million 6.50% Notes due February 15, 2014.
Revolving Credit Facilities
DuringIn the thirdsecond quarter of 2016, we2020, the Company entered into a Credit Agreement, dated as of September 25, 2019 (the “2020 Credit Facility”), that provides a syndicated $3.5$4.0 billion five-year senior unsecured revolving credit facility (the “Global Facility”). The Global Facility haswith a $3.15$3.6 billion aggregate sublimit of availability in Canadian dollars, British pound sterling, and Euros. The remaining terms and conditions of the Global Facility are substantially similar to those previously in placeEuro. Borrowings under the $1.3 billion revolving2020 Credit Facility bear interest based upon the London Interbank Offered Rate (“LIBOR”), Canadian Dealer Offered Rate for credit facility which was terminatedextensions denominated in October 2015. There wereCanadian dollars, a prime rate, or alternative overnight rates as applicable, plus agreed margins. The 2020 Credit Facility matures in September 2024 and had no borrowings during 2022 and 2021 and no amounts outstanding under this facility as of March 31, 2016.2022 and 2021.
On March 31, 2021, the Company entered into Amendment No. 2 to the 2020 Credit Facility, which superseded Amendment No. 1, dated as of February 1, 2021. The Global2020 Credit Facility, as amended, contains various customary investment grade covenants, including a financial covenant which obligates the Company to maintain a debtmaximum Total Debt to capitalConsolidated EBITDA ratio, of no greater than 65% and other customary investment grade covenants.as defined in the amended credit agreement. If we dothe Company does not comply with these covenants, ourits ability to use the Global2020 Credit Facility may be suspended and repayment of any outstanding balances under the Global2020 Credit Facility may be required. At March 31, 2016, we were2022, the Company was in compliance with all covenants.
At March 31, 2015, we had a syndicated $1.3 The remaining terms and conditions of the 2020 Credit Facility are substantially similar to those previously in place under the $3.5 billion five-year senior unsecured revolving credit facility with the original expiration date(the “Global Facility”), which was scheduled to mature in September 2016, as well as a syndicated €500 million five-year senior unsecured revolving credit facility with the original expiration date in February 2018. Both revolving credit facilities wereOctober 2020. The Global Facility was terminated in connection with the execution of a new $3.5 billion global facilitythe 2020 Credit Facility in October 2015, as discussed above. There wereSeptember 2019 and had no borrowings outstanding under these facilities during the last three years, and as of March 31, 2015.
six months ended September 30, 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
WeThe Company also maintainmaintains bilateral credit linesfacilities primarily denominated in Euros with a total committed and uncommitted balanceamount of $427 million. These credit lines have interest rates ranging from 0.18% to 6.00%. During 2016 and 2015, we borrowed $641$7 million and $225an uncommitted amount of $111 million as of March 31, 2022. Borrowings and repaid $635 millionrepayments were not material in 2022 and $267 million2021 and amounts outstanding under these credit lines primarily related to short‑term borrowings. Borrowings and repayments during 2014 were not material. Asmaterial as of March 31, 20162022 and 2015, there were $28 million and $29 million outstanding under these credit lines.
Accounts Receivable Facilities
Following the execution of the Global Facility, we also terminated an accounts receivable sales facility (the “AR Facility”) with a committed balance of $1.35 billion during the third quarter of 2016. There were no borrowings outstanding under the AR Facility during 2016 and 2015. In 2014, we borrowed $550 million under the AR Facility and repaid $550 million. At March 31, 2015, there were no secured borrowings and related securitized accounts receivable outstanding under the AR Facility. The AR Facility contained requirements relating to the performance of the accounts receivable and covenants relating to the Company. If we did not comply with these covenants, our ability to use the AR Facility would have been suspended and repayment of any outstanding balances under the AR Facility would have been required. At March 31, 2015, we were in compliance with all covenants.
We also have Accounts Receivable Factoring Facilities (the “Factoring Facilities”) denominated in foreign currencies. Transactions under these facilities are accounted for as secured borrowings and have interest rates ranging from 0.85% to 1.26%. During 2016, 2015 and 2014, we borrowed $919 million, $2,875 million and $570 million and repaid $1,055 million, $2,908 million and $575 million in short-term borrowings under these facilities. At March 31, 2016 and 2015, there were $7 million and $135 million in secured borrowings outstanding under these facilities. All of the Factoring Facilities expired through April 2016.2021.
Commercial Paper
We maintainThe Company maintains a commercial paper program to support ourits working capital requirements and for other general corporate purposes. In November 2015, we replacedUnder the existing program, with a new commercial paper program through which the Company can issue up to $3.5$4.0 billion in outstanding notes. There were no material commercial paper issuances duringnotes. During 2022, 2021, and 2020, the last three yearsCompany borrowed $11.2 billion, $6.3 billion, and no amounts outstanding at$21.4 billion, respectively, and repaid $11.2 billion, $6.3 billion, and $21.4 billion, respectively, under the program. At March 31, 2016.2022 and 2021, there were 0 commercial paper notes outstanding.
| |
17. | Variable Interest Entities |
We evaluate our13. Variable Interest Entities
The Company evaluates its ownership, contractual, and other interests in entities to determine if they are variable interest entities (“VIEs”),VIEs if we haveit has a variable interest in those entities, and the nature and extent of those interests. These evaluations are highly complex and involve management judgment and the use of estimates and assumptions based on available historical information, and management’s judgment, among other factors. Based on ourits evaluations, if we determine we arethe Company determines it is the primary beneficiary of such VIEs, we consolidateit consolidates such entities into ourits financial statements.
Consolidated Variable Interest Entities
We consolidate VIEsThe Company consolidates a VIE when we haveit has 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, areis considered the primary beneficiary of the VIE. We consolidateIt consolidates certain single-lessee leasing entities where we,it, as the lessee, havehas the majority risk of the leased assets due to ourits minimum lease payment obligations to these leasing entities. As a result of absorbing this risk, the leases provide usthe Company with the power to direct the operations of the leased properties and the obligation to absorb losses or the right to receive benefits of the entity. Consolidated VIEs do not have an immateriala material impact on our consolidated statementsthe Company’s Consolidated Statements of operationsOperations and cash flows.Cash Flows. Total assets and liabilities included in our consolidated balance sheetits Consolidated Balance Sheets for these VIEs were $119$660 million and $44$65 million, respectively, at March 31, 20162022, and $144$662 million and $51$74 million, respectively, at March 31, 2015.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
2021.
Investments in Unconsolidated Variable Interest Entities
We areThe Company is involved with VIEs which we doit does not consolidate because we doit does not have the power to direct the activities that most significantly impact their economic performance and thus areis not considered the primary beneficiary of the entities. OurIts relationships include equity method investments and lending, leasing, contractual, or other relationships with the VIEs. OurThe Company’s most significant VIE relationships are with oncology and other specialty practices. Under these practice arrangements, wethe Company generally ownowns or leaseleases all of the real estate and equipment used by the affiliated practices and managemanages the practices’ administrative functions. We also havePrior to the divestment of the Austrian businesses in 2022, the Company had relationships with certain pharmacies in Europe with whom we may provideit provided financing, havehad equity ownership, and/or had a supply agreement whereby we supplyit supplied the vast majority of the pharmacies’ purchases. OurThe Company’s maximum exposure to loss (regardless of probability) as a result of all unconsolidated VIEs were $1.1was $1.4 billion and $1.2$1.5 billion at March 31, 20162022 and 2015,2021, respectively, which primarily represents the value of intangible assets related to service agreements, equity investments, and lease and loan receivables. These amounts excludeThis amount excludes the customer loan guarantees discussed in Financial Note 23,17, “Financial Guarantees and Warranties.” We believe thatThe Company believes there is no material loss exposure on these assets or from these relationships.
We maintain14. Pension Benefits
The Company maintains 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 theThe 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 ashas an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives.
executives, as well as benefit pension plans for eligible employees outside the U.S.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 23, 2018, the Company’s Board of Directors approved the termination of its frozen U.S. defined benefit pension plan (“Plan”). During the first quarter of 2020, the Company offered the option of receiving a lump sum payment to certain participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 1,300 participants elected to receive the settlement, and lump sum payments of approximately $49 million were made from Plan assets to these participants in June 2019. The benefit obligation settled approximated payments to Plan participants and a settlement charge of $17 million was recorded during the first quarter of 2020. During the second quarter of 2020, the Company transferred the remainder of the Plan’s pension obligation to a third-party insurance provider by purchasing annuity contracts for approximately $280 million which was fully funded directly by Plan assets. The third-party insurance provider assumed the obligation to pay future pension benefits and provide administrative services on November 1, 2019 and a pre-tax settlement charge of $105 million was recorded during the second quarter of 2020. Settlement charges were included within “Other income, net,” in the Consolidated Statement of Operations for the year ended March 31, 2020. As of March 31, 2020, this defined benefit pension plan had an accumulated comprehensive loss of approximately nil.
OurThe Company’s non-U.S. defined benefit pension plans cover eligible employees located predominantly in Norway, the United Kingdom, Germany, and Germany.Canada. Benefits for these plans are based primarily on each employee’s final salary, with annual adjustments for inflation. The obligations in Norway are largely related to the state-regulated pension plan which is managed by the Norwegian Public Service Pension Fund (“SPK”). According to the terms of the SPK, the plan assets of state regulated plans in Norway must correspond very closely to the pension obligation calculated using the principles codified in Norwegian law. The shortfall may not exceed 1% of the obligation. If the shortfall exceeds this threshold, it must be remedied within two years. In the United Kingdom, we haveU.K., the Company has 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’sMcKesson Europe’s Management Board.
During the fourth quarter of 2022, the Company derecognized $43 million of pension liabilities included in liabilities held for sale and $11 million of accumulated other comprehensive loss related to the sale of its Austrian business. During the third quarter of 2021, the Company derecognized $187 million of pension liabilities included in liabilities held for sale and $33 million of accumulated other comprehensive loss related to its German pharmaceutical wholesale business contributed to a joint venture, as discussed in more detail in Financial Note 2, “Held for Sale.”
Defined benefit plan assets and obligations are measured as of the Company’s fiscal year-end.
The net periodic expense for ourthe Company’s pension plans which includes net pension expense of Celesio beginning February 2014, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Service cost - benefits earned during the year | $ | — | | | $ | — | | | $ | — | | | $ | 11 | | | $ | 15 | | | $ | 16 | |
| Interest cost on projected benefit obligation | — | | | — | | | 6 | | | 14 | | | 19 | | | 19 | |
| Expected return on assets | — | | | — | | | (4) | | | (19) | | | (20) | | | (22) | |
| Amortization of unrecognized actuarial loss and prior service costs | — | | | — | | | 2 | | | 3 | | | 5 | | | 6 | |
| Curtailment/settlement loss (gain) | — | | | — | | | 127 | | | (5) | | | — | | | — | |
| | | | | | | | | | | |
| Net periodic pension expense | $ | — | | | $ | — | | | $ | 131 | | | $ | 4 | | | $ | 19 | | | $ | 19 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Service cost - benefits earned during the year | $ | 4 |
| | $ | 1 |
| | $ | 4 |
| | $ | 20 |
| | $ | 16 |
| | $ | 6 |
|
| Interest cost on projected benefit obligation | 18 |
| | 19 |
| | 19 |
| | 24 |
| | 34 |
| | 11 |
|
| Expected return on assets | (19 | ) | | (21 | ) | | (20 | ) | | (30 | ) | | (30 | ) | | (12 | ) |
| Amortization of unrecognized actuarial loss, prior service costs and net transitional obligation | 42 |
| | 19 |
| | 32 |
| | 3 |
| | 3 |
| | 4 |
|
| Curtailment/settlement loss (gain) | 2 |
| | — |
| | — |
| | — |
| | 6 |
| | (1 | ) |
| Net periodic pension expense | $ | 47 |
| | $ | 18 |
| | $ | 35 |
| | $ | 17 |
| | $ | 29 |
| | $ | 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.
period of active employees.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations and plan assets for ourthe Company’s pension plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Change in benefit obligations | | | | | | | |
Benefit obligation at beginning of period (1) | $ | 9 | | | $ | 10 | | | $ | 875 | | | $ | 896 | |
| Service cost | — | | | — | | | 11 | | | 15 | |
| Interest cost | — | | | — | | | 14 | | | 19 | |
| Actuarial loss (gain) | — | | | — | | | (55) | | | 89 | |
| Benefits paid | (1) | | | (1) | | | (35) | | | (34) | |
| Curtailment/settlement | — | | | — | | | (32) | | | — | |
| Expenses paid | — | | | — | | | (1) | | | — | |
Divestiture (2) | — | | | — | | | (43) | | | (187) | |
| | | | | | | |
| Foreign exchange impact and other | — | | | — | | | (33) | | | 77 | |
Benefit obligation at end of period (1) | $ | 8 | | | $ | 9 | | | $ | 701 | | | $ | 875 | |
| | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of period | $ | — | | | $ | — | | | $ | 735 | | | $ | 594 | |
| Actual return on plan assets | — | | | — | | | (4) | | | 87 | |
| Employer and participant contributions | 1 | | | 1 | | | 43 | | | 27 | |
| Benefits paid | (1) | | | (1) | | | (35) | | | (34) | |
| | | | | | | |
| Expenses paid | — | | | — | | | (1) | | | — | |
| Settlements | — | | | — | | | (24) | | | — | |
| Foreign exchange impact and other | — | | | — | | | (33) | | | 61 | |
| Fair value of plan assets at end of period | $ | — | | | $ | — | | | $ | 681 | | | $ | 735 | |
| | | | | | | |
| Funded status at end of period | $ | (8) | | | $ | (9) | | | $ | (20) | | | $ | (140) | |
| | | | | | | |
| Amounts recognized on the balance sheet | | | | | | | |
Current assets (3) | $ | — | | | $ | — | | | $ | 49 | | | $ | — | |
| Long-term assets | — | | | — | | | 40 | | | 54 | |
Current liabilities (3) | (1) | | | (1) | | | (90) | | | (9) | |
| Long-term liabilities | (7) | | | (8) | | | (19) | | | (185) | |
| Total | $ | (8) | | | $ | (9) | | | $ | (20) | | | $ | (140) | |
(1)The benefit obligation is the projected benefit obligation.
(2)The divestiture relates to the sale of the Company’s Austrian business in 2022 and to the contribution of the Company’s German pharmaceutical wholesale business to a joint venture in 2021 as discussed in more detail in Financial Note 2, “Held for Sale.”
(3)Current assets at March 31, 2022 include $49 million reclassified from long-term assets to assets held for sale as part of the Company’s U.K. disposal group. Current liabilities at March 31, 2022 include $85 million reclassified from long-term liabilities to liabilities held for sale as part of the Company’s E.U. disposal group. Refer to Financial Note 2, “Held for Sale” for additional information.
The actuarial gain of $55 million in 2022 was primarily attributable to:
•Discount rates ($69 million gain): The weighted average discount rate for Non-U.S. plans increased to 2.67% as of March 31, 2022 from 1.89% as of March 31, 2021.
|
| | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| Change in benefit obligations | | | | | | | |
Benefit obligation at beginning of period (1) | $ | 583 |
| | $ | 540 |
| | $ | 963 |
| | $ | 934 |
|
| Service cost | 4 |
| | 1 |
| | 20 |
| | 16 |
|
| Interest cost | 18 |
| | 19 |
| | 24 |
| | 34 |
|
| Actuarial loss (gain) | (13 | ) | | 53 |
| | (64 | ) | | 194 |
|
| Benefit payments | (54 | ) | | (30 | ) | | (35 | ) | | (49 | ) |
| Amendments | — |
| | — |
| | (2 | ) | | (6 | ) |
| Expenses paid | (3 | ) | | — |
| | — |
| | — |
|
| Foreign exchange impact and other | — |
| | — |
| | (7 | ) | | (160 | ) |
Benefit obligation at end of period (1) | $ | 535 |
| | $ | 583 |
| | $ | 899 |
| | $ | 963 |
|
| | | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of period | $ | 298 |
| | $ | 300 |
| | $ | 612 |
| | $ | 590 |
|
| Actual return on plan assets | (3 | ) | | 16 |
| | 2 |
| | 88 |
|
| Employer and participant contributions | 24 |
| | 12 |
| | 44 |
| | 73 |
|
| Benefits paid | (54 | ) | | (30 | ) | | (35 | ) | | (49 | ) |
| Expenses paid | (3 | ) | | — |
| | — |
| | — |
|
| Foreign exchange impact and other | — |
| | — |
| | (16 | ) | | (90 | ) |
| Fair value of plan assets at end of period | $ | 262 |
| | $ | 298 |
| | $ | 607 |
| | $ | 612 |
|
| | | | | | | | |
| Funded status at end of period | $ | (273 | ) | | $ | (285 | ) | | $ | (292 | ) | | $ | (351 | ) |
| | | | | | | | |
| Amounts recognized on the balance sheet | | | | | | | |
| Assets | $ | — |
| | $ | — |
| | $ | 21 |
| | $ | — |
|
| Current liabilities | (2 | ) | | (17 | ) | | (11 | ) | | (6 | ) |
| Long-term liabilities | (271 | ) | | (268 | ) | | (302 | ) | | (345 | ) |
| Total | $ | (273 | ) | | $ | (285 | ) | | $ | (292 | ) | | $ | (351 | ) |
| | | | | |
(1) | The benefit obligation is the projected benefit obligation. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
•Demographic and assumption changes ($14 million loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as inflation assumption, compensation changes, mortality, and other changes including losses related to the divestitures in 2022.
The actuarial loss of $89 million in 2021 was primarily attributable to:
•Discount rates ($32 million loss): The weighted average discount rate for Non-U.S. plans decreased to 1.89% as of March 31, 2021 from 2.03% as of March 31, 2020.
•Demographic and assumption changes ($57 million loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as inflation assumption, compensation changes, mortality, and other changes including losses related to the divestiture in 2021.
The following table provides the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for all ourthe Company’s pension plans, with anincluding accumulated benefit obligation in excess of plan assets.assets:
|
| | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | March 31, | | March 31, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| Projected benefit obligation | $ | 535 |
| | $ | 583 |
| | $ | 899 |
| | $ | 963 |
|
| Accumulated benefit obligation | 535 |
| | 583 |
| | 855 |
| | 897 |
|
| Fair value of plan assets | 262 |
| | 298 |
| | 607 |
| | 612 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| March 31, | | March 31, |
| (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Projected benefit obligation | $ | 8 | | | $ | 9 | | | $ | 701 | | | $ | 875 | |
| Accumulated benefit obligation | 8 | | | 9 | | | 689 | | | 847 | |
| Fair value of plan assets | — | | | — | | | 681 | | | 735 | |
Amounts recognized in accumulated other comprehensive income (pre-tax)loss consist of:
| | | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | March 31, | | March 31, | | March 31, | | March 31, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Net actuarial loss | $ | 185 |
| | $ | 220 |
| | $ | 133 |
| | $ | 175 |
| Net actuarial loss | $ | 1 | | | $ | 1 | | | $ | 70 | | | $ | 120 | |
| Prior service credit | — |
| | — |
| | (11 | ) | | (6 | ) | Prior service credit | — | | | — | | | (2) | | | (2) | |
| Total | $ | 185 |
| | $ | 220 |
| | $ | 122 |
| | $ | 169 |
| Total | $ | 1 | | | $ | 1 | | | $ | 68 | | | $ | 118 | |
Other changes in accumulated other comprehensive income (pre-tax) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Net actuarial loss (gain) | $ | — | | | $ | — | | | $ | (3) | | | $ | (32) | | | $ | (9) | | | $ | (24) | |
| | | | | | | | | | | |
| Amortization of: | | | | | | | | | | | |
| Net actuarial loss | — | | | — | | | (129) | | | (14) | | | (35) | | | (6) | |
| Prior service credit (cost) | — | | | — | | | — | | | 1 | | | 1 | | | — | |
| Foreign exchange impact and other | — | | | — | | | — | | | (5) | | | 15 | | | (6) | |
| Total recognized in other comprehensive loss (income) | $ | — | | | $ | — | | | $ | (132) | | | $ | (50) | | | $ | (28) | | | $ | (36) | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Net actuarial loss (gain) | $ | 9 |
| | $ | 58 |
| | $ | (31 | ) | | $ | (38 | ) | | $ | 117 |
| | $ | 12 |
|
| Prior service credit | — |
| | — |
| | (8 | ) | | (5 | ) | | (8 | ) | | — |
|
| Amortization of: | | | | | | | | | | | |
| Net actuarial loss | (44 | ) | | (27 | ) | | (32 | ) | | (5 | ) | | (5 | ) | | (4 | ) |
| Prior service credit (cost) | — |
| | 8 |
| | — |
| | 2 |
| | 2 |
| | 2 |
|
| Foreign exchange impact and other | — |
| | — |
| | (1 | ) | | (1 | ) | | (8 | ) | | 4 |
|
| Total recognized in other comprehensive loss (income) | $ | (35 | ) | | $ | 39 |
| | $ | (72 | ) | | $ | (47 | ) | | $ | 98 |
| | $ | 14 |
|
We expectIn 2022, the Company recognized $11 million in actuarial losses for pension plans to amortize $15stockholders’ equity as a result of the sale of its Austrian business. In 2021, the Company recognized $33 million in actuarial losses for pension plans to stockholders’ equity as a result of the contribution of its German pharmaceutical wholesale business to a joint venture. Refer to Financial Note 2, “Held for Sale,” for more information. The Company recognized $127 million in actuarial losslosses for the pension plans fromto stockholders’ equity toin 2020 as a result of the termination of the U.S. defined benefit pension expense in 2017. Comparable 2016 amounts were $1 million of prior service creditplan and $47 million of actuarial loss.the settlement from the executive benefit retirement plan for a retired executive.
Projected benefit obligations related to ourthe Company’s unfunded U.S. plans were $175$8 million and $189$9 million at March 31, 20162022 and 2015.2021, respectively. Pension obligations for ourits unfunded plans are based on the recommendations of independent actuaries. Projected benefit obligations relating to ourthe Company’s unfunded non-U.S. plans were $272$101 million and $222$162 million at March 31, 20162022 and 2015.2021, respectively. Funding obligations for ourits 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 ourthe Company’s pension plans are as follows: $59$34 million, $174$33 million, $110$33 million, $66$34 million, and $65$35 million for 20172023 to 20212027, respectively, and $327$186 million for 20222028 through 2026.2032. 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 ourthe Company’s pension plans are $15$13 million for 2017.2023.
Weighted-average assumptions used to estimate the net periodic pension expense and the actuarial present value of benefit obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Years Ended March 31, | | Years Ended March 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Net periodic pension expense | | | | | | | | | | | |
| Discount rates | 2.35% | | 3.08% | | 3.66% | | 1.89 | % | | 1.89 | % | | 2.03 | % |
| Rate of increase in compensation | N/A (1) | | N/A (1) | | N/A (1) | | 3.20 | | | 3.20 | | | 2.93 | |
| Expected long-term rate of return on plan assets | N/A | | N/A | | 4.00 | | 2.56 | | | 2.56 | | | 3.01 | |
| Benefit obligation | | | | | | | | | | | |
| Discount rates | 3.35% | | 2.35% | | 3.08% | | 2.67 | % | | 1.89 | % | | 2.03 | % |
| Rate of increase in compensation | N/A (1) | | N/A (1) | | N/A (1) | | 3.67 | | | 3.20 | | | 2.93 | |
|
| | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Net periodic pension expense | | | | | | | | | | | |
| Discount rates | 3.36 | % | | 3.74 | % | | 3.39 | % | | 2.36 | % | | 3.85 | % | | 3.95 | % |
| Rate of increase in compensation | 4.00 |
| | 4.00 |
| | 4.00 |
| | 2.80 |
| | 3.11 |
| | 2.66 |
|
| Expected long-term rate of return on plan assets | 6.75 |
| | 7.25 |
| | 7.25 |
| | 4.87 |
| | 5.39 |
| | 5.71 |
|
| Benefit obligation | | | | | | | | | | | |
| Discount rates | 3.27 | % | | 3.18 | % | | 3.58 | % | | 2.84 | % | | 2.50 | % | | 3.92 | % |
| Rate of increase in compensation | 4.00 |
| | 4.00 |
| | 4.00 |
| | 2.98 |
| | 3.24 |
| | 3.27 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
OurThe Company’s defined benefit pension plan liabilities are valued using a discount rate based on a yield curve developed from a portfolio of high quality corporate bonds rated AA or better whose maturities are aligned with the expected benefit payments of ourits plans. For March 31, 2016, our2022, the Company’s U.S. defined benefit liabilities are valued using a weighted averageweighted-average discount rate of 3.27%3.35%, which represents an increase of 9100 basis points from our 2015its 2021 weighted-average discount rate of 3.18%2.35%. Our non-U.SThe Company’s non-U.S. defined benefit pension plan liabilities are valued using a weighted-average discount rate of 2.84%2.67%, which represents an increase of 3478 basis points from our 2015its 2021 weighted-average discount rate of 2.50%1.89%.
Sensitivity to changes in the weighted-average discount rate for our pension plans is as follows:
|
| | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| (In millions) | One Percentage Point Increase | | One Percentage Point Decrease | | One Percentage Point Increase | | One Percentage Point Decrease |
| Increase (decrease) on projected benefit obligation | $ | (35) | | $ | 41 | | $ | (85) | | $ | 101 |
| Increase (decrease) on net periodic pension cost | | — | | | — | | | (4) | | | 6 |
Plan Assets
Investment Strategy: The overall objective for U. S. pension plan assets is to generate long-term investment returns consistent with capital preservation and prudent investment practices, with a diversification of asset types and investment strategies. Periodic adjustments are made to provide liquidity for benefit payments and to rebalance plan assets to their target allocations.
The target allocations for U.S. plan assets at March 31, 2016 and 2015 are 50% equity investments, 45% fixed income investments including cash and cash equivalents and 5% real estate. Equity investments include common stock, preferred stock, and equity commingled funds. Fixed income investments include corporate bonds, government securities, mortgage-backed securities, asset-backed securities, other directly held fixed income investments, and fixed income commingled funds. The real estate investment is in a commingled real estate fund.
For both U.S. and non-U.S. plan assets, the investment strategies are subject to local regulations and the asset/liability profiles of the plans in each individual country. Plan assets of the non-U.S. plans are broadly invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the plans. Plan assets are primarily invested in high-quality corporate and government bond funds and equity securities. Assets are properly diversified to avoid excessive reliance on any particular asset, issuer, or group of undertakings so as to avoid accumulations of risk in the portfolio as a whole.
We developThe Company develops 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fair Value Measurements: The following tables represent our pension plan assets as of March 31, 2016 and 2015, 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. The following tables represent the Company’s pension plan assets as of March 31, 2022 and 2021, using the fair value hierarchy by asset class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-U.S. Plans |
| March 31, 2022 | | March 31, 2021 |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 15 | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | 5 | |
| Equity securities: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity commingled funds | — | | | 38 | | | — | | | 38 | | | 64 | | | 117 | | | — | | | 181 | |
| Fixed income securities: | | | | | | | | | | | | | | | |
| Government securities | — | | | 6 | | | — | | | 6 | | | 5 | | | 144 | | | — | | | 149 | |
| Corporate bonds | — | | | 11 | | | — | | | 11 | | | 6 | | | 30 | | | — | | | 36 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Fixed income commingled funds | 336 | | | 25 | | | — | | | 361 | | | 51 | | | 222 | | | 1 | | | 274 | |
| Other: | | | | | | | | | | | | | | | |
| Annuity contracts | — | | | — | | | 173 | | | 173 | | | — | | | — | | | — | | | — | |
| Real estate funds and Other | 31 | | | 4 | | | 2 | | | 37 | | | 31 | | | 4 | | | 3 | | | 38 | |
| Total | $ | 382 | | | $ | 84 | | | $ | 175 | | | $ | 641 | | | $ | 162 | | | $ | 517 | | | $ | 4 | | | $ | 683 | |
| | | | | | | | | | | | | | | |
Assets held at NAV practical expedient (1): | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other | | | | | | | 40 | | | | | | | | | 52 | |
| Total plan assets | | | | | | | $ | 681 | | | | | | | | | $ | 735 | |
Table of Contents(1) Equity commingled funds, fixed income commingled funds, real estate funds, and other investments for which fair value is measured using the NAV per share as a practical expedient are not leveled within the fair value hierarchy and are included as a reconciling item to total investments.McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | March 31, 2016 | | March 31, 2016 |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| Equity securities: | | | | | | | | | | | | | | | |
| Common and preferred stock | 16 |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | — |
|
| Equity commingled funds | — |
| | 165 |
| | — |
| | 165 |
| | 6 |
| | 150 |
| | — |
| | 156 |
|
| Fixed income securities: | | | | | | | | | | | | | | | |
| Government securities | — |
| | 12 |
| | — |
| | 12 |
| | 23 |
| | 68 |
| | — |
| | 91 |
|
| Corporate bonds | — |
| | 12 |
| | — |
| | 12 |
| | 1 |
| | 14 |
| | — |
| | 15 |
|
| Mortgage-backed securities | — |
| | 14 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | — |
|
| Asset-backed securities and other | — |
| | 22 |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
|
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | 66 |
| | 120 |
| | — |
| | 186 |
|
| Other: | | | | | | | | | | | | | | | |
| Real estate funds | — |
| | — |
| | 17 |
| | 17 |
| | — |
| | — |
| | 24 |
| | 24 |
|
| Other | — |
| | — |
| | — |
| | — |
| | 21 |
| | 107 |
| | 3 |
| | 131 |
|
| Total | $ | 20 |
| | $ | 225 |
| | $ | 17 |
| | $ | 262 |
| | $ | 121 |
| | $ | 459 |
| | $ | 27 |
| | $ | 607 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | March 31, 2015 | | March 31, 2015 |
| (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 |
|
| Equity securities: | | | | | | | | | | | | | | | |
| Common and preferred stock | 18 |
| | — |
| | — |
| | 18 |
| | — |
| | — |
| | — |
| | — |
|
| Equity commingled funds | — |
| | 138 |
| | — |
| | 138 |
| | 7 |
| | 149 |
| | — |
| | 156 |
|
| Fixed income securities: | | | | | | | | | | | | | | | |
| Government securities | — |
| | 14 |
| | — |
| | 14 |
| | 26 |
| | 53 |
| | — |
| | 79 |
|
| Corporate bonds | — |
| | 14 |
| | — |
| | 14 |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Mortgage-backed securities | — |
| | 14 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | — |
|
| Asset-backed securities and other | — |
| | 26 |
| | — |
| | 26 |
| | — |
| | — |
| | — |
| | — |
|
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | 64 |
| | 127 |
| | — |
| | 191 |
|
| Other: | | | | | | | | | | | | | | | |
| Real estate funds | — |
| | — |
| | 18 |
| | 18 |
| | — |
| | — |
| | 26 |
| | 26 |
|
| Other commingled funds | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Other | — |
| | — |
| | — |
| | — |
| | 7 |
| | 115 |
| | 4 |
| | 126 |
|
| Total | $ | 73 |
| | $ | 207 |
| | $ | 18 |
| | $ | 298 |
| | $ | 112 |
| | $ | 470 |
| | $ | 30 |
| | $ | 612 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.$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.corporations. Inputs to the valuation methodology include quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Multiple prices and price types are obtained from pricing vendors whenever possible, enabling cross-provider price validations. Fixed income securities are generally classified as Level 1 or Level 2 investments.
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, 2, or 23 investments.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Annuity contracts - The value of the annuity contracts is reported by the Trustee and is based on a valuation of the remaining contracted cash flow of the contract. Inputs in the valuation include discounted future cash flows; these are classified as Level 3 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, 2, or Level 23 investments.
Other - At March 31, 20162022 and 2015,2021, this includes $40$35 million and $39$36 million, respectively, 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table represents a reconciliation ofpresents the changes in the Level 3 plan assets held duringmeasured on a recurring basis for the yearsyear ended March 31, 2016 and 2015:2022:
| | | | | |
| (In millions) | Level 3 |
| Balance as of March 31, 2021 | $ | 4 | |
| Purchases | 196 | |
| Return on assets | (25) | |
| |
| Balance as of March 31, 2022 | $ | 175 | |
|
| | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| (In millions) | Real Estate Funds | | Total | | Real Estate Funds | | Other | | Total |
| Balance at March 31, 2014 | $ | 16 |
| | $ | 16 |
| | $ | 7 |
| | $ | 5 |
| | $ | 12 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | — |
|
| Unrealized gain on plan assets still held | 2 |
| | 2 |
| | 1 |
| | — |
| | 1 |
|
| Purchases, sales and settlements | — |
| | — |
| | 18 |
| | (1 | ) | | 17 |
|
| Balance at March 31, 2015 | $ | 18 |
| | $ | 18 |
| | $ | 26 |
| | $ | 4 |
| | $ | 30 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | — |
|
| Unrealized gain on plan assets still held | 1 |
| | 1 |
| | (2 | ) | | (1 | ) | | (3 | ) |
| Purchases, sales and settlements | (2 | ) | | (2 | ) | | — |
| | — |
| | — |
|
| Balance at March 31, 2016 | $ | 17 |
|
| $ | 17 |
| | $ | 24 |
| | $ | 3 |
| | $ | 27 |
|
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 2016, we2017, it also contributed to the Pensjonsordningen for Apoteketaten (“POA”), a mandatory multiemployer pension scheme for ourits 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 ourthe Company’s withdrawal liability and contributions may increase.
Contributions and amounts accrued for U.S. Plansplans were not material for the years ended March 31, 2016, 2015,2022, 2021, and 2014.2020. Contributions to the POA for non-U.S. Plansplans exceeding 5% of total plan contributions were $23$20 million,, $24 $22 million, and $5$17 million in 2016, 20152022, 2021, and 2014.2020, respectively. Based on actuarial calculations, we estimatethe Company estimates the funded status for ourits non-U.S. Plans to be approximately 66%88% as of March 31, 2016.2022. No amounts were accrued for liability associated with the POA as we havethe Company has no intention to withdraw from the plan.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Defined Contribution Plans
We haveThe Company has a contributory profit sharing investmentretirement savings plan (“PSIP”RSP”) for U.S. eligible employees. Eligible employees may contribute to the PSIPRSP 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 PSIPRSP and non-U.S. plans were $99$116 million $103for the year ended March 31, 2022 and $102 million and $83 million for each of the years ended March 31, 2016, 2015,2021 and 2014.2020.
Postretirement Benefits
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| |
19. | Postretirement Benefits |
We maintainThe Company maintains a number of postretirement benefits,benefit plans, 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. WeIt also provideprovides postretirement benefits for certain U.S. executives. Defined benefit plan obligations are measured as of the Company’s fiscal year-end.
The net periodic (credit) expense for ourthe Company’s postretirement welfare benefits is as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Service cost - benefits earned during the year | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
| Interest cost on accumulated benefit obligation | 4 |
| | 5 |
| | 5 |
|
| Amortization of unrecognized actuarial gain and prior service credit | — |
| | (4 | ) | | (1 | ) |
| Curtailment gain | — |
| | — |
| | (2 | ) |
| Net periodic postretirement expense | $ | 5 |
| | $ | 2 |
| | $ | 4 |
|
Information regarding the changes in benefit obligations for our postretirement welfare plans is as follows:
|
| | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 |
| Benefit obligation at beginning of period | $ | 118 |
| | $ | 119 |
|
| Service cost | 1 |
| | 1 |
|
| Interest cost | 4 |
| | 5 |
|
| Plan amendments | (16 | ) | | — |
|
| Actuarial loss | 3 |
| | 5 |
|
| Benefit payments | (11 | ) | | (12 | ) |
| Curtailment gain | (1 | ) | | — |
|
| Benefit obligation at end of period | $ | 98 |
| | $ | 118 |
|
The components of the amount recognized in accumulated other comprehensive income for the Company’s other postretirement benefits at March 31, 2016 and 2015 were net actuarial losses of $4 million and $1 million and net prior service credits of $16 million and $1 million. Other changes in benefit obligations recognized in other comprehensive income were net actuarial losses of $3 million in 2016 and $9 million in 2015 and net prior service credits of $16 million in 2016.
We estimate that the amortization of the actuarial loss from stockholders’ equity to other postretirement expense in 2017 will be $1 million. Comparable 2016 amount was a gain of $1 million.
Other postretirement benefits are funded as claims are paid. Expected benefit payments for our postretirement welfare benefit plans are as follows: $11 million, $9 million, $9 million, $8 million and $8 million for 2017 to 2021 and $34 million cumulatively for 2022 through 2026. 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 $11 million for 2017.
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were 3.59%, 4.07% and 3.84% for 2016, 2015 and 2014. Weighted-average discount rates for the actuarial present value of benefit obligations were 3.68%, 3.61% and 4.08% for 2016, 2015 and 2014.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 6.50% and 6.75% for prescription drugs, 7.00/6.50% and 7.25/6.75% for ages pre-65/post-65 medical and 5.00% for dental in 2016 and 2015. For 2016, 2015 and 2014, 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, 2016, 2015,2022, 2021, and 2014.2020. The benefit obligation at March 31, 2022 and 2021 was $56 million and $64 million, respectively.
15. Hedging Activities
In the normal course of business, we arethe Company is exposed to interest rate and foreign currency exchange rate fluctuations. At times, we limitthe Company limits these risks through the use of derivatives such as interest ratecross-currency swaps, cross currency swaps and foreign currency forward contracts.contracts, and interest rate swaps. In accordance with ourthe Company’s policy, derivatives are only used for hedging purposes. We doIt does not use derivatives for trading or speculative purposes.
Interest rate risk
From time to time, we may enter into interest rate swaps which involve the exchange of floating and fixed-rate 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. Amounts recorded to earnings were not material for 2015 and 2014.
Foreign currency exchange risk
We conduct ourThe Company conducts its business worldwide in U.S. dollars and the functional currencies of ourits foreign subsidiaries, including Euro, British pound sterling, and Canadian dollar.dollars. Changes in foreign currency exchange rates could have a material adverse impact on ourthe Company’s financial results that are reported in U.S. dollars. We areThe Company is also exposed to foreign currency exchange rate risk related to ourits foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We haveThe Company has certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross currencycross-currency swaps. These forward contracts and cross currencycross-currency swaps are generally used to offset the potential income statement effects from intercompany loans and other obligations denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.
Non-Derivative Instruments Designated as Hedges
At March 31, 2022 and 2021, the Company had €1.1 billion and €1.7 billion, respectively, of Euro-denominated notes designated as non-derivative net investment hedges. These hedges are utilized to hedge portions of the Company’s net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For all notes that are designated as net investment hedges and meet effectiveness requirements, the changes in carrying value of the notes attributable to the change in spot rates are recorded in foreign currency translation adjustments in “Accumulated other comprehensive loss” in the Consolidated Statements of Stockholders’ Equity (Deficit) where they offset foreign currency translation gains and losses recorded on the Company’s net investments. To the extent foreign currency-denominated notes designated as net investment hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings.
On September 30, 2019, the Company de-designated its £450 million British pound sterling-denominated notes prospectively from net investment hedges as the hedging relationship ceased to be effective.
Foreign currency gains or losses from net investment hedges recorded within Other comprehensive income were gains of $73 million in 2022, losses of $118 million in 2021, and gains of $39 million in 2020. Ineffectiveness on the Company’s non-derivative net investment hedges during 2020 resulted in gains of $34 million which were recorded in earnings in “Other income, net” in the Consolidated Statement of Operations. There was no ineffectiveness in the Company’s net investment hedges for the years ended March 31, 2022 and 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Derivatives Designated as Hedges
At March 31, 20162022 and 2015, we2021, the Company had forwardcross-currency swaps designated as net investment hedges with a total gross notional amount of $500 million Canadian dollars. Under the terms of the cross-currency swap contracts, the Company agrees with third parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and to exchange principal in one currency for principal in another currency, calculated by reference to agreed-upon notional amounts. These swaps are utilized to hedge portions of the U.S. dollar against cash flowsCompany’s net investments denominated in Canadian dollars against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The changes in the fair value of these derivatives attributable to the changes in spot currency exchange rates and differences between spot and forward interest rates are recorded in “Accumulated other comprehensive loss” in the Consolidated Statements of Stockholders’ Equity (Deficit) where they offset foreign currency translation gains and losses recorded on the Company’s net investments denominated in Canadian dollars. To the extent cross-currency swaps designated as hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. There was no ineffectiveness in the Company’s net investment hedges for the years ended March 31, 2022, 2021, and 2020. The cross-currency swaps will mature in November 2024.
In 2020, the Company terminated its cross-currency swaps designated as net investment hedges with a total gross notional amountsamount of $323£932 million and $399 million, which were designated as cash flow hedges. These contracts will mature between March 2017 and March 2020.
During the fourth quarter of 2016, we entered into cross currency swaps to convert fixed-rate British pound sterling swaps. The termination was due to ineffectiveness in its British pound sterling hedging program that arose due to 2019 impairments of goodwill and certain long-lived assets in the U.K. businesses. Proceeds from the termination of these swaps totaled $84 million and resulted in a settlement gain of $34 million in 2020. This gain was recorded in earnings in “Other income, net” in the Consolidated Statements of Operations.
Gains or losses from the Company’s cross-currency swaps designated as net investment hedges recorded in Other comprehensive income were losses of $4 million and $119 million in 2022 and 2021, respectively, and gains of $76 million in 2020. There was no ineffectiveness in the Company’s hedges for the years ended March 31, 2022, 2021 and 2020.
On September 30, 2019, the Company entered into a number of cross-currency swaps designated as fair value hedges with total notional amounts of £450 million British pound sterling. Under the terms of the cross-currency swap contracts, the Company agreed with third parties to exchange fixed interest payments in British pound sterling for floating interest payments in U.S. dollars based on three-month LIBOR plus a spread. These swaps are utilized to hedge the changes in the fair value of the underlying £450 million British pound sterling notes resulting from changes in benchmark interest rates and foreign exchange rates. The changes in the fair value of these derivatives, which are designated as fair value hedges, and the offsetting changes in the fair value of the hedged notes are recorded in earnings. Gains from these fair value hedges recorded in earnings were largely offset by the losses recorded in earnings related to these notes. The swaps will mature in February 2023.
From time to time, the Company also enters into cross-currency swaps to hedge intercompany loans denominated borrowings to fixed-rate U.S. dollar borrowings.in non-functional currencies. For our cross currencycross-currency swap transactions, we agreethe Company agrees with another partythird parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and to exchange principal in one currency for principal in another currency, at a fixed exchange rate, generally set at inception, calculated by reference to an agreed uponagreed-upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party.amounts. These cross currencycross-currency swaps are designed to reduce the income statement effects arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges. The cross currencyAt March 31, 2022 and 2021, the Company had cross-currency swaps mature from February 2018 to March 2019 and have awith total gross notional amountamounts of approximately $546 million.$1.3 billion and $2.6 billion, respectively, which are designated as cash flow hedges. These swaps will mature between July 2022 and January 2024.
For forward contracts and currencycross-currency swaps that are designated as cash flow hedges, the effective portion of changes in the fair valuesvalue of the hedges is recorded into accumulatedin Accumulated other comprehensive incomeloss and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings. Gain or losses on these hedges recorded in other comprehensive income and earnings were not material in 2016, 2015 and 2014.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On April 27, 2020, the Company entered into forward starting interest rate swaps designated as cash flow hedges, with combined notional amounts of $500 million and €600 million, to hedge the variability of future benchmark interest rates on planned bond issuances. Under the terms of the forward interest rate swap contracts, the Company agreed with third parties to pay fixed interest payments for the $500 million swaps for floating interest payments in U.S. dollars based on three-month LIBOR and to pay fixed interest payments for floating interest payments in Euros based on six-month Euro Interbank Offered Rate (“EURIBOR”) for the €600 million swaps. The $500 million swaps were terminated upon the issuance of the 2025 Notes in November 2020. The settlement loss on the swaps was not material and will be amortized on a straight-line basis as interest expense over the five-year life of the 2025 Notes. The €600 million swaps were terminated in the second quarter of 2022 and the loss on termination of the swaps recorded in interest expense was not material for the year ended March 31, 2022. Refer to Financial Note 12, “Debt and Financing Activities,” for more information.
During 2022, the Company entered into forward starting interest rate swaps designated as cash flow hedges, with a combined notional amount of $500 million, to hedge the variability of future benchmark interest rates on a planned bond issuance. Under the terms of the forward interest rate swap contracts, the Company agreed with third parties to pay fixed interest payments for the $500 million swaps for floating interest payments in U.S. dollars based on three-month LIBOR.
Gains or losses from cash flow hedges recorded in Other comprehensive income were gains of $21 million in 2022, losses of $42 million in 2021, and gains of $98 million in 2020. Gains or losses reclassified from Accumulated other comprehensive income and recorded in “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations were not material in 2022, 2021, and 2020. There was no ineffectiveness in the Company’s cash flow hedges for the years ended March 31, 2022, 2021, and 2020.
Derivatives Not Designated as Hedges
We also have a numberDerivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change in value included in earnings.
From time to time, the Company enters into forward contracts to primarily hedge the Euro against cash flows denominated in British pound sterling and other European currencies. At March 31, 20162022 and 2015,2021, the total gross notional amounts of these contracts were $876nil and $39 million, and $1,755 million.
These contracts will mature through December 2016 and none of these contracts were designated for hedge accounting.respectively. Changes in the fair values for contracts not designated as hedges are recorded directly into earnings in “Selling, distribution, general, and accordingly, net gainsadministrative expenses” in the Consolidated Statements of $60 millionOperations. Changes in the fair values were not material in 2022, 2021, and net losses of $189 million were recorded within operating expenses in 2016 and 2015. The2020. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans. Gainsobligations.
In 2020, the Company also entered into a number of forward contracts and lossesswaps to offset a portion of the earnings impacts from the ineffectiveness of the non-derivative net investment hedges discussed above. These contracts matured through January 2020 and none of these contracts were designated for hedge accounting. In December 2019, the Company entered into a series of forward contracts with a total notional amount of €250 million to offset the earnings impact from its Euro-denominated notes. These contracts and the notes against which they are offsetting matured in February 2020 and were not materialdesignated for hedge accounting. Changes in 2014.the fair value for contracts not designated as hedges are recorded directly in earnings. In 2020, losses of $44 million were recorded in earnings in “Other income, net” in the Consolidated Statements of Operations, which offset the ineffectiveness on the Company’s non-derivative net investment hedges noted above.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the fair value of derivatives on a gross basis is as follows:
| | | | Balance Sheet Caption | March 31, 2016 | | March 31, 2015 | | Balance Sheet
Caption | March 31, 2022 | | March 31, 2021 |
| | Fair Value of Derivative | U.S. Dollar Notional | | Fair Value of Derivative | U.S. Dollar Notional | | Fair Value of
Derivative | | U.S. Dollar Notional | | Fair Value of
Derivative | | U.S. Dollar Notional |
| (In millions) | Asset | Liability | | Asset | Liability | (In millions) | Asset | | Liability | | Asset | | Liability | |
| Derivatives designated for hedge accounting | | | | | Derivatives designated for hedge accounting | |
Foreign exchange contracts (current) | Prepaid expenses and other | $ | 16 |
| $ | — |
| $ | 80 |
| | $ | 14 |
| $ | — |
| $ | 76 |
| |
Foreign exchange contracts (non-current) | Other Noncurrent Assets | 46 |
| — |
| 243 |
| | 53 |
| — |
| 323 |
| |
Cross currency swaps (non-current) | Other Noncurrent Liabilities | — |
| 8 |
| 546 |
| | — |
| — |
| — |
| |
| | Cross-currency swaps (current) | | Cross-currency swaps (current) | Prepaid expenses and other/Other accrued liabilities | $ | 30 | | | $ | 39 | | | $ | 1,537 | | | $ | 4 | | | $ | 47 | | | $ | 826 | |
| Cross-currency swaps (non-current) | | Cross-currency swaps (non-current) | Other non-current assets/liabilities | — | | | 36 | | | 679 | | | 72 | | | 92 | | | 2,663 | |
| Forward starting interest rate swaps (current) | | Forward starting interest rate swaps (current) | Other accrued liabilities | 31 | | | — | | | 500 | | | — | | | 7 | | | 704 | |
| | Total | | $ | 62 |
| $ | 8 |
|
| | $ | 67 |
| $ | — |
|
| Total | | $ | 61 | | | $ | 75 | | | $ | 76 | | | $ | 146 | | |
| Derivatives not designated for hedge accounting | | | | | Derivatives not designated for hedge accounting | | | | | | | | | |
Foreign exchange contracts (current) | Prepaid expenses and other | $ | 23 |
| $ | — |
| $ | 680 |
| | $ | 7 |
| $ | — |
| $ | 493 |
| Foreign exchange contracts (current) | Prepaid expenses and other | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 29 | |
Foreign exchange contracts (current) | Other accrued liabilities | — |
| — |
| 196 |
| | — |
| 79 |
| 1,262 |
| Foreign exchange contracts (current) | Other accrued liabilities | — | | | — | | | — | | | — | | | 1 | | | 10 |
| Total | | $ | 23 |
| $ | — |
|
| | $ | 7 |
| $ | 79 |
|
| Total | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | |
Refer to Financial Note 21,16, “Fair Value Measurements,” for more information on these recurring fair value measurements.
16. Fair Value Measurements McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| |
21. | 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 participantsThe Company measures certain assets and liabilities at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliabilityin accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and preferred use,Disclosures. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value 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, orsignificant other inputs that are observable or can be corroborated by observable market data.market-based inputs.
Level 3 - Valuations based onsignificant unobservable inputs for which little or no market data exists and requires considerable assumptions that are both significant to the fair value measurementmeasurement.
Assets and unobservable.Liabilities Measured at Fair Value on a Recurring Basis
Cash and cash equivalents at March 31, 2022 and 2021 included investments in money market funds of $981 million and $1.6 billion, respectively, which are reported at fair value. The fair value of money market funds was determined using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature. Fair values for the Company’s marketable securities were not material at March 31, 2022 and 2021.
Fair values of the Company’s interest rate swaps and foreign currency forward contracts were determined using observable inputs from available market information, including quoted interest rates, foreign currency exchange rates, and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note 15, “Hedging Activities,” for fair value and other information on the Company’s derivatives including interest rate swaps, forward foreign currency contracts, and cross-currency swaps.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company holds investments in equity securities of U.S. growth stage companies that address both current and emerging business challenges in the healthcare industry and which had carrying values of $346 million and $269 million at March 31, 2022 and 2021, respectively. These investments primarily consist of equity securities without readily determinable fair values and are included in “Other non-current assets” in the Consolidated Balance Sheets. During 2022 and 2021, certain of the Company’s investments in equity securities without readily determinable fair values experienced transactions which resulted in changes in the observable price of those securities. Additionally, in 2021, certain of the Company’s investments in equity securities were converted into shares of public common stock through initial public offerings and an acquisition. The Company exited most of its investments in publicly traded shares in the fourth quarter of 2021. Net gains related to the Company’s investments in these equity securities were approximately $98 million and $133 million, respectively, for the years ended March 31, 2022 and 2021. These net gains were recorded in “Other income, net” in the Consolidated Statements of Operations. The carrying value of publicly traded investments was determined using quoted prices for identical investments in active markets and are considered to be Level 1 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company’s assets and liabilities are also subject to nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges, including long-lived assets associated with the Company’s restructuring initiatives as discussed in more detail in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net.”
At March 31, 20162022, the assets and 2015,liabilities associated with the E.U. disposal group and U.K. disposal group classified as held for sale were measured at the lower of carrying value or fair value less costs to sell, as discussed in more detail in Financial Note 2, “Held for Sale." Additionally, at March 31, 2022, assets measured at fair value on a nonrecurring basis included certain long-lived assets within the International segment related to the Company’s operations in Denmark and its retail pharmacy businesses in Canada, as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net.”
At March 31, 2021, assets measured at fair value on a nonrecurring basis included long-lived assets of the Company’s International segment and its Europe Retail Pharmacy reporting unit within the International segment. Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges, Net” and Financial Note 11, “Goodwill and Intangible Assets, Net,” for more information.
The aforementioned investments in equity securities of U.S. growth stage companies include the carrying value of investments without readily determinable fair values, which were determined using a measurement alternative and are recorded at cost less impairment, plus or minus any changes in observable price from orderly transactions of the same or similar security of the same issuer. 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.
There were no other liabilities measured at fair value on a nonrecurring basis at March 31, 2022 and 2021.
Other Fair Value Disclosures
At March 31, 2022 and 2021, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings, and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.
OurThe Company determines the fair value of commercial paper using quoted prices in active markets for identical instruments, which are considered Level 1 inputs under the fair value measurements and disclosure guidance.
The Company’s long-term debt is carriedalso recorded at amortized cost. The carrying amountsvalue and estimated fair valuesvalue of these liabilities were $8.1 billion and $8.6 billion at March 31, 2016 and $9.7 billion and $10.4 billion at March 31, 2015. the Company’s long-term debt was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 | | |
| (In millions) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | |
| Long-term debt, including current maturities | $ | 5,879 | | | $ | 5,999 | | | $ | 7,148 | | | $ | 7,785 | | | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The estimated fair value of ourthe Company’s long-term debt was determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.
Assets Measured at Goodwill
Fair Value on a Recurring Basis
Our financial assets measured at fair value on a recurring basis consistassessments of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2016 | | March 31, 2015 |
(In millions) | Level 1 | Level 2 | Level 3 | Total | | Level 1 | Level 2 | Level 3 | Total |
| Cash Equivalents | | | | | | | | | |
Money market funds (1) | $ | 2,413 |
| $ | — |
| $ | — |
| $ | 2,413 |
| | $ | 2,880 |
| $ | — |
| $ | — |
| $ | 2,880 |
|
Time deposits (2) | — |
| — |
| — |
| — |
| | — |
| 94 |
| — |
| 94 |
|
Repurchase agreements (2) | — |
| — |
| — |
| — |
| | 1,243 |
| — |
| — |
| 1,243 |
|
| Total cash equivalents | $ | 2,413 |
| $ | — |
| $ | — |
| $ | 2,413 |
| | $ | 4,123 |
| $ | 94 |
| $ | — |
| $ | 4,217 |
|
(1) Gross unrealized gainreporting unit and losses were not material for the years ended March 31, 2016 and 2015 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 identicalreporting unit's net assets, which are performed for goodwill impairment tests, are considered a Level 13 measurement due to the significance of unobservable inputs underdeveloped using company-specific information. The Company considered a market approach as well as an income approach using a DCF model to determine the fair value measurements and disclosure guidance. Fair values for our marketable securities were not material at March 31, 2016 and 2015.
Fair values of our forward foreign currency contracts were determined using quoted market prices of similar instruments in an active market and other observable inputs from available market information. Fair values of our foreign currency swaps were determined using quoted foreign currency exchange rates and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future.each reporting unit.
Refer to Financial Note 20, “Hedging Activities,11, “Goodwill and Intangible Assets, Net,” for fair valuemore information regarding goodwill impairment charges recorded for certain reporting units during 2021.
Long-lived Assets
The Company utilizes multiple approaches including the DCF model and other information on our foreign currency derivatives including foreign currency forward contracts and swaps.
There were no transfers between Level 1, Level 2 or Level 3 ofmarket approaches for estimating the fair value hierarchy duringof intangible assets. The future cash flows used in the years ended March 31, 2016analysis are based on internal cash flow projections from its long-range plans and 2015.include significant assumptions by management. Accordingly, the fair value assessment of the long-lived assets is considered a Level 3 fair value measurement.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Assets Measured at Fair Value on a Nonrecurring Basis
We measureThe Company measures certain long-lived assets and goodwillintangible assets at fair value on a nonrecurring basis when they are deemed toevents occur that indicate an asset group may not be other-than-temporarily impaired.recoverable. If the costcarrying amount 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 valueasset group is less than cost and the financial outlook for the industry and location. Annot recoverable, 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 9, “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 Brazilian distribution business toamount by the excess over 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 inRefer to Financial Note 9, “Discontinued Operations,” during 2014, we recorded an $80 million non-cash pre-tax3, “Restructuring, Impairment, and after-tax impairment charge to reduceRelated Charges, Net” under 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 of the preliminary purchase offers received heading “Long-Lived Asset Impairments” for this business during 2014. Accordingly, the fair value measurement is classified as Level 3 in the fair value hierarchy.more information.
We lease facilities17. Financial Guarantees and equipment almost solely under operating leases. At March 31, 2016, 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:Warranties
|
| | | |
| (In millions) | Noncancelable Operating Leases |
| 2017 | $ | 363 |
|
| 2018 | 309 |
|
| 2019 | 252 |
|
| 2020 | 209 |
|
| 2021 | 168 |
|
| Thereafter | 669 |
|
Total minimum lease payments (1) | $ | 1,970 |
|
| |
(1) | Minimum lease payments have not been reduced by minimum sublease rentals of $45 million due under future noncancelable subleases.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Rental expense under operating leases was $433 million, $440 million and $298 million in 2016, 2015 and 2014. We recognize rent expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the lease. Deferred rent is recognized for the difference between the rent expense recognized on a straight-line basis and the payments made per the terms of the lease. Remaining terms for facilities leases generally range from one to fourteen years, while remaining terms for equipment leases range from one to eight years. Most real property leases contain renewal options (generally for five-year increments) and provisions requiring us to pay property taxes and operating expenses in excess of base period amounts. Sublease rental income was not material for 2016, 2015 and 2014.
| |
23. | Financial Guarantees and Warranties |
Financial Guarantees
We haveThe Company has agreements with certain of ourits customers’ financial institutions, mainlyprimarily in Canada and Europe,its International segment, under which we haveit has guaranteed the repurchase of ourits customers’ inventory or ourits customers’ debt in the event these customers are unable to meet their obligations to those financial institutions. For ourthe Company’s inventory repurchase agreements, among other requirements, inventories must be in a 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 generally range from one to twelve10 years and are primarily provided to facilitate financing for certain customers. The majority of ourthe Company’s customers’ debt guarantees are secured by certain assets of the customer. At March 31, 2016,2022, the maximum amounts of inventory repurchase guarantees and customers’ debt guarantees were $201$367 million and $139$84 million,, respectively, of which $1 million had been accrued.the Company has not accrued any material amounts. The expirations of these financial guarantees are as follows: $194$309 million,, $8 $45 million,, $10 $6 million,, $12 $15 million, and $12$12 million from 20172023 through 20212027, respectively, and $104$64 million thereafter.
At March 31, 2016, our2022, the Company’s banks and insurance companies have issued $142$214 million of standby letters of credit and surety bonds, which were issued on ourthe Company’s behalf mostlyprimarily related to ourits customer contracts and in order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, pension obligations in Europe, and ourits workers’ compensation and automotive liability programs. Additionally, at March 31, 2016, we have a commitment to contribute up to $4 million to a non-consolidated investment for building and equipment construction.
OurThe Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if ourits software products infringe a third party’s intellectual property rights. To date, we havethe Company has not incurred any material costs as a result of such indemnification agreements and havehas not accrued any liabilities related to such obligations.
In conjunction with certain transactions, primarily divestitures, wethe Company may provide routine indemnification agreements (such as retention of previously existing environmental, tax, and employee liabilities) whose terms vary in duration and often are not explicitly defined. Where appropriate, obligations for such indemnifications are recorded as liabilities. Because the amounts of these indemnification obligations often are not explicitly stated, the overall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we havethe Company has historically not made material payments as a result of these indemnification provisions.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Warranties
In the normal course of business, we providethe Company provides certain warranties and indemnification protection for ourits products and services. For example, we providethe Company provides warranties that the pharmaceutical and medical-surgical products we distributeit distributes are in compliance with the U.S. Food, Drug, and Cosmetic Act and other applicable laws and regulations. We haveIt has received the same warranties from ourits suppliers, which customarily are the manufacturers of the products. In addition, we havethe Company has indemnity obligations to ourits customers for these products, which have also been provided to us from ourits suppliers, either through express agreement or by operation of law.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.Consolidated Balance Sheets.
| |
24. | Commitments and Contingent Liabilities |
18. Commitments and Contingent Liabilities
In addition to commitments and obligations incurred in the ordinary course of business, we arethe Company is subject to variousa variety of claimsand legal proceedings, including claims withfrom customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulationsinvestigations, and other matters. The Company and its affiliates are parties to the legal claims and proceedings described below. The Company is vigorously defending itself against those claims and in those proceedings. Significant developments in those matters arising out ofare described below. If the normal conduct of our business. As described below, manyCompany is unsuccessful in defending, or if it determines to settle, any of these proceedings are at preliminary stages and many seek an indeterminate amountmatters, it may be required to pay substantial sums, be subject to injunction and/or be forced to change how it operates its business, which could have a material adverse impact on its financial position or results of damages.operations.
When a lossUnless otherwise stated, the Company is considered probable andunable to 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 possible loss may not be practicable based onfor the matters described below. Often, the Company is unable to determine that a loss is probable, or to reasonably estimate the amount of loss or a range of loss, for a claim because of the limited information available and the potential effecteffects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the contingency. Moreover, itclaim. Many of the matters described are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for such mattersclaims to be resolvedremain unresolved over many years, during which time relevant developments and new information must be reevaluatedyears. The Company reviews loss contingencies at least quarterly to determine bothwhether the likelihood of potential loss has changed and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable butcan make a reasonable estimate cannot be made, disclosure of the proceedingloss or range of loss. When the Company determines that a loss from a claim is provided.
Disclosureprobable and reasonably estimable, it records a liability for an estimated amount. The Company also is providedprovides disclosure when it is reasonably possible that a loss willmay be incurred or when it is reasonably possible that the amount of a loss will exceed its recorded liability. Amounts included within “Claims and litigation charges, net” in the recorded provision. We review allConsolidated Statement of Operations consist of estimated loss contingencies at least quarterlyrelated to determine whetheropioid-related litigation matters.
I. Litigation and Claims Involving Distribution of Controlled Substances
The Company and its affiliates have been sued as defendants in many cases asserting claims related to distribution of controlled substances. They have been named as defendants along with other pharmaceutical wholesale distributors, pharmaceutical manufacturers, and retail pharmacy chains. The plaintiffs in these actions have included state attorneys general, county and municipal governments, school districts, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. These actions have been filed in state and federal courts throughout the likelihoodU.S., and in Puerto Rico and Canada. They seek monetary damages and other forms of loss has changedrelief based on a variety of causes of action, including negligence, public nuisance, unjust enrichment, and to assess whether a reasonable estimatecivil conspiracy, as well as alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), state and federal controlled substances laws, and other statutes.
On July 21, 2021, the Company and the 2 other national pharmaceutical distributors (collectively “Distributors”) announced that they had negotiated a comprehensive proposed settlement agreement which, if all conditions were satisfied, would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities. On February 25, 2022, the Distributors determined that there was sufficient State and subdivision participation to proceed with an agreement ("Settlement") to settle a substantial majority of opioids-related lawsuits filed against the Distributors by U.S. states, territories, and local governmental entities. As previously disclosed, 46 of 49 eligible states and their participating subdivisions, as well as the District of Columbia and all eligible territories (collectively, “Settling Governmental Entities”), have agreed to join the Settlement. To date, over 98% of eligible political subdivisions that have brought opioid-related suits against the Company, as calculated by population under the agreement, have agreed to participate in the settlement or have had their claims addressed by state legislation.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Settlement became effective on April 2, 2022. If all conditions to the Settlement are satisfied, including the receipt of approval by relevant courts of consent decrees to dismiss the lawsuits, the Distributors would pay the Settling Governmental Entities up to approximately $19.5 billion over 18 years, with up to approximately $7.4 billion to be paid by the Company for its 38.1% portion. Under the Settlement, a minimum of 85% of the settlement payments must be used by state and local governmental entities to remediate the opioid epidemic. Most of the remaining percentage relates to plaintiffs’ attorneys’ fees and costs, and would be payable over a shorter time period. Under the Settlement, the Distributors will establish a clearinghouse to consolidate their controlled-substance distribution data, which will be available to the settling U.S. states to use as part of their anti-diversion efforts. The Settlement provides that the Distributors do not admit liability or wrongdoing and do not waive any defenses.
Before the effective date of the Settlement, the Company entered into separate settlement agreements with the states of New York, Ohio, Rhode Island, Texas, and Florida. These states intended to participate in the Settlement when it was finalized, and these agreements provided that each state and its participating subdivisions would receive a settlement consistent with their allocation under the comprehensive Settlement framework, as well as, in some cases, certain attorneys’ fees and costs. Now that the Settlement has become effective, these separate settlement agreements have become part of that broader agreement.
Three eligible states, Alabama, Oklahoma, and Washington, did not join the Settlement.
With respect to the claims of the Alabama attorney general, the Company has negotiated an agreement in principle under which the Company will pay $141 million in 10 equal annual installments and an additional approximately $33 million in attorney fees and costs to resolve the opioid-related claims of the state of Alabama and its subdivisions. On May 3, 2022, the Distributors announced an agreement with the attorney general of Washington to settle the claims of the state of Washington and its subdivisions. Under that agreement, Washington and its subdivisions would be paid up to $518 million, of which the Company’s portion would be 38.1% (or approximately $197 million), consistent with Washington’s allocation under the comprehensive framework, as well as certain additional attorneys’ fees and costs. The claims of the Oklahoma attorney general are pending in the District Court of Bryan County, Oklahoma (Case No. CJ-2020-84, 85, and 86), and trial is scheduled to begin in January 2023. The Company’s loss contingency accruals for these three states and their subdivisions reflect the amounts of these agreements in principle or, where there is no agreement in principle, amounts equivalent to what that state and its subdivisions would have been allocated under the framework of the Settlement.
The Company previously settled with the state of West Virginia, and West Virginia and its subdivisions were not eligible to participate in the comprehensive Settlement. Claims of various West Virginia subdivisions remain pending in both state and federal courts. Trial in the case of Cabell County and City of Huntington occurred in the U.S. District Court for the Southern District of West Virginia and concluded on July 28, 2021. The outcome of that trial is pending. The claims of certain other West Virginia subdivisions are pending in the federal Multi-district Litigation and before the state Mass Litigation Panel. On September 30, 2021, the Mass Litigation Panel issued an order scheduling a liability-only trial on the public nuisance claims of certain political subdivisions against the Distributors for July 5, 2022. The Company’s loss contingency accruals for the West Virginia subdivisions are reflected in the estimated liability for the opioid-related claims as of March 31, 2022.
With respect to the claims of Native American tribes, on September 28, 2021, the Company announced that the Distributors reached an agreement with the Cherokee Nation to pay approximately $75 million over 6.5 years to resolve opioid-related claims, of which the Company’s portion would be 38.1% (or, approximately $29 million). The Company has also negotiated a broad resolution of opioid-related claims brought by Native American tribes. Under the proposed agreement, which has been endorsed by the leadership committee of counsel representing the tribes, the Distributors would pay the Native American tribes other than the Cherokee Nation approximately $440 million over 6 years, of which the Company’s portion would be 38.1% (or, approximately $167 million). This broad resolution is contingent on the participation of a substantial majority of the Native American tribes that have brought opioid-related claims against the Distributors. Under these agreements, a minimum of 85% of the settlement payments must be used by the Native American tribes to remediate the opioid epidemic. The Company’s loss-contingency accruals for the Native American tribes reflect these amounts and are reflected in the estimated liability for the opioid-related claims as of March 31, 2022.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Although the Settlement terminated the substantial majority of opioid-related suits pending against the Company, a small number of subdivisions in participating states have opted not to participate in the comprehensive settlement, and other suits brought by subdivisions in non-participating states remain pending. The Company continues to prepare for trial in these pending matters and believes that it has valid defenses to the claims pending against it, and it intends to vigorously defend against all such claims if acceptable settlement terms are not achieved. The Company’s loss contingency accruals for these subdivisions are reflected in the estimated liability for the opioid-related claims consistent with what would be allocated under the framework of the settlement.
The Company has paid $157 million in payments to date associated with the Settlement and separate settlement agreements of opioid-related claims of participating states, subdivisions, and Native American tribes.
The Company’s estimated accrued liability for the opioid-related claims of governmental entities is as follows:
| | | | | | | | | | | | | | | |
| (In millions) | March 31, 2022 | | March 31, 2021 | | | | |
Current litigation liabilities (1) (2) | $ | 1,046 | | | $ | — | | | | | |
| Long-term litigation liabilities | 7,220 | | | 8,067 | | | | | |
| | | | | | | |
| Total litigation liabilities | $ | 8,266 | | | $ | 8,067 | | | | | |
(1)This amount, recorded in “Other accrued liabilities” in the Consolidated Balance Sheet, is the amount estimated to be paid prior to March 31, 2023.
(2)In light of the uncertainty of the timing of amounts that would be paid with respect to the charge, the charge was recorded in “Long-term litigation liabilities” in our Consolidated Balance Sheet as of March 31, 2021.
Consistent with the terms of the Settlement, the Company placed approximately $354 million into escrow on September 30, 2021. During the second half of 2022, the Company placed an additional net $41 million into escrow to reflect the participation of additional states, and as part of a separate agreement in principle with the Alabama attorney general. Those escrow amounts were presented as restricted cash within “Prepaid expenses and other” in our Consolidated Balance Sheet as of March 31, 2022. These amounts excluded the proportionate allocation under the Settlement for each non-participating state. The Settlement created a binding obligation to release the funds from escrow upon entry of consent judgments and establishment of a settlement administrator.
Although the vast majority of opioid claims have been brought by governmental entities in the U.S., the Company is also a defendant in cases brought in the U.S. by private plaintiffs, such as hospitals, health and welfare funds, third-party payors, and individuals, as well as 4 cases brought in Canada (3 by governmental or tribal entities and 1 by an individual). These claims, and those of private entities generally, are not included in the Settlement or in the charges recorded by the Company, described above. The Company believes it has valid legal defenses in these matters and intends to mount a vigorous defense. Trial is scheduled for July 18, 2022 in one such case brought by a group of individual plaintiffs in Glynn County, Georgia Superior Court. These plaintiffs seek to recover for damages allegedly arising from their family members’ abuse of prescription opioids. Poppell v. Cardinal Health, Inc. et al., CE19-00472. The Company has not concluded a loss is probable in any of these matters; nor is any possible loss or range of loss can be made. As discussed above, developmentreasonably estimable.
Because of a meaningful estimate of loss or a range of potential lossthe many uncertainties associated with the remaining opioid-related litigation matters, the Company 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 possiblenot able to reasonably estimate athe upper or lower ends of the range of potentialultimate possible 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. Shouldall opioid-related litigation matters. An adverse judgment or negotiated resolution in 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 ourthe Company’s financial position, cash flows or liquidity, or results of operations.
I. Litigation and Claims
On September 7, 2007, McKesson Specialty Arizona Inc.August 8, 2018, the Company was served with a complaint filed in the New York Supreme Court, New York County by PSKW, LLC, alleging that McKesson Specialty Arizona misappropriated trade secrets and confidential information in launching its LoyaltyScript® program, PSKW, LLC v. McKesson Specialty Arizona Inc., Index No. 602921/07. PSKW later amended its complaint twice to add additional, but related claims. The trial presentation of evidence has completed. The parties are engaged in post-trial briefing.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On April 16, 2013, the Company’s wholly-owned subsidiary, U.S. Oncology, Inc. (“USON”), was served with a third amended qui tam complaint filedpending 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,Massachusetts alleging that USON solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute,Company violated the federal False Claims Act and various state false claims statutes,acts due to the alleged failure of the Company and seeking damages, treble damages, civil penalties, attorneys’ fees and costsother defendants to report providers who were engaged in diversion of suit, all in unspecified amounts, controlled substances. United States ex rel. PiacentileManchester v. Amgen Inc.Purdue Pharma, L.P., 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.Case No. 1-16-cv-10947. On February 5, 2013,August 22, 2018, the United States filed a motion to dismiss the claims pled against Amgen. On September 30, 2013,dismiss. The relator died, and on February 25, 2019 the court grantedentered an order staying the United States’ motion to dismiss. Onmatter until a proper party can be substituted, and providing that if no party is substituted within 90 days of February 25, 2019, the case would be dismissed. In April 4, 2014, USON2019, the widow of the relator filed a motion to dismisssubstitute their daughter as the relator; the United States and defendants opposed this substitution request. The motion remains pending and the case remains stayed.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In December 2019, the Company was served with 2 qui tam complaints filed by the same 2 relators alleging violations of the federal False Claims Act, the California False Claims Act, and the California Unfair Business Practices statute based on alleged predicate violations of the Controlled Substances Act and its implementing regulations, United States ex rel. Kelley, 19-cv-2233, and State of California ex rel. Kelley, CGC-19-576931. The complaints seek relief including treble damages, civil penalties, attorney fees, and costs in unspecified amounts. On February 16, 2021, the court in the federal action dismissed the second amended complaint with prejudice, and the relators appealed the dismissal to the U.S. Court of Appeals for the Ninth Circuit, which affirmed the dismissal on March 10, 2022. On June 28, 2021, the court in the state action dismissed the complaint with prejudice, and the relators appealed the dismissal to the Superior Court of California, County of San Francisco.
Insurance Coverage Litigation
NaN cases pending in the Northern District of California were filed against McKesson by its liability umbrella insurers about policies they issued to the Company for the period 1999-2017, AIU Insurance Company and National Union Fire Insurance Company of Pittsburgh, Pa. (together "AIG") and ACE Property and Casualty Insurance Company ("ACE"). AIU Insurance Company et al. v. McKesson Corporation, No. 3:20-cv-07469 (N.D. Cal.) was initiated by AIG in the Northern District of California on October 23, 2020. Ace Property and Casualty Insurance Company v. McKesson Corporation et al., No. 3:20-cv-09356 (N.D. Cal.) was brought by ACE in California state court on November 2, 2020, and was removed by McKesson to federal court, transferred to the Northern District of California, and designated as related to the AIU action. AIG and ACE are seeking declarations that they have no duty to defend or indemnify McKesson in the thousands of lawsuits pending in federal and state courts related to opioids. In both actions, McKesson has asserted claims pled against it. Theunder the AIG and ACE policies seeking declarations and damages for past and future defense and indemnity costs. On April 5, 2022, the court hasissued an order granting partial summary judgment to the insurers that the Company’s defense costs in certain opioid-related litigation were not yet ruled on USON’s motion.covered by two of the insurance policies.
II. Other Litigation and Claims
On May 17, 2013, the Company was served with a complaint filed in the United States District Court for the Northern District of California by True Health Chiropractic Inc., alleging that McKesson sent unsolicited marketing faxes in violation of the Telephone Consumer Protection Act of 1991 (“TCPA”), as amended by the Junk Fax Protection Act of 2005 or JFPA, True Health Chiropractic Inc., et al. v. McKesson Corporation, et al., No. CV-13-02219 (HG). Plaintiffs seek statutory damages from $500 to $1,500 per violation plus injunctive relief. True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. True Health Chiropractic and McLaughlin Chiropractic Associates purport to represent all persons who were sent marketingBoth plaintiffs alleged that defendants violated the TCPA by sending faxes that did not contain proper opt-out notices and from whomregarding how to opt out of receiving the Company and McKesson Technologies, Inc. did not obtain prior express permission from June 2009 tofaxes. On August 13, 2019, the present. In July 2015, True Health Chiropractic and McLaughlin Chiropractic Associates filed acourt granted plaintiffs’ renewed motion for class certification. The court has not yet ruled on True Health ChiropracticAfter class notice and McLaughlin Chiropractic Associates’ motion. In August 2015, McKesson was granted a waiver from the opt-out requirement fromperiod, 9,490 fax numbers remain in the Federal Communications Commission (“FCC”). Whetherclass, representing 48,769 faxes received. On October 8, 2021, the FCC hascourt de-certified the authorityclass citing the plaintiffs lacked class-wide proof identifying the manner of receipt, thus leaving two named Plaintiffs remaining in the case. On April 27, 2022, the Court found that the named Plaintiffs had failed to grant such a waiver is currently on appeal beforemeet their burden to show Defendants willfully or knowingly violated the United States CircuitTCPA and therefore were not entitled to treble damages. The Court found McKesson liable for statutory damages in the amount of Appeals for the District of Columbia Circuit.$6,500.
On May 21, 2014, four hedge funds managed by Magnetar Capital filed a complaint against Celesio Holdings (formerly known as “Dragonfly GmbH & Co KGaA”), a wholly-owned subsidiary of the Company, in a German court in Frankfurt, Germany, alleging that Celesio Holdings violated German takeover law in connection withApril 16, 2013, the Company’s acquisition of Celesio by paying more to some holders of Celesio’s convertible bonds than it paid to the shareholders of Celesio’s stock, Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA, No. 3- 05 O 44/14. On December 5, 2014, the court dismissed Magnetar’s lawsuit. Magnetar subsequently appealed that ruling. On January 19, 2016, the Appellate Court reversed the lower court’s ruling and entered judgment against Celesio Holdings. On February 22, 2016, Celesio Holdings filed a notice of appeal.
On June 17, 2014,subsidiary, U.S. Oncology, Specialty, LPInc. (“USOS”USON”), was served with a fifththird amended qui tam complaint filed in July 2008 in the United States District Court for the Eastern District of New York by a relator2 relators, purportedly on behalf of the United States, 21 states and the District of Columbia, against USOS, among others,USON and 5 other defendants, alleging that USOSUSON 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. HanksPiacentile v. Amgen Inc., et al., CV-08-03096CV 04-3983 (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 aSeptember 30, 2013, the court granted the United States’ motion to dismiss the claims pled against Amgen. On September 17, 2018, the court granted USON’s motion to dismiss the claims pled against it, andwith leave to amend. On November 16, 2018, the hearing occurredrelators filed a fourth amended complaint; that complaint was dismissed with prejudice on October 7, 2014. The court has not yet ruled on USOS’s motion.
On January 26, 2016,December 1, 2021. Plaintiffs filed a notice of appeal with the Company was served with an amended complaint filed in the Circuit Court of Boone County, West Virginia, by three relators, including the Attorney General of West Virginia, purportedly on behalf of the State of West Virginia, alleging that since 2007, the Company has oversupplied controlled substances to West Virginia and failed to report suspicious orders of controlled substances in violation of the West Virginia Controlled Substances Act, the West Virginia Consumer Credit and Protection Act, as well as common law claims for negligence, public nuisance and unjust enrichment, and seeking injunctive relief, monetary damages and civil penalties, State of West Virginia ex rel. Morrisey v. McKesson Corporation, Civil Action No.: 16-C-1. On February 23, 2016, the Company removed this action to the United States District CourtAppeals for the Southern District of West Virginia (Civil Action No.: 2:16-cv-01772). On March 21, 2016, the Company filed a motion for judgmentSecond Circuit on the pleadings. On March 24, 2016, the State of West Virginia filed a motion to remand the matter to state court. The court has not yet ruled on either motion.
January 4, 2022.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On January 28, 2016, the CompanyJune 17, 2014, U.S. Oncology Specialty, LP (“USOS”) was served with a fifth amended qui tam lawsuit, complaint filed in the United States District Court for the SouthernEastern District of TexasNew York by a relator purportedly on behalf of the United States, 29 states and the District of Columbia, against the Company and two other defendants, alleging that the defendants reported materially inaccurate data to manufacturers, which caused manufacturers to submit inaccurate Average Manufacturer Prices (“AMPs”) to the Centers for MedicareUSOS, among others, solicited and Medicaid Servicesreceived illegal “kickbacks” from January 1, 2004 to the present,Amgen in violation of the Anti-Kickback Statute, the federal False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees interest and costs of suit, all in unspecified amounts, United States ex rel. GreenHanks v. AmerisourceBergen,Amgen, Inc., et al., 4:15-CV-00379. The United StatesCV-08-03096 (SJ). Previously, the U.S. declined to intervene in the case as to all allegations and defendants. defendants except for Amgen. On September 17, 2018, the court granted USOS’s motion to dismiss. Following the relator’s appeal, the United States Court of Appeals for the Second Circuit vacated the district court’s order and remanded the suit to the district court, directing it to consider the question of whether the suit should be dismissed for lack of jurisdiction. The district court granted the relator leave to amend the complaint for a seventh time. The relator filed the seventh amended complaint on November 30, 2020.
On April 18, 2016,3, 2018, a second amended qui tam complaint was filed in the United States District Court for the Eastern District of New York by a relator, purportedly on behalf of the United States, 30 states, the District of Columbia, and 2 cities against McKesson Corporation, McKesson Specialty Care Distribution Corporation, McKesson Specialty Distribution LLC, McKesson Specialty Care Distribution Joint Venture, L.P., Oncology Therapeutics Network Corporation, Oncology Therapeutics Network Joint Venture, L.P., US Oncology, Inc. and US Oncology Specialty, L.P., alleging that from 2001 through 2010 the defendants repackaged and sold single-dose syringes of oncology medications in a manner that violated the federal False Claims Act and various state and local false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts, United States ex rel. Omni Healthcare Inc. v. McKesson Corporation, et al., 12-CV-06440 (NG). The United States and the named states have declined to intervene in the case. On October 15, 2018, the Company along with the other defendants, filed a joint motion to dismiss the complaint as to all named defendants. On February 4, 2019, the court granted the motion to dismiss in part and denied it in part, leaving the Company and Oncology Therapeutics Network Corporation as the only remaining defendants in the case. On December 9, 2019, the United States District Court for the Eastern District of New York ordered the unsealing of another complaint filed by the same relator, alleging the same misconduct and seeking the same relief with respect to US Oncology, Inc., purportedly on behalf of the same government entities, United States ex rel. Omni Healthcare, Inc. v. US Oncology, Inc., 19-cv-05125. The United States and the named states declined to intervene in the case.
The Company is a defendant in an amended complaint filed on June 15, 2018 in a case pending in the United States District Court for the Southern District of Illinois alleging that the Company’s subsidiary, McKesson Medical-Surgical Inc., among others, violated the Sherman Act by restraining trade in the sale of safety and conventional syringes and safety IV catheters. Marion Diagnostic Center, LLC v. Becton, Dickinson, et al., No. 18:1059. The action is filed on behalf of a purported class of purchasers, and seeks treble damages and further relief, all in unspecified amounts. On July 20, 2018, the defendants filed a motion to dismiss. On November 30, 2018, the district court granted the motion to dismiss, and dismissed the complaint with prejudice. On December 27, 2018, plaintiffs appealed the order to the United States Court of Appeals for the Seventh Circuit. On March 5, 2020, the United States Court of Appeals for the Seventh Circuit vacated the district court’s order, and ruled that dismissal was appropriate on alternative grounds. The case was remanded to the district court to allow the plaintiffs an opportunity to amend their complaint. Plaintiffs filed an amended complaint on August 21, 2020. Defendants filed a motion to dismiss the amended complaint, which the district court granted on March 15, 2021. Plaintiffs appealed the order to the United States Court of Appeals for the Seventh Circuit, which affirmed the district court’s dismissal on March 18, 2022.
On December 30, 2019, a group of independent pharmacies and a hospital filed a purported class action complaint alleging that the Company and other distributors violated the Sherman Act by colluding with manufacturers to restrain trade in the sale of generic drugs. Reliable Pharmacy, et al. v. Actavis Holdco US, et al., No. 2:19-cv-6044; MDL No. 16-MD-2724. The complaint seeks relief including treble damages, disgorgement, attorney fees, and costs in unspecified amounts.
On December 12, 2018, the Company received a purported class action complaint in the United States District Court for the Northern District of California, alleging that McKesson and 2 of its former officers, CEO John Hammergren and CFO James Beer, violated the Securities Exchange Act of 1934 by reporting profits and revenues from 2013 until early 2017 that were false and misleading, due to an alleged undisclosed conspiracy to fix the prices of generic drugs. Evanston Police Pension Fund v. McKesson Corporation, No. 3:18-06525. The complaint seeks relief including damages, attorney fees, and costs in unspecified amounts. On February 8, 2019, the court appointed the Pension Trust Fund for Operating Engineers as the lead plaintiff. On April 10, 2019, the lead plaintiff filed an amended complaint that added insider trading allegations against defendant Hammergren. On April 8, 2021, the court granted plaintiff’s motion for class certification.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In July 2015, The Great Atlantic & Pacific Tea Company (“A&P”), a former customer of the Company, filed for reorganization in bankruptcy under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court for the Southern District of New York. In re The Great Atlantic & Pacific Tea Company, Inc., et al., Case No. 15-23007. A suit filed in 2017 against the Company in this bankruptcy case seeks to recover alleged preferential transfers. The Official Committee of Unsecured Creditors on behalf of the bankruptcy estate of The Great Atlantic & Pacific Tea Company, Inc., et al. v. McKesson Corporation d/b/a McKesson Drug Co., Adv. Proc. No. 17-08264.
In October 2019, the Company’s subsidiary NDCHealth Corporation dba RelayHealth (“RelayHealth”) was served with 3 purported class action complaints filed in the United States District Court for the Northern District of Illinois. The complaints allege that RelayHealth violated the Sherman Act by entering into an agreement with co-defendant Surescripts, LLC not to compete in the electronic prescription routing market, and by conspiring with Surescripts, LLC to monopolize that market, Powell Prescription Center, et al. v. Surescripts, LLC, et al., No. 1:19-cv-06627; Intergrated Pharmaceutical Solutions LLC v. Surescripts, LLC, et al., 1:19-cv-06778; Falconer Pharmacy, Inc. v. Surescripts LLC, et al., No. 1:19-cv-07035. In November 2019, 3 similar complaints were filed in the United States District Court for the Northern District of Illinois. Kennebunk Village Pharmacy, Inc. v. SureScripts, LLC, et al., 1:19-cv-7445; Whitman v. SureScripts, LLC et al., No. 1:19-cv-7448; BBK Global Corp. v. SureScripts, LLC et al., 1:19-cv-7640. In December 2019, the 6 actions were consolidated in the Northern District of Illinois. The complaints seek relief including treble damages, attorney fees, and costs. Plaintiffs and RelayHealth reached an agreement in June 2020 to resolve the class action lawsuits and RelayHealth paid into escrow an amount not material in the context of the Company’s overall financial results. The settlement does not include any admission of liability, and RelayHealth expressly denies wrongdoing. The Court granted Plaintiffs’ motion for final approval of the settlement on February 24, 2022.
In July 2020, the Company was served with a first amended qui tam complaint filed in the United States District Court for the Southern District of New York by a relator on behalf of the U.S., 27 states and the District of Columbia against McKesson Corporation, McKesson Specialty Distribution LLC, and McKesson Specialty Care Distribution Corporation, alleging that defendants violated the Anti-Kickback Statute, federal False Claims Act, and various state false claims pled against them.statutes by providing certain business analytical tools to oncology practice customers, United States ex rel. Hart v. McKesson Corporation, et al., 15-cv-00903-RA. The U.S. and the named states have declined to intervene in the case. The complaint seeks relief including damages, treble damages, civil penalties, attorney fees, and costs of suit, all in unspecified amounts. On May 5, 2022, the district court granted the Company’s motion to dismiss the complaint, but granted the plaintiff leave to amend the complaint.
II.III. Government Subpoenas and Investigations
From time-to-time,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.settlements of claims against the Company. The Company responds to these requests in the ordinary course of business. The following are examples of the type of subpoenas or requests the Company receives from time to time.
In May 2017 and August 2018, respectively, the Company was served with 2 separate Civil Investigative Demands by the U.S. Attorney’s Office for the Eastern District of New York relating to the certification the Company obtained for 2 software products under the U.S. Department of Health and Human Services’ Electronic Health Record Incentive Program.
In April and June 2019, the United States Attorney’s Office for the Eastern District of New York served grand jury subpoenas seeking documents related to the Company’s anti-diversion policies and procedures and its distribution of Schedule II controlled substances. The Company believes the subpoenas are part of a broader investigation by that office into pharmaceutical manufacturers’ and distributors’ compliance with the Controlled Substances Act and related statutes.
In January 2020, the United States Attorney’s Office for the District of Massachusetts served a Civil Investigative Demand on the Company seeking documents related to certain discounts and rebates paid to physician practice customers.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On November 21, 2016, the Belgian Competition Authority carried out inspections at the premises of several Belgian wholesalers, including Belmedis SA, which was subsequently acquired by the Company. Pharma Belgium NV was also part of the investigation. The Company resolved this matter in April 2022 by paying fines not material in the context of the Company’s overall financial results that had been fully reserved for in the third quarter of 2022.
On May 19, 2021, the Norwegian Competition Authority carried out an inspection of Norsk Medisinaldepot AS regarding its and its competitors alleged sharing of competitively sensitive information.
In June 2021, the United States Department of Justice served a Civil Investigative Demand on the Company seeking documents related to distribution arrangements for ophthalmology products.
IV. State Opioid Statutes
Legislative, regulatory, or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that it may not be able to predict. For example, in April 2018, the fourth quarterState of 2015,New York adopted the Opioid Stewardship Act (the “OSA”) which required the creation of an aggregate $100 million annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids in New York. The initial surcharge payment would have been due on January 1, 2019 for opioids sold or distributed during calendar year 2017. On July 6, 2018, the Healthcare Distribution Alliance filed a lawsuit challenging the constitutionality of the law and seeking an injunction against its enforcement. On December 19, 2018, the U.S. District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing the State of New York from enforcing the law. The State appealed that decision. On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision on procedural grounds. The Company reachedhas accrued a $50 million pre-tax charge ($37 million after-tax) as its estimated share of the OSA surcharge for calendar years 2017 and 2018. This OSA provision was recognized in “Selling, distribution, general, and administrative expenses” in the Consolidated Statement of Operations for the year ended March 31, 2021 and in “Other accrued liabilities” in the Consolidated Balance Sheet as of March 31, 2021. The State of New York adopted an agreementexcise tax on sales of opioids in principlethe State, which became effective July 1, 2019. The law adopting the excise tax made clear that the OSA does not apply to sales or distributions occurring after December 31, 2018. The Healthcare Distribution Alliance filed a petition for panel rehearing, or, in the alternative, for rehearing en banc with the Drug Enforcement Administration (“DEA”), DepartmentU.S. Court of Justice (“DOJ”)Appeals for the Second Circuit; that petition was denied on December 18, 2020. On February 12, 2021, the Court of Appeals for the Second Circuit granted a motion by the Healthcare Distribution Alliance to stay its mandate pending the filing and variousdisposition of a petition for writ of certiorari before the U.S. Attorney’s officesSupreme Court. That petition was denied on October 4, 2021. In December 2021, McKesson paid $26 million for the assessment for calendar year 2017 while reserving all rights to settle all potential administrative and civil claims relating to investigations aboutchallenge 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 termsconstitutionality 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.assessment.
III.V. 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 five5 sites where it, or entities acquired by it, formerly conducted operations and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation.
Based on a determination by the Company’s environmental staff, in consultation with outside environmental specialists and counsel, the current estimate of the Company’s probable loss associated with the remediation costs for these five5 sites is $8.1$15 million, net of amounts anticipated from third parties. The $8.1$15 million is expected to be paid out between April 20162022 and March 2046.2052. The Company’sCompany has accrued for the estimated probable loss for these environmental matters has been entirely accrued for in the accompanying consolidated balance sheets.matters.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company has been designated as a Potentially Responsible Party (“PRP”) under the Superfund law for environmental assessment and cleanup costs as the result of its alleged disposal of hazardous substances at 1514 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 liabilityliabilities upon PRPs, as a practical matter, costs of these sites are typically shared with other PRPs. At one1 of these sites, the United States Environmental Protection Agency has selected a preferred remedy with an estimated cost of approximately $1.38$1.4 billion. It is not certain at this point in time what proportion of this estimated liability will be borne by the Company or by the numerous other PRPs.Company. Accordingly, the Company’s estimated probable loss at those 1514 sites is approximately $26$29 million, which has been entirely accrued for in the accompanying consolidated balance sheets.Consolidated Balance Sheets. However, it is possible that the ultimate costs of these matters may exceed or be less than the reserves.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
IV.VI. Value Added Tax Assessments
We operateThe Company operates in various countries outside the United StatesU.S. which collect value added taxes (“VAT”). The determination of the manner in which a VAT applies to ourthe Company’s foreign operations is subject to varying interpretations arising from the complex nature of the tax laws. We haveThe Company has received assessments for VAT which are in various stages of appeal. We disagreeThe Company disagrees with these assessments and believebelieves that we haveit has a strong legal argumentsargument to defend ourits 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 believethe Company believes the ultimate outcome of these matters will not have a material adverse effect on ourits financial position, cash flows or results of operations.
V. Average Wholesale Price (“AWP”) LitigationVII. Antitrust Settlements
Numerous lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. These lawsuits are typically brought as class actions. The Company has not been named a reserve relating to AWP public entity claims, which is reviewed at least quarterly and whenever events or circumstances indicate changes. We recorded $68 millionplaintiff in any of pre-tax charges relating to changesthese class action lawsuits, but has been a member of the class of those who purchased directly from the pharmaceutical manufacturers. Some of these class action lawsuits have settled in the Company’s AWP litigation reserve,past with the Company receiving proceeds, including accrued interest,$46 million, $181 million, and $22 million in 2014. All charges2022, 2021, and 2020, respectively, which were recordedincluded in operating expenses within our Distribution Solutions segment. Cash payments“Cost of $105 million were madesales” in 2014. At March 31, 2016 and 2015, the reserve for this matter was not material.Consolidated Statements of Operations.
VI.VIII. Other Matters
The Company is involved in various other litigation, governmental proceedings, and claims, not described above, that arise in the normal course of business. While it is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings, or claims, the Company believes, based on current knowledge and the advice of counsel, that such litigation, proceedings, and claims will not have a material impact on the Company’s financial position or results of operations.
19. Stockholders' Equity (Deficit)
Each share of the Company’s outstanding common stock is permitted one1 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”).Board.
In July 2015,2021, the quarterly dividend was raised from $0.24$0.42 to $0.28$0.47 per common share for dividends declared on or after such date until further action by the Board. Dividends were $1.08$1.83 per share in 2016, $0.962022, $1.67 per share in 20152021, and $0.92 per share$1.62 in 2014.2020. 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 combinationcombinations of such methods.methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including ourthe Company’s stock price, corporate and regulatory requirements, restrictions under ourthe Company’s debt obligations, and other market and economic conditions.
During the last three years, the Company’s share repurchases were transacted through both open market transactions and ASR programs with third-party financial institutions.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the share repurchase activity over the last three years is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Share Repurchases (1) |
| (In millions, except price per share data) | | Total Number of Shares Purchased (2) | | Average Price
Paid Per Share | | Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs |
| Balance, March 31, 2019 | | | | | | $ | 3,469 | |
| Shares repurchased - Open market | | 9.2 | | | $ | 144.68 | | | (1,334) | |
| Shares repurchased - May 2019 ASR | | 4.7 | | | $ | 127.68 | | | (600) | |
| Balance, March 31, 2020 | | | | | | 1,535 | |
| Shares repurchase authorization increase in 2021 | | | | | | 2,000 | |
Shares repurchased - Open market (3) | | 4.7 | | | $ | 160.33 | | | (750) | |
| Balance, March 31, 2021 | | | | | | 2,785 | |
Shares repurchased - May 2021 ASR | | 5.2 | | | $ | 193.22 | | | (1,000) | |
| Shares repurchased - Open market | | 4.6 | | | $ | 217.73 | | | (1,007) | |
| Shares repurchase authorization increase in 2022 | | | | | | 4,000 | |
Shares repurchased - February 2022 ASR (4) | | 4.8 | | | $ | 265.56 | | | (1,500) | |
| Balance, March 31, 2022 | | | | | | $ | 3,278 | |
|
| | | | | | | | | | |
| | Share Repurchases (1) |
| (In millions, except price per share data) | | Total Number of Shares Purchased (2) (3) | | Average Price Paid Per Share | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| Balance, March 31, 2013 | | | | | | $ | 340 |
|
| Shares repurchased | | — | | $ | — |
| | — |
|
| Balance, March 31, 2014 | | | | | | $ | 340 |
|
| Shares repurchased | | 1.5 | | $ | 226.55 |
| | (340 | ) |
| Balance, March 31, 2015 | | | | | | $ | — |
|
| Shares repurchase plans authorized | | | | | | |
| May 2015 | | | | | | 500 |
|
| October 2015 | | | | | | 2,000 |
|
| Shares repurchased | | 8.7 | | $ | 173.64 |
| | (1,504 | ) |
| Balance, March 31, 2016 | | | | | | $ | 996 |
|
| |
(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. |
In 2016, our(2)The number of shares purchased reflects rounding adjustments.
(3)Of the total dollar value, $8 million was accrued within “Other accrued liabilities” in the Company’s Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were transacted through both open market transactionsexecuted in late March and an ASR program with a third party financial institution. In 2015, all of our share repurchases were conducted through open market transactions. All share repurchases were funded with cash on hand.settled in early April.
In 2016, we repurchased 4.5 million of the Company’s shares for $854 million through open market transactions at an average price per share of $192.27. (4)In February 2016, we2022, the Company entered into an ASR program with a third partythird-party financial institution to repurchase $650 million$1.5 billion of the Company’s common stock. The average price paid per share and total number of shares purchased under this program are estimates based on the initial share purchase price and initial delivery of shares under an ASR agreement and may differ from the average price paid per share and total number of shares purchased under the ASR program was completed duringupon its final settlement in May 2022.
On March 9, 2020, the fourth quarter and we repurchased 4.2 million shares at an average price per share of $154.04. During 2016, weCompany completed the May 2015 share repurchase authorization. At March 31, 2016, $1.0 billion remained available for future authorized repurchasesSplit-off of its interest in the Change Healthcare JV. In connection with the Split-off, the Company distributed all 176.0 million outstanding shares of SpinCo common stock, which held all of the Company’s interests in the Change Healthcare JV, to participating holders of the Company’s common stock under the October 2015 authorization.
In 2016, we retired 115.5in exchange for 15.4 million or $7.8 billion byshares of McKesson stock, which are now held as treasury stock on the Company’s treasury shares previously repurchased. UnderConsolidated Balance Sheets. Following consummation of the applicable state law, these shares resume the statusexchange offer, on March 10, 2020, SpinCo merged with and into Change with each share of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excessSpinCo common stock converted into 1 share of share repurchase price overChange common stock, par value between additional paid-in capital$0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. See Financial Note 4, “Business Acquisitions and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $6.35 billion and $1.5 billion during 2016.
Divestitures,” for more information.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Other Comprehensive Income (Loss)
Information regarding other comprehensive income (loss) including noncontrolling interests and redeemable noncontrolling interests, net of tax, by component is as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
Foreign currency translation adjustments(1) | | | | | |
Foreign currency translation adjustments arising during period, net of income tax expense (benefit) of ($23), nil and nil (2) (3) | $ | 113 |
| | $ | (1,845 | ) | | $ | 9 |
|
Reclassified to income statement, net of income tax expense of nil, nil and 24(4) | — |
| | (10 | ) | | 44 |
|
| | 113 |
| | (1,855 | ) | | 53 |
|
| Unrealized gains (losses) on cash flow hedges | | | | | |
| Unrealized gains (losses) on cash flow hedges arising during period, net of income tax benefit of nil, nil and nil | 6 |
| | (13 | ) | | (6 | ) |
| Reclassified to income statement, net of income tax expense of nil, nil and nil | 3 |
| | 3 |
| | — |
|
| | 9 |
| | (10 | ) | | (6 | ) |
| |
|
| |
|
| |
|
|
| Changes in retirement-related benefit plans | | | | | |
Net actuarial gain (loss) and prior service credit (cost) arising during period, net of income tax expense (benefit) of $13, ($66) and $16 (5) | 23 |
| | (140 | ) | | 17 |
|
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of $18, $6 and $12 (6) | 30 |
| | 11 |
| | 22 |
|
| Foreign currency translation adjustments and other, net of income tax expense of nil, nil and nil | (3 | ) | | 4 |
| | (4 | ) |
| Reclassified to income statement, net of income tax expense of nil, nil, and $1 | — |
| | 1 |
| | 1 |
|
| | 50 |
| | (124 | ) | | 36 |
|
| |
|
| |
| |
|
| Other Comprehensive Income (Loss), net of tax | $ | 172 |
| | $ | (1,989 | ) | | $ | 83 |
|
| |
(1) | Foreign currency translation adjustments result from the conversion of non-U.S. dollar financial statements of our foreign subsidiaries into the Company’s reporting currency, U.S. dollars, and were primarily related to our foreign subsidiary, Celesio, in 2016 and 2015. |
| |
(2) | The 2016 net foreign currency translation gains of $113 million were primarily due to the recovery of the Euro against the U.S. dollar, partly offset by the weakening of the Canadian dollar and British pound sterling against the U.S. dollar during the period between April 1, 2015 and March 31, 2016. The 2015 foreign currency translation losses of $1,855 million were primarily due to the weakening of the Euro against U.S. dollar during the period between April 1, 2014 and March 31, 2015. |
| |
(3) | 2016 includes net foreign currency translation gains of $16 million and 2015 includes net foreign currency translations losses of $267 million attributable to noncontrolling and redeemable noncontrolling interests. |
| |
(4) | These net foreign currency losses were reclassified from accumulated other comprehensive income (loss) to discontinued operations within our consolidated statement of operations due to the sale of certain businesses. |
| |
(5) | The net gains of $4 million and net losses of $12 million attributable to noncontrolling and redeemable noncontrolling interests in 2016 and 2015. |
| |
(6) | Pre-tax amount was reclassified into cost of sales and operating expenses in the consolidated statements of operations. The related tax expense was reclassified into income tax expense in the consolidated statements of operations. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in ourthe Company’s accumulated other comprehensive income (loss) by component are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | | | | | |
| (In millions) | Foreign Currency Translation Adjustments, Net of Tax (1) | | Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax (2) | | Unrealized Gains (Losses) on Cash Flow Hedges,
Net of Tax | | Unrealized Gains (Losses) and Other Components of Benefit Plans, Net of Tax | | Total Accumulated Other Comprehensive Loss |
| Balance at March 31, 2019 | $ | (1,628) | | | $ | 53 | | | $ | (37) | | | $ | (237) | | | $ | (1,849) | |
| Other comprehensive income (loss) before reclassifications | (151) | | | 85 | | | 86 | | | 33 | | | 53 | |
Amounts reclassified to earnings and other (3) | — | | | — | | | — | | | 96 | | | 96 | |
| Other comprehensive income (loss) | (151) | | | 85 | | | 86 | | | 129 | | 149 | |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | 1 | | | — | | | — | | | 2 | | | 3 | |
| Other comprehensive income (loss) attributable to McKesson | (152) | | | 85 | | | 86 | | | 127 | | 146 | |
| Balance at March 31, 2020 | (1,780) | | | 138 | | | 49 | | | (110) | | | (1,703) | |
| Other comprehensive income (loss) before reclassifications | 312 | | | (175) | | | (36) | | | (2) | | | 99 | |
Amounts reclassified to earnings and other (4) | 47 | | | — | | | — | | | 24 | | | 71 | |
| Other comprehensive income (loss) | 359 | | | (175) | | | (36) | | | 22 | | | 170 | |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | (60) | | | (1) | | | — | | | 8 | | (53) | |
| Other comprehensive income (loss) attributable to McKesson | 419 | | | (174) | | | (36) | | | 14 | | 223 | |
| Balance at March 31, 2021 | (1,361) | | | (36) | | | 13 | | | (96) | | | (1,480) | |
| Other comprehensive income (loss) before reclassifications | (51) | | | 41 | | 18 | | 31 | | 39 | |
Amounts reclassified to earnings and other (5) | 71 | | | (1) | | | (4) | | | 10 | | 76 | |
| Other comprehensive income | 20 | | | 40 | | 14 | | 41 | | 115 | |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | 5 | | | (6) | | | — | | | — | | | (1) | |
| Other comprehensive income attributable to McKesson | 15 | | 46 | | 14 | | 41 | | 116 | |
| Exercise of put right by noncontrolling shareholders of McKesson Europe AG | (158) | | | — | | | — | | | (12) | | | (170) | |
| Balance at March 31, 2022 | $ | (1,504) | | | $ | 10 | | | $ | 27 | | | $ | (67) | | | $ | (1,534) | |
(1)Primarily results from the conversion of non-U.S. dollar financial statements of the Company’s operations in Europe and Canada into the Company’s reporting currency, U.S. dollars.
(2)Amounts before reclassifications recorded in 2022, 2021, and 2020 include gains (losses) of $73 million, $(118) million, and $39 million, respectively, related to net investment hedges from Euro-denominated notes and gains (losses) of $(4) million, $(119) million, and $76 million, respectively, related to net investment hedges from cross-currency swaps. These amounts are net of income tax benefit (expense) of $(23) million, $62 million, and $(30) million in 2022, 2021, and 2020, respectively.
|
| | | | | | | | | | | | | | | |
| (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, 2014 | $ | 168 |
| | $ | (11 | ) | | $ | (160 | ) | | $ | (3 | ) |
| Other comprehensive income (loss) before reclassifications | (1,845 | ) | | (13 | ) | | (136 | ) | | (1,994 | ) |
| Amounts reclassified to earnings | (10 | ) | | 3 |
| | 12 |
| | 5 |
|
| Other comprehensive income (loss) | $ | (1,855 | ) | | $ | (10 | ) | | $ | (124 | ) | | $ | (1,989 | ) |
| Less: amounts attributable to noncontrolling and redeemable interests | (267 | ) | | — |
| | (12 | ) | | (279 | ) |
| Other comprehensive income (loss) attributable to McKesson | $ | (1,588 | ) | | $ | (10 | ) | | $ | (112 | ) | | $ | (1,710 | ) |
| Balance at March 31, 2015 | $ | (1,420 | ) | | $ | (21 | ) | | $ | (272 | ) | | $ | (1,713 | ) |
| Other comprehensive income (loss) before reclassifications | 113 |
| | 6 |
| | 23 |
| | 142 |
|
| Amounts reclassified to earnings and other | — |
| | 3 |
| | 27 |
| | 30 |
|
| Other comprehensive income (loss) | $ | 113 |
| | $ | 9 |
| | $ | 50 |
| | $ | 172 |
|
| Less: amounts attributable to noncontrolling and redeemable interests | 16 |
| | — |
| | 4 |
| | 20 |
|
| Other comprehensive income (loss) attributable to McKesson | $ | 97 |
| | $ | 9 |
| | $ | 46 |
| | $ | 152 |
|
| Balance at March 31, 2016 | $ | (1,323 | ) | | $ | (12 | ) | | $ | (226 | ) | | $ | (1,561 | ) |
| | | | | |
26. | Related Party Balances and Transactions |
CelesioMcKESSON CORPORATION
FINANCIAL NOTES (Continued)
(3)Primarily reflects a reclassification of losses of $127 million, net of $33 million of income tax benefit, predominantly on the termination of the Company’s U.S. defined benefit pension plan from “Accumulated other comprehensive loss” to “Other income, net” in the Company’s Consolidated Statement of Operations.
(4)Primarily includes adjustments for amounts related to the contribution of the Company’s German pharmaceutical wholesale business to a joint venture, as discussed in more detail in Financial Note 2, “Held for Sale” and Financial Note 6, “Other Income, Net.” These amounts were included in the 2021 and 2020 calculation of charges to remeasure the assets and liabilities held for sale to fair value less costs to sell recorded within Selling, distribution, general, and administrative expenses in the Consolidated Statements of Operations.
(5)Primarily includes adjustments for amounts related to the sale of the Company’s Austrian business, as discussed in more detail in Financial Note 2, “Held for Sale.” These amounts were included in the 2022 calculation of charges to remeasure the assets and liabilities held for sale to fair value less costs to sell recorded within Selling, distribution, general, and administrative expenses in the Consolidated Statement of Operations.
20. Related Party Balances and Transactions
McKesson Europe has investments in pharmacies located across Europe that are accounted for under the equity-method. Celesioequity method. McKesson Europe maintains distribution arrangements with these pharmacies for the sale of related goods and services under which revenues of $112$137 million, $178 million, and $114$141 million are included in our consolidated statementthe Consolidated Statements of operations in 2016Operations for the years ended March 31, 2022, 2021, and 2015,2020, respectively, and receivables related to these transactions included in the Consolidated Balance Sheets were not material as of $8 millionMarch 31, 2022 and $9 million2021. Predominately all of these pharmacies were divested from the Company in the fourth quarter of 2022 as part of the completed sale of the Company’s Austrian business, while certain other remaining pharmacies are included in our consolidated balance sheetthe E.U. disposal group and U.K. disposal group. Refer to Financial Note 2, “Held for Sale,” for additional information.
In 2022, 2021, and 2020, the year endedCompany’s pharmaceutical sales to one of its equity method investees in the U.S. Pharmaceutical segment totaled $100 million, $111 million, and $60 million, respectively. Trade receivables related to these transactions from this investee were not material as of March 31, 20162022 and 2015.2021. During 2022, the Company’s investment in this investee was no longer accounted for using the equity method and is not considered a related party as of March 31, 2022.
Refer to Financial Note 4, “Business Acquisitions and Divestitures,” for information regarding related party balances and transactions with Change and the Change Healthcare JV.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We report our operations in two operatingCommencing with the second quarter of 2021, the Company began reporting under 4 reportable segments: McKesson DistributionU.S. Pharmaceutical, RxTS, Medical-Surgical Solutions, and International. Other, for retrospective periods presented, consists of the Company’s previous equity method investment in the Change Healthcare JV, which was split-off from McKesson Technology Solutions.in the fourth quarter of 2020. The organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments includedinclude the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluateThe Company evaluates the performance of ourits operating segments on a number of measures, including revenues and operating profit (loss) before interest expense and income taxes and results from discontinued operations.taxes. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.
The Distribution SolutionsU.S. Pharmaceutical segment distributes branded, generic, specialty, biosimilar and genericover-the-counter pharmaceutical drugs, and other healthcare-related products worldwide and provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers within the United States.products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. It also provides specialty pharmaceutical solutions for pharmaceutical manufacturers including offering multiple distribution channels and clinical trial access to our network of oncology physicians. Additionally, thisIn addition, the segment operates retail pharmacies in Europe and supports independent pharmacy networks within North America. It also sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
The McKesson Technology SolutionsRxTS segment delivers enterprise-wide clinical, patient care, financial, supply chain, strategic management softwareserves McKesson’s biopharma and life sciences partners and patients to address medication challenges for patients throughout their journeys. RxTS works across healthcare to connect pharmacies, providers, payers, and biopharma companies to deliver innovative access and adherence solutions as well as connectivity, outsourcingdesigned to benefit stakeholders and other services, including remote hostinghelp people get the medicine they need to live healthier lives. RxTS also offers third-party logistics and managed services,wholesale distribution support across various therapeutic categories and temperature ranges to healthcare organizations.
Corporate includes expenses associated with Corporate functions and projects andbiopharma customers throughout the results of certain investments. Corporate expenses are allocated to the operating segments to the extent that these items can be directly attributable to the segment.
product lifecycle.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Medical-Surgical Solutions segment provides medical-surgical supply distribution, logistics, and other services to healthcare providers, including physician offices, surgery centers, nursing homes, hospital reference labs, and home health care agencies. This segment offers more than 285,000 national brand medical-surgical products as well as McKesson’s own line of high-quality products through a network of distribution centers within the U.S.
The International segment includes the Company’s operations in Europe and Canada, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. The Company’s operations in Europe provide distribution and services to wholesale, institutional, and retail customers in 11 European countries where it owns, partners, or franchises with retail pharmacies and operates through two businesses: Pharmaceutical Distribution and Retail Pharmacy. The Company’s Canada operations deliver vital medicines, supplies, and information technology solutions throughout Canada and includes Rexall Health retail pharmacies. In 2022, the Company entered into agreements to sell the E.U. disposal group and U.K. disposal group, and completed the sale of its Austrian business. Refer to Financial Note 2, “Held for Sale,” for more information.
Other, for retrospective periods presented consists of the Company’s previous investment in the Change Healthcare JV, which was split-off from the Company in the fourth quarter of 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial information relating to ourthe Company’s reportable operating segments and reconciliations to the consolidated totals is as follows:
| | | | | | | | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2022 | | 2021 | | 2020 |
Segment revenues (1) | | | | | |
| U.S. Pharmaceutical | $ | 212,149 | | | $ | 189,274 | | | $ | 181,700 | |
| Prescription Technology Solutions | 3,864 | | | 2,890 | | | 2,705 | |
| Medical-Surgical Solutions | 11,608 | | | 10,099 | | | 8,305 | |
| International | 36,345 | | | 35,965 | | | 38,341 | |
| Total revenues | $ | 263,966 | | | $ | 238,228 | | | $ | 231,051 | |
| | | | | |
Segment operating profit (loss) (2) | | | | | |
U.S. Pharmaceutical (3) | $ | 2,879 | | | $ | 2,763 | | | $ | 2,745 | |
| Prescription Technology Solutions | 500 | | | 395 | | | 396 | |
Medical-Surgical Solutions (4) | 959 | | | 707 | | | 499 | |
International (5) | (968) | | | (37) | | | (161) | |
Other (6) | — | | | — | | | (1,113) | |
| Subtotal | 3,370 | | | 3,828 | | | 2,366 | |
Corporate expenses, net (7) | (1,073) | | | (8,645) | | | (973) | |
Loss on debt extinguishment (8) | (191) | | | — | | | — | |
| Interest expense | (178) | | | (217) | | | (249) | |
| Income (loss) from continuing operations before income taxes | $ | 1,928 | | | $ | (5,034) | | | $ | 1,144 | |
| | | | | |
Segment depreciation and amortization (9) | | | | | |
| U.S. Pharmaceutical | $ | 228 | | | $ | 211 | | | $ | 208 | |
| Prescription Technology Solutions | 82 | | | 87 | | | 85 | |
| Medical-Surgical Solutions | 129 | | | 130 | | | 136 | |
| International | 204 | | | 334 | | | 357 | |
| Corporate | 117 | | | 125 | | | 136 | |
| Total depreciation and amortization | $ | 760 | | | $ | 887 | | | $ | 922 | |
| | | | | |
Segment expenditures for long-lived assets (10) | | | | | |
| U.S. Pharmaceutical | $ | 137 | | | $ | 246 | | | $ | 109 | |
| Prescription Technology Solutions | 10 | | | 22 | | | 23 | |
| Medical-Surgical Solutions | 74 | | | 57 | | | 36 | |
| International | 177 | | | 212 | | | 218 | |
| Corporate | 137 | | | 104 | | | 120 | |
| Total expenditures for long-lived assets | $ | 535 | | | $ | 641 | | | $ | 506 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
Distribution Solutions (1) | | | | | |
| North America pharmaceutical distribution and services | $ | 158,469 |
| | $ | 143,711 |
| | $ | 123,929 |
|
| International pharmaceutical distribution and services | 23,497 |
| | 26,358 |
| | 4,485 |
|
| Medical-Surgical distribution and services | 6,033 |
| | 5,907 |
| | 5,648 |
|
| Total Distribution Solutions | 187,999 |
| | 175,976 |
| | 134,062 |
|
| | | | | | |
| Technology Solutions - products and services | 2,885 |
| | 3,069 |
| | 3,330 |
|
| Total Revenues | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
|
| | | | | | |
| Operating profit | | | | | |
Distribution Solutions (2) (4) | $ | 3,553 |
| | $ | 3,047 |
| | $ | 2,472 |
|
Technology Solutions (3) (4) | 519 |
| | 438 |
| | 448 |
|
| Total | 4,072 |
| | 3,485 |
| | 2,920 |
|
Corporate Expenses, Net (4) | (469 | ) | | (454 | ) | | (449 | ) |
| Interest Expense | (353 | ) | | (374 | ) | | (300 | ) |
| Income From Continuing Operations Before Income Taxes | $ | 3,250 |
| | $ | 2,657 |
| | $ | 2,171 |
|
| | | | | | |
Depreciation and amortization (5) | | | | | |
| Distribution Solutions | $ | 669 |
| | $ | 750 |
| | $ | 446 |
|
| Technology Solutions | 107 |
| | 156 |
| | 169 |
|
| Corporate | 109 |
| | 111 |
| | 120 |
|
| Total | $ | 885 |
| | $ | 1,017 |
| | $ | 735 |
|
| | | | | | |
Expenditures for long-lived assets (6) | | | | | |
| Distribution Solutions | $ | 306 |
| | $ | 301 |
| | $ | 179 |
|
| Technology Solutions | 15 |
| | 27 |
| | 47 |
|
| Corporate | 167 |
| | 48 |
| | 52 |
|
| Total | $ | 488 |
| | $ | 376 |
| | $ | 278 |
|
| | | | | | |
Revenues, net by geographic area (7) | | | | | |
| United States | $ | 158,255 |
| | $ | 142,810 |
| | $ | 122,426 |
|
| Foreign | 32,629 |
| | 36,235 |
| | 14,966 |
|
| Total | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
|
(2)Segment operating profit (loss) includes gross profit, net of total operating expenses, as well as other income (expense), net, for the Company’s reportable segments. For retrospective periods presented, operating loss for Other reflects equity earnings and charges from the Company’s previous equity method investment in the Change Healthcare JV, which was split-off from McKesson in the fourth quarter of 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(3)The Company’s U.S. Pharmaceutical segment’s operating profit for 2022, 2021, and 2020 includes credits of $23 million, $38 million, and $252 million, respectively, related to the LIFO method of accounting for inventories. Operating profit for 2022, 2021, and 2020 also includes $46 million, $181 million, and $22 million, respectively, of cash receipts for the Company’s share of antitrust legal settlements. In addition, operating profit for 2021 includes a charge of $50 million recorded in connection with the Company’s estimated liability under the State of New York’s OSA, as further discussed in Financial Note 18, “Commitments and Contingent Liabilities.”
| |
(1) | Revenues derived from services represent less than 2% of this segment’s total revenues.
|
| |
(2) | Distribution Solutions operating profit for the year ended March 31, 2016, 2015, and 2014 include $244 million, $337 million, and $311 million in pre-tax charges related to our last-in, first-out (“LIFO”) method of accounting for inventories. LIFO expense was less in 2016 primarily due to lower net price increases. For the year ended March 31, 2016 includes $76 million of net cash proceeds representing our share of net settlements of antitrust class action lawsuits as well as a pre-tax gain of $52 million recognized from the sale of our ZEE Medical business.
|
| |
(3) | Technology Solutions operating profit for the year ended March 31, 2016 includes a pre-tax gain of $51 million recognized from the sale of our nurse triage business, and for year ended March 31, 2015 includes a non-cash pre-tax charge of $34 million related to the retained workforce business within our International Technology business.
|
| |
(4) | During the fourth quarter of 2016, the Company approved the Cost Alignment Plan to reduce its operating expenses and recorded pre-tax restructuring charges of $229 million. Pre-tax charges were recorded as follows: $161 million, $51 million and $17 million within our Distribution Solutions segment, Technology Solutions segment and Corporate.
|
| |
(5) | Amounts primarily include amortization of acquired intangible assets purchased in connection with business acquisitions, capitalized software held for sale and capitalized software for internal use. |
| |
(6) | (4)The Company’s Medical-Surgical Solutions segment’s operating profit for 2022 and 2021 includes inventory charges of $164 million and $136 million, respectively, on certain PPE and other related products. (5)The Company’s International segment’s operating loss for 2022, 2021, and 2020 reflects the following: •2022 includes charges of $1.1 billion to remeasure assets and liabilities of the U.K. disposal group to fair value less costs to sell, as discussed in more detail in Financial Note 2, “Held for Sale;” •2022 includes charges of $383 million to remeasure assets and liabilities of the E.U. disposal group to fair value less costs to sell and to impair certain assets, including internal-use software that will not be utilized in the future, as discussed in more detail in Financial Note 2, “Held for Sale;” •2022 includes a gain of $59 million related to the sale of the Company’s Canadian health benefit claims management and plan administrative services business; •2022 includes a gain of $42 million related to the sale of the Company’s 30% interest in its German pharmaceutical wholesale joint venture to WBA. 2021 and 2020 includes charges of $58 million and $275 million, respectively, related to the contribution of a majority of its German pharmaceutical wholesale business to the joint venture with WBA completed on November 1, 2020. See Financial Note 2, “Held for Sale,” and Financial Note 6, “Other Income, Net,” for further details; •2021 includes a goodwill impairment charge of $69 million related to one of the Company’s reporting units in Europe, as discussed in more detail in Financial Note 11, “Goodwill and Intangible Assets, Net;” and •2021 and 2020 includes long-lived asset impairment charges of $115 million and $112 million, respectively, primarily related to retail pharmacy businesses in Canada and Europe, as discussed in more detail in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net.” (6)Operating loss for Other for 2020 includes an impairment charge of $1.2 billion and a dilution loss of $246 million associated with the Company’s previous investment in the Change Healthcare JV, partially offset by a net gain of $414 million (pre-tax and after-tax) related to the separation of its interest in the Change Healthcare JV completed during the fourth quarter of 2020. Operating loss for 2020 also includes the Company’s proportionate share of loss from the Change Healthcare JV of $119 million. (7)Corporate expenses, net, for 2022, 2021, and 2020 reflects the following: •2022 includes charges of $55 million primarily related to the effect of accumulated other comprehensive loss components from the E.U. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale;” •2022 includes charges of $42 million primarily related to the effect of accumulated other comprehensive loss components from the U.K. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale;” •2022 and 2021 includes charges of $274 million and $8.1 billion, respectively, related to the estimated liability for opioid-related claims, as discussed in more detail in Financial Note 18, “Commitments and Contingent Liabilities;" •2022 and 2021 includes net gains of $98 million and $133 million, respectively, associated with certain of the Company’s equity investments, as discussed in more detail in Financial Note 16, “Fair Value Measurements;” •2021 includes a net gain of $131 million recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to the Company’s controlled substances monitoring program; •2020 includes settlement charges of $122 million for the termination of the Company’s defined benefit pension plan; and •2020 includes a settlement charge of $82 million related to opioid claims. (8)Loss on debt extinguishment for 2022 consists of a charge of $191 million related to the Company’s July 2021 tender offer to redeem a portion of its existing debt, as discussed in more detail in Financial Note 12, “Debt and Financing Activities.” (9)Amounts primarily consist of amortization of acquired intangible assets purchased in connection with business acquisitions and capitalized software for internal use as well as depreciation and amortization of property, plant, and equipment, net. (10)Long-lived assets consist of property, plant and equipment. |
| |
(7) | 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:and capitalized software.
|
| | | | | | | |
| | March 31, |
| (In millions) | 2016 | | 2015 |
| Segment assets | | | |
| Distribution Solutions | $ | 47,088 |
| | $ | 43,982 |
|
| Technology Solutions | 3,072 |
| | 3,281 |
|
| Total | 50,160 |
| | 47,263 |
|
| Corporate | | | |
| Cash and cash equivalents | 4,048 |
| | 5,341 |
|
| Other | 2,355 |
| | 1,266 |
|
| Total | $ | 56,563 |
| | $ | 53,870 |
|
| | | | |
| Property, plant and equipment, net |
|
| |
|
|
| United States | $ | 1,500 |
| | $ | 1,273 |
|
| Foreign | 778 |
| | 772 |
|
| Total | $ | 2,278 |
| | $ | 2,045 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | |
28. | 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 2016 | | | | | | | |
| Revenues | $ | 47,546 |
| | $ | 48,761 |
| | $ | 47,899 |
| | $ | 46,678 |
|
Gross profit (1) (2) (3) | 2,848 |
| | 2,844 |
| | 2,872 |
| | 2,852 |
|
| Income after income taxes: | | | | | | | |
Continuing operations (1) (3) (4) | $ | 599 |
| | $ | 636 |
| | $ | 642 |
| | $ | 465 |
|
| Discontinued operations | (10 | ) | | (6 | ) | | 5 |
| | (21 | ) |
| Net income | $ | 589 |
| | $ | 630 |
| | $ | 647 |
| | $ | 444 |
|
| Net income attributable to McKesson | $ | 576 |
| | $ | 617 |
| | $ | 634 |
| | $ | 431 |
|
Earnings (loss) per common share attributable to McKesson (5) | | | | | | | |
| Diluted | | | | | | | |
| Continuing operations | $ | 2.50 |
| | $ | 2.65 |
| | $ | 2.71 |
| | $ | 1.97 |
|
| Discontinued operations | (0.05 | ) | | (0.02 | ) | | 0.02 |
| | (0.09 | ) |
| Total | $ | 2.45 |
| | $ | 2.63 |
| | $ | 2.73 |
| | $ | 1.88 |
|
| Basic | | | | | | | |
| Continuing operations | $ | 2.53 |
| | $ | 2.68 |
| | $ | 2.74 |
| | $ | 1.99 |
|
| Discontinued operations | (0.04 | ) | | (0.02 | ) | | 0.02 |
| | (0.09 | ) |
| Total | $ | 2.49 |
| | $ | 2.66 |
| | $ | 2.76 |
| | $ | 1.90 |
|
| |
(1) | Gross profit for the first, second, third and fourth quarters of 2016 included pre-tax charges related to our last-in-first-out (“LIFO”) method of accounting for inventories of $91 million, $91 million, $33 million and $29 million. |
| |
(2) | Gross profit for the first and third quarters of 2016 included $59 million and $17 million of cash proceeds representing our share of net settlements of antitrust class action lawsuits against drug manufacturers. |
| |
(3) | Financial results for the fourth quarter of 2016 include pre-tax restructuring charges of $229 million within our continuing operations. Charges were recorded as follows: $26 million in cost of sales and $203 million in operating expenses. |
| |
(4) | Financial results for the first quarter of 2016 include an after-tax gain of $38 millionfrom the sale of our nurse triage business, and for the second quarter of 2016 include an after-tax gain of$29 million from the sale of ZEE Medical business.
|
| |
(5) | Certain computations may reflect rounding adjustments. |
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
Segment assets and long-lived assets by geographic areas were as follows:
| | | | | | | | | | | |
| | March 31, |
| (In millions) | 2022 | | 2021 |
| Segment assets | | | |
| U.S. Pharmaceutical | $ | 38,346 | | | $ | 35,236 | |
| Prescription Technology Solutions | 3,528 | | | 3,446 | |
| Medical-Surgical Solutions | 5,830 | | | 5,986 | |
| International | 13,717 | | | 14,987 | |
| | | |
| Corporate | 1,877 | | | 5,360 | |
| Total assets | $ | 63,298 | | | $ | 65,015 | |
| | | |
Long-lived assets (1) | | | |
| United States | $ | 2,060 | | | $ | 2,110 | |
| Foreign | 352 | | | 984 | |
| Total long-lived assets | $ | 2,412 | | | $ | 3,094 | |
(1)Long-lived assets consist of property, plant, and equipment, net and capitalized software and excludes amounts classified as assets held for sale.
|
| | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal 2015 | | | | | | | |
| Revenues | $ | 43,476 |
| | $ | 44,160 |
| | $ | 46,484 |
| | $ | 44,925 |
|
Gross profit (1) | 2,732 |
| | 2,864 |
| | 2,898 |
| | 2,917 |
|
| Income after income taxes | | | | | | | |
Continuing operations (1) (2) | $ | 419 |
| | $ | 491 |
| | $ | 521 |
| | $ | 411 |
|
Discontinued operations (3) | (8 | ) | | (14 | ) | | (10 | ) | | (267 | ) |
| Net income | $ | 411 |
| | $ | 477 |
| | $ | 511 |
| | $ | 144 |
|
| Net income attributable to McKesson | $ | 403 |
| | $ | 469 |
| | $ | 472 |
| | $ | 132 |
|
Earnings per common share attributable to McKesson (4) | | | | | | | |
| Diluted | | | | | | | |
| Continued operations | $ | 1.76 |
| | $ | 2.05 |
| | $ | 2.04 |
| | $ | 1.69 |
|
| Discontinued operations | (0.04 | ) | | (0.06 | ) | | (0.04 | ) | | (1.13 | ) |
| Total | $ | 1.72 |
| | $ | 1.99 |
| | $ | 2.00 |
| | $ | 0.56 |
|
| Basic | | | | | | | |
| Continuing operations | $ | 1.79 |
| | $ | 2.08 |
| | $ | 2.07 |
| | $ | 1.72 |
|
| Discontinued operations | (0.04 | ) | | (0.06 | ) | | (0.04 | ) | | (1.15 | ) |
| Total | $ | 1.75 |
| | $ | 2.02 |
| | $ | 2.03 |
| | $ | 0.57 |
|
| |
(1) | Gross profit for the first, second, third and fourth quarters of 2015 included pre-tax charges related to our LIFO method of accounting for inventories of $98 million, $94 million, $95 million and $50 million. |
| |
(2) | Financial results for the fourth quarter of 2015 included a non-cash after-tax charge of $150 million related to the settlement of controlled substance distribution claims. |
| |
(3) | Discontinued operations for the fourth quarter of 2015 included $235 million non-cash after-tax impairment charges related to our Brazilian pharmaceutical distribution business. |
| |
(4) | Certain computations may reflect rounding adjustments. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| |
Item 9A. | Controls and Procedures. |
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 werewas no changeschange 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 20162022 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. | Other Information. |
Item 9B.Other Information.
None.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
| |
Item 10. | Directors, Executive Officers and Corporate Governance. |
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 20162022 Annual Meeting of StockholdersShareholders (the “Proxy Statement”) under the heading “Election of Directors.” Information about compliance with Section 16(a) of the Exchange Actour Executive Officers is incorporated by reference from the discussion in Part I of this report under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in“Information about our Proxy Statement.Executive Officers.” Information about our Audit Committee, including the members of the committee and our Audit Committee Financial Expert,Experts, is incorporated by reference from the discussion in Item 1 of our Proxy Statement under the headingsheading “The Board, Committees and Meetings,” and in Item 2 of our Proxy Statement under the heading “Audit Committee Report.” “Audit Committee Financial Expert” and “Audit Committee Report” 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. |
McKESSON CORPORATION
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. |
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, 20162022 with respect to the plans under which the Company’s common stock is authorized for issuance:
|
| | | | | | | | |
Plan Category (In millions, except per share amounts) | 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) |
Equity compensation plans approved by security holders | 6.4 (2) | | $ | 118.95 |
| | 33.0 (3) |
|
Equity compensation plans not approved by security holders | — | | $ | — |
| | — |
|
| | | | | | | | | | | | | | | | | |
(1)Plan Category
(In millions, except per share amounts) | The weighted-average Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights | | Weighted-average exercise price set forthof outstanding options, warrants and rights (1) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected 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.first column) |
Equity compensation plans approved by security holders | 3.0 (2) | | $ | 175.23 | | | 20.4 (3) |
(2)Equity compensation plans not approved by security holders | 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 4,373,049 shares available for purchase under the 2000 Employee Stock Purchase Plan and 28,608,465 shares available for grant under the 2013 Stock Plan.— | | | — | |
(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 1.9 million shares available for purchase under the 2000 Employee Stock Purchase Plan and 18.5 million shares available for grant under the 2013 Stock Plan.
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) 30,000,00030.0 million 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 sharefull-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. Beginning with awards granted in fiscal year 2021, RS and RSUs generally vest over fourthree years. PeRSUsRSUs granted under the PeRSU program vest three years following the end of the performance period. Beginning in May 2014, theThe Company’s executive officers and other members of senior management are annually granted performance awards called Total Shareholder Return Unitsperformance stock units (“TSRUs”PSUs”), 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.Board of Directors. 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. Stock options were granted at no less than fair market value and options granted under the 2005 Stock Plan generally have a contractual term of seven years.
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.
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.
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Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
McKESSON CORPORATION
Item 13.Certain Relationships and Related Transactions and Director Independence.
Information with respect to certain transactions with directors and management is incorporated by reference from the Proxy Statement under the heading “Certain Relationships“Related Party Transactions Policy and Transactions with Related Transactions.Persons.” Information regarding Director independence is incorporated by reference from the Proxy Statement under the heading “Director Independence.” 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 26,20, “Related Party Balances and Transactions,”Transactions” to the consolidated financial statements appearingincluded in this Annual Report on Form 10‑K.Report.
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Item 14. | Principal Accounting Fees and Services. |
Item 14.Principal Accounting Fees and Services.
Information regarding principal accountingaccountant 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 2017”Year 2023” in our Proxy Statement and all such information is incorporated herein by reference.
PART IV
Item 15.Exhibits and Financial Statement Schedule.
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Item 15. | Exhibits andPage |
(a)(1) Consolidated Financial Statement Schedule.Statements |
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(a)(1) Consolidated Financial Statements | |
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| (a)(2) Financial Statement Schedule | |
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| 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. | |
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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.
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| | | MCKESSON CORPORATION
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Date: May 5, 2016 | | /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:
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* | | * |
John H. Hammergren
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
| | M. Christine Jacobs, Director
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* | | * |
James A. Beer
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
| | Donald R. Knauss, Director
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* | | * |
Nigel A. Rees
Senior Vice President and Controller
(Principal Accounting Officer)
| | Marie L. Knowles, Director
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* | | * |
Andy D. Bryant, Director
| | David M. Lawrence, M.D., Director
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* | | * |
Wayne A. Budd, Director
| | Edward A. Mueller, Director
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* | | * |
N. Anthony Coles, M.D., Director | | Susan R. Salka, Director |
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* | | /s/ Lori A. Schechter |
Alton F. Irby III, Director
| | Lori A. Schechter
*Attorney-in-Fact
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Date: May 5, 2016 | | |
SCHEDULE II
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2016, 2015 and 2014
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Additions | | | | |
| Description | 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) |
| Year Ended March 31, 2022 | | | | | | | | | |
| Allowances for credit losses | $ | 211 | | | $ | 29 | | | $ | (35) | | | $ | (106) | | | $ | 99 | |
| Other allowances | 50 | | | — | | | 4 | | | (2) | | | 52 | |
| $ | 261 | | | $ | 29 | | | $ | (31) | | | $ | (108) | | | $ | 151 | |
| | | | | | | | | |
| Year Ended March 31, 2021 | | | | | | | | | |
| Allowances for credit losses | $ | 252 | | | $ | 4 | | | $ | 1 | | | $ | (46) | | | $ | 211 | |
| Other allowances | 30 | | | 11 | | | 9 | | | — | | | 50 | |
| $ | 282 | | | $ | 15 | | | $ | 10 | | | $ | (46) | | | $ | 261 | |
| | | | | | | | | |
| Year Ended March 31, 2020 | | | | | | | | | |
| Allowances for credit losses | $ | 273 | | | $ | 91 | | | $ | (19) | | | $ | (93) | | | $ | 252 | |
| Other allowances | 24 | | | — | | | — | | | 6 | | | 30 | |
| $ | 297 | | | $ | 91 | | | $ | (19) | | | $ | (87) | | | $ | 282 | |
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| | | 2022 | | 2021 | | 2020 |
| (1) | Deductions: | | | | | | |
| Written-off | | $ | (106) | | | $ | (40) | | | $ | (93) | |
| Credited to other accounts and other | | (2) | | | (6) | | | 6 | |
| Total | | $ | (108) | | | $ | (46) | | | $ | (87) | |
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| (2) | Amounts shown as deductions from current and non-current receivables (current allowances were $144 million, $250 million, and $265 million at March 31, 2022, 2021, and 2020, respectively) | | $ | 151 | | | $ | 261 | | | $ | 282 | |
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| (3) | Primarily represents reclassifications to other balance sheet accounts. | | | | | | |
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| | | | Additions | | | | |
| Description | 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) |
| Year Ended March 31, 2016 | | | | | | | | | |
Allowances for doubtful accounts | $ | 141 |
| | $ | 113 |
| | $ | 2 |
| | $ | (44 | ) | | $ | 212 |
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| Other allowances | 33 |
| | — |
| | (3 | ) | | 11 |
| | 41 |
|
| | $ | 174 |
| | $ | 113 |
| | $ | (1 | ) | | $ | (33 | ) | | $ | 253 |
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| Year Ended March 31, 2015 | | | | | | | | | |
Allowances for doubtful accounts | $ | 112 |
| | $ | 67 |
| | $ | — |
| | $ | (38 | ) | | $ | 141 |
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| Other allowances | 22 |
| | 8 |
| | — |
| | 3 |
| | 33 |
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| | $ | 134 |
| | $ | 75 |
| | $ | — |
| | $ | (35 | ) | | $ | 174 |
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| Year Ended March 31, 2014 | | | | | | | | | |
Allowances for doubtful accounts | $ | 121 |
| | $ | 36 |
| | $ | (11 | ) | | $ | (34 | ) | | $ | 112 |
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| Other allowances | 15 |
| | — |
| | 10 |
| | (3 | ) | | 22 |
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| | $ | 136 |
| | $ | 36 |
| | $ | (1 | ) | | $ | (37 | ) | | $ | 134 |
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| | | | 2016 | | 2015 | | 2014 |
| (1) | Deductions: | | | | | | |
| | Written off | | $ | (33 | ) | | $ | (34 | ) | | $ | (39 | ) |
| | Credited to other accounts | | — |
| | (1 | ) | | 2 |
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| | Total | | $ | (33 | ) | | $ | (35 | ) | | $ | (37 | ) |
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| (2) | Amounts shown as deductions from current and non-current receivables | | $ | 253 |
| | $ | 174 |
| | $ | 134 |
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| (3) | Primarily represents reclassifications from other balance sheet accounts. | | | | | | |
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;agreement. Those representations and warranties:
•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.
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| | | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 3.1 | Amended and Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on July 27, 2011. | 8-K | 1-13252 | 3.1 | August 2, 2011 |
| 3.2 | Amended and Restated By-Laws of the Company, as amended July 29, 2015. | 8-K | 1-13252 | 3.1 | July 31, 2015 |
| 4.1 | Indenture, dated as of March 11, 1997, by and between the Company, as issuer, and The First National Bank of Chicago, as trustee. | 10-K | 1-13252 | 4.4 | June 19, 1997 |
| 4.2 | Officers’ Certificate, dated as of March 11, 1997, and related Form of 2027 Note. | S-4 | 333-30899 | 4.2 | July 8, 1997 |
| 4.3 | Indenture, dated as of March 5, 2007, by and between the Company, as issuer, and The Bank of New York Trust Company, N.A., as trustee. | 8-K | 1-13252 | 4.1 | March 5, 2007 |
| 4.4 | Officers’ Certificate, dated as of March 5, 2007, and related Form of 2017 Note. | 8-K | 1-13252 | 4.2 | March 5, 2007 |
| 4.5 | Officers’ Certificate, dated as of February 12, 2009, and related Form of 2014 Note and Form of 2019 Note. | 8-K | 1-13252 | 4.2 | February 12, 2009 |
| 4.6 | 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. | 8-K | 1-13252 | 4.2 | February 28, 2011 |
| 4.7 | Indenture, dated as of December 4, 2012, by and between the Company, as issuer, and Wells Fargo Bank, National Association, as trustee. | 8-K | 1-13252 | 4.1 | December 4, 2012 |
| 4.8 | Officers’ Certificate, dated as of December 4, 2012, and related Form of 2015 Note and Form of 2022 Note. | 8-K | 1-13252 | 4.2 | December 4, 2012 |
| 4.9 | Officers’ Certificate, dated as of March 8, 2013, and related Form of 2018 Note and Form of 2023 Note. | 8-K | 1-13252 | 4.2 | March 8, 2013 |
| 4.10 | 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. | 8-K | 1-13252 | 4.2 | March 10, 2014 |
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| | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 2.1 | Agreement of Contribution and Sale, dated as of June 28, 2016, by and among McKesson Corporation, PF2 NewCo LLC, PF2 NewCo Intermediate Holdings, LLC, PF2 NewCo Holdings, LLC, HCIT Holdings, Inc., Change Healthcare, Inc., Change Aggregator L.P. and H&F Echo Holdings, L.P. | 8-K | 1-13252 | 2.1 | July 5, 2016 |
| 2.2 | Amendment No. 1 to Agreement Contribution and Sale, dated as of March 1, 2017, by and among by and among Change Healthcare LLC, Change Healthcare Intermediate Holdings, LLC, Change Healthcare Holdings, LLC, HCIT Holdings, Inc., Change Healthcare, Inc., a Delaware corporation, for itself and in its capacity as Echo Representative, certain affiliates of The Blackstone Group, L.P., certain affiliates of Hellman & Friedman LLC, and McKesson Corporation, a Delaware corporation. | 8-K | 1-13252 | 2.1 | March 7, 2017 |
| 2.3 | | 8-K | 1-13252 | 2.1 | February 10, 2020 |
| 3.1 | | 8-K | 1-13252 | 3.1 | August 2, 2011 |
| 3.2 | | 8-K | 1-13252 | 3.1 | March 13, 2020 |
| 4.1 | | 10-K | 1-13252 | 4.4 | June 19, 1997 |
| 4.2 | | S-4 | 333-30899 | 4.2 | July 8, 1997 |
| 4.3 | | 8-K | 1-13252 | 4.1 | March 5, 2007 |
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| | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 4.4 | 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 2021 Note and Form of 2041 Note. | 8-K | 1-13252 | 4.2 | February 28, 2011 |
| 4.5 | | 8-K | 1-13252 | 4.1 | December 4, 2012 |
| 4.6 | | 8-K | 1-13252 | 4.2 | December 4, 2012 |
| 4.7 | | 8-K | 1-13252 | 4.2 | March 8, 2013 |
| 4.8 | | 8-K | 1-13252 | 4.2 | March 10, 2014 |
| 4.9 | | 8-K | 1-13252 | 4.1 | February 17, 2017 |
| 4.10 | | 8-K | 1-13252 | 4.1 | February 13, 2018 |
| 4.11 | | 8-K | 1-13252 | 4.1 | February 21, 2018 |
| 4.12 | | 8-K | 1-13252 | 4.1 | November 30, 2018 |
| 4.13 | | 8-K | 1-13252 | 4.1 | December 3, 2020 |
| 4.14 | | 8-K | 1-13252 | 4.1 | August 12, 2021 |
| 4.15† | | — | — | — | — |
| 10.1* | | 10-K | 1-13252 | 10.6 | June 6, 2003 |
| 10.2* | | 10-Q | 1-13252 | 10.2 | October 30, 2019 |
| 10.3* | | 10-K | 1-13252 | 10.7 | May 7, 2008 |
| 10.4* | | 10-Q | 1-13252 | 10.1 | October 30, 2019 |
| 10.5* | | 8-K | 1-13252 | 10.1 | January 25, 2010 |
| 10.6*† | | — | — | — | — |
| 10.7* | | 10-K | 1-13252 | 10.8 | May 22, 2020 |
| 10.8*† | | — | — | — | — |
| 10.9*† | | — | — | — | — |
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| | Incorporated by Reference |
Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
10.1* | McKesson Corporation 1997 Non-Employee Directors’
Equity Compensation and Deferral Plan, as amended through January 29, 2003.
| 10-K | 1-13252 | 10.4 | June 10, 2004 |
10.2* | McKesson Corporation Supplemental Profit Sharing Investment Plan, as amended and restated on January 29, 2003. | 10-K | 1-13252 | 10.6 | June 6, 2003 |
10.3* | McKesson Corporation Supplemental Profit Sharing Investment Plan II, as amended and restated on July 29, 2014. | 10-Q | 1-13252 | 10.1 | October 28, 2014 |
10.4* | McKesson Corporation Deferred Compensation Administration Plan, as amended and restated as of October 28, 2004. | 10-K | 1-13252 | 10.6 | May 13, 2005 |
10.5* | 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. | 10-K | 1-13252 | 10.7 | May 7, 2008 |
10.6* | McKesson Corporation Deferred Compensation Administration Plan III, as amended and restated July 29, 2014. | 10-Q | 1-13252 | 10.2 | October 28, 2014 |
10.7* | McKesson Corporation Executive Benefit Retirement Plan, as amended and restated on October 24, 2008. | 10-Q | 1-13252 | 10.3 | October 29, 2008 |
10.8* | McKesson Corporation Executive Survivor Benefits Plan,
as amended and restated as of January 20, 2010.
| 8-K | 1-13252 | 10.1 | January 25, 2010 |
10.9* | McKesson Corporation Severance Policy for Executive Employees, as amended and restated as of April 23, 2013. | 10-K | 1-13252 | 10.11 | May 7, 2013 |
10.10* | McKesson Corporation Change in Control Policy for Selected Executive Employees, as amended and restated on October 26, 2010. | 10-Q | 1-13252 | 10.2 | February 1, 2011 |
10.11* | McKesson Corporation Management Incentive Plan, effective July 29, 2015. | 8-K | 1-13252 | 10.1 | July 31, 2015 |
10.12* | Form of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation Management Incentive Plan, effective May 26, 2015. | 10-Q | 1-13252 | 10.1 | July 29, 2015 |
10.13* | McKesson Corporation Long-Term Incentive Plan, as amended and restated, effective May 26, 2015. | 10-Q | 1-13252 | 10.2 | July 29, 2015 |
10.14† | Forms of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation Long-Term Incentive Plan, effective May 24, 2016. | — | — | — | — |
10.15* | McKesson Corporation 2005 Stock Plan, as amended and restated on July 28, 2010. | 10-Q | 1-13252 | 10.4 | July 30, 2010 |
10.16* | 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 adopted on May 22, 2013. | 8-K | 1-13252 | 10.1 | August 2, 2013 |
10.18† | Forms of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation 2013 Stock Plan. | — | — | — | — |
10.19† | Form of Commercial Paper Dealer Agreement between McKesson Corporation, as Issuer, and the Dealer | — | — | — | — |
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| | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 10.10* | | 10-Q | 1-13252 | 10.4 | July 30, 2010 |
| 10.11* | | 10-Q | 1-13252 | 10.2 | July 26, 2012 |
| 10.12* | | 8-K | 1-13252 | 10.1 | August 2, 2013 |
| 10.13*† | | — | — | — | — |
| 10.14 | | 8-K | 1-13252 | 10.1 | March 7, 2017 |
| 10.15 | | 10-K | 1-13252 | 10.19 | May 5, 2016 |
| 10.16 | Credit Agreement, dated as of October 22, 2015, among the Company and Certain Subsidiaries, as Borrowers, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. (acting through its Canada Branch), Citibank, N.A. and Barclays Bank PLC, as Swing Line Lenders, Wells Fargo Bank, National Association as L/C Issuer, Barclays Bank PLC, Citibank N.A., Wells Fargo Bank, National Association as Co-Syndication Agents, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd. as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Citigroup Global Markets Inc., Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Book Runners. | 8-K | 1-13252 | 10.1 | October 23, 2015 |
| 10.17 | 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. | 8-K | 1-3252 | 10.1 | February 5, 2014 |
| 10.18 | Credit Agreement dated as of September 25, 2019, among the Company and certain subsidiaries, as borrowers, Bank of America, N.A., as administrative agent, Barclays Bank PLC, Citibank, N.A., Wells Fargo Bank, National Association, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., and HSBC Securities (USA) Inc., as co-syndication agents, the lenders party thereto, the letter of credit issuers party thereto ("2020 Credit Facility"). | 8-K | 1-13252 | 10.1 | September 27, 2019 |
| | 8-K | 1-13252 | 10.1 | April 2, 2021 |
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| | | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 10.20 | Credit Agreement, dated as of October 22, 2015, among the Company and Certain Subsidiaries, as Borrowers, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. (acting through its Canada Branch), Citibank, N.A. and Barclays Bank PLC, as Swing Line Lenders, Wells Fargo Bank, National Association as L/C Issuer, Barclays Bank PLC, Citibank N.A., Wells Fargo Bank, National Association as Co-Syndication Agents, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd. as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Citigroup Global Markets Inc., Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, The Bank of TokyoMitsubishi UFJ, Ltd. and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Book Runners.
| 8-K | 1-13252 | 10.1 | October 23, 2015 |
| 10.21 | 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. | 8-K | 1-3252 | 10.1 | February 5, 2014 |
| 10.22* | Amended and Restated Employment Agreement, effective as of November 1, 2008, by and between the Company and its Chairman, President and Chief Executive Officer. | 10-Q | 1-13252 | 10.10 | October 29, 2008 |
| 10.23* | 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. | 8-K | 1-13252 | 10.1 | April 2, 2012 |
| 10.24* | 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. | 8-K | 1-13252 | 10.1 | February 28, 2014 |
| 10.25* | Amended and Restated Employment Agreement, effective as of November 1, 2008, by and between the Company and its Executive Vice President and Group President. | 10-Q | 1-13252 | 10.12 | October 29, 2008 |
| 10.26* | Form of Director and Officer Indemnification Agreement. | 10-K | 1-13252 | 10.27 | May 4, 2010 |
| 12† | Computation of Ratio of Earnings to Fixed Charges. | — | — | — | — |
| 21† | List of Subsidiaries of the Registrant. | — | — | — | — |
| 23† | Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP. | — | — | — | — |
| 24† | Power of Attorney. | — | — | — | — |
| 31.1† | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | — | — | — | — |
| 31.2† | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | — | — | — | — |
|
| | | | | |
| | Incorporated by Reference |
Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
32†† | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | — | — | — | — |
101† | 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. | — | — | — | — |
| | | | | | | | | | | | | | | | | |
| | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| | 8-K | 1-13252 | 10.2 | April 2, 2021 |
| 10.19* | | 10-K | 1-13252 | 10.27 | May 4, 2010 |
| 10.20 | | 8-K | 1-13252 | 10.1 | March 13, 2020 |
| 10.21 | | 8-K/A | 1-6671 | 10.1 | May 3, 2022 |
| 21† | | — | — | — | — |
| 23† | | — | — | — | — |
| 31.1† | | — | — | — | — |
| 31.2† | | — | — | — | — |
| 32†† | | — | — | — | — |
| 101† | The following materials from the McKesson Corporation Annual Report on Form 10-K for the fiscal year ended March 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Stockholders' Equity (Deficit), (v) Consolidated Statements of Cash Flows, and (vi) related Financial Notes. | — | — | — | — |
| 104† | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101). | — | — | — | — |
________________
| |
* | Management contract or compensation plan or arrangement in which directors and/or executive officers are eligible to participate. |
* 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.
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | MCKESSON CORPORATION |
DIRECTORS AND OFFICERS | | | |
| May 9, 2022 | | /s/ Britt J. Vitalone |
BOARD OF DIRECTORS | | CORPORATE OFFICERS | Britt J. Vitalone |
| | |
John H. Hammergren | | John H. Hammergren |
Chairman of the Board, | | Chairman of the Board, |
President and Chief Executive Officer, | | President and Chief Executive Officer, |
McKesson Corporation | | McKesson Corporation |
| | |
Andy D. Bryant | | James A. Beer |
Chairman of the Board, | | 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:
| | | | | | | | |
Intel Corporation/s/ Brian S. Tyler | | /s/ Donald R. Knauss |
Brian S. Tyler Chief Executive Officer and Director (Principal Executive Officer) | | Patrick J. BlakeDonald R. Knauss, Director |
Wayne A. Budd | | |
| /s/ Britt J. Vitalone | | /s/ Bradley E. Lerman |
Britt J. Vitalone Executive Vice President and Group President |
Senior Counsel, | | |
Goodwin Procter LLP | | Jorge L. Figueredo |
| | Executive Vice President, Human Resources |
N. Anthony Coles, M. D. | | |
Chairman and Chief Executive Officer, | | Paul C. Julian |
Yumanity Therapeutics, LLC | | Executive Vice President and Group President |
| | |
Alton F. Irby III | | Bansi Nagji |
Chairman and Founding Partner, | | Executive Vice President, |
London Bay Capital | | Corporate Strategy and Business Development |
| | |
M. Christine Jacobs | | Kathleen D. McElligott |
Chairman of the Board, President and | | Executive Vice President, Chief Information Officer and |
Chief Executive Officer, Retired, | | Chief Technology Officer |
Theragenics Corporation | | |
| | Lori A. Schechter |
Donald R. Knauss | | Executive Vice President, General Counsel and |
Executive Chairman of the Board, Retired, | | Chief Compliance Officer |
The Clorox Company | | |
| | Brian P. Moore |
Marie L. Knowles | | Senior Vice President and Treasurer |
Executive Vice President and | | |
Chief Financial Officer Retired,(Principal Financial Officer) | | Nigel A. ReesBradley E. Lerman, Director |
Atlantic Richfield Company | | |
| /s/ Napoleon B. Rutledge Jr. | | /s/ Linda P. Mantia |
Napoleon B. Rutledge Jr. Senior Vice President and Controller (Principal Accounting Officer) | | Linda P. Mantia, Director |
| | |
David M. Lawrence, M.D./s/ Richard H. Carmona | | John G. Saia/s/ Maria Martinez |
Chairman of the Board andRichard H. Carmona, M.D., Director | | SecretaryMaria Martinez, Director |
Chief Executive Officer, Retired, | | |
Kaiser Foundation Health Plan, Inc. and/s/ Dominic J. Caruso | | |
Kaiser Foundation Hospitals | | |
| | |
| /s/ Edward A. Mueller | | |
Chairman of the Board andDominic J. Caruso, Director | | Edward A. Mueller, Director |
Chief Executive Officer, Retired, | | |
Qwest Communications International Inc./s/ W. Roy Dunbar | | |
| | |
| /s/ Susan R. Salka | | |
Chief Executive Officer and President,W. Roy Dunbar, Director | | Susan R. Salka, Director |
AMN Healthcare Services, Inc. | | |
| /s/ James H. Hinton | | /s/ Kathleen Wilson-Thompson |
| James H. Hinton, Director | | Kathleen Wilson-Thompson, Director |
| | |
| May 9, 2022 | | |
CORPORATE INFORMATION
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.
Stockholder Information
Wells Fargo Shareowner Services, 1110 Centre Pointe Curve, Suite 101, Mendota Heights, MN 55120-4100 acts as transfer agent, registrar, dividend-paying agent and dividend reinvestment plan agent for McKesson Corporation stock and maintains all registered stockholder records for the Company. For information about McKesson Corporation stock or to request replacement of lost dividend checks, stock certificates or 1099-DIVs, or to have your dividend check deposited directly into your checking or savings account, 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 website—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, July and October. McKesson Corporation’s Dividend Reinvestment Plan offers stockholders the opportunity to reinvest dividends in common stock and to purchase additional shares of common stock. 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. EDT, on July 27, 2016 at the McKesson Corporation Medical-Surgical office at 9954 Mayland Drive, Richmond, VA 23233.
