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, 20182021
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 |
| 0.625% Notes due 2021 | MCK21A | 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)
☐ | | Smaller reporting company | | ¨☐ |
| | | | 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, 2017,2020, was approximately $32 billion.$23.9 billion.
Number of shares of common stock outstanding on April 30, 2018: 202,050,9862021: 158,186,277
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 20182021 Annual Meeting of Stockholders 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,” or “we”“we,” and other similar pronouns), currently ranked 6th on the FORTUNE 500,originally founded in 1833, is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information technology. We partnersolutions. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments, and other healthcare organizations in healthcare to help provide the right medicines,, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively.
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year. 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,”) 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 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
ThroughCommencing with the endsecond quarter of 2018, we operated our2021, the Company operates its business through twoin four reportable segments: McKesson DistributionU.S. Pharmaceutical, International, Medical-Surgical Solutions, (“MDS”) and McKessonPrescription Technology Solutions (“MTS”RxTS”). The Company’s equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson in the fourth quarter of 2020, has been included in Other for retrospective periods presented.
Our Distribution SolutionsU.S. Pharmaceutical segment distributes brand,branded, generic, specialty, biosimilar and over-the-counter (“OTC”) pharmaceutical drugs, and other healthcare-related products worldwide.products. 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 solutions for 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 pharmacy chains in Europe and Canada, and supports independent pharmacies within North America and Europe. It also sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
Our TechnologyInternational segment provides distribution and services to wholesale, institutional, and retail customers in 13 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.
Our Medical-Surgical Solutions segment provides clinical, financialmedical-surgical supply distribution, logistics, and supply chain management solutionsother services to healthcare organizationsproviders, including physician offices, surgery centers, nursing homes, hospital reference labs, and owns approximately 70% equity interest inhome health care agencies. We offer more than 275,000 national brand medical-surgical products as well as McKesson’s own line of high-quality products through a joint venture, Change Healthcare Holdings, LLC (“Change Healthcare”), which was formed in the fourth quarternetwork of 2017.
Distribution Solutions segment:
Our Distribution Solutions segment consists of the following businesses: North America pharmaceutical distribution and services, International pharmaceutical distribution and services and Medical-Surgical distribution and services.
North America pharmaceutical distribution and services
Our North America pharmaceutical distribution and services business is the largest pharmaceutical distributor incenters within the United States with more than 40,000 customers and is comprised of the following business units: (“U.S. Pharmaceutical Distribution, McKesson Specialty Health, McKesson Canada”).
Our RxTS segment brings together CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Technology Solutions (“MRxTS”).Automation, including Multi-Client Central Fill as a Service, to serve our biopharma and life sciences partners and patients. Together, we work across the healthcare delivery system to connect pharmacies, providers, payers, and biopharma for next-generation patient access and adherence solutions that help people get the medicine they need to live healthier lives.
U.S. Pharmaceutical DistributionSegment:
This business is the largest pharmaceutical distributor in the United States with more than 40,000 customers. This business supplies brand,Our U.S. Pharmaceutical segment provides distribution and logistics services for branded, generic, specialty, biosimilar, and OTC pharmaceutical drugs andalong with other healthcare-related products to customers throughout the United States and Puerto Rico through three primary customer channels: (1) Retail national accounts which includes national and regional chains, food and drug combinations, mail order pharmacies and mass merchandisers; (2) Independent retail pharmacies; and (3) Institutional healthcare providers such as hospitals, health systems, integrated delivery networks and long-term care providers.customers. This business also provides solutions and services to pharmacies, hospitals and other providers, pharmaceutical manufacturers. This business provides secondary distribution of genericsmanufacturers, physicians, payers, and medical suppliespatients throughout the U.S. and consulting services.Puerto Rico. We also source generic pharmaceutical drugs through our joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”), which was formed in 2017..
Our U.S. pharmaceutical distribution businessPharmaceutical segment operates and serves customer locations in all 50 states and Puerto Ricocustomers through a network of 2733 distribution centers, as well as a primarystrategic redistribution center, two strategica primary and a secondary redistribution centers and two repackaging facilities.center. We invest in technology and other systems at all of our distribution centers to enhance safety, and reliability, and product availability. For example, we 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. We make extensive use of technology as an enabler to ensure customers have the right products at the right time 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 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 as:pharmaceutical distribution channels: (i) retail national accounts which include national and regional chains, food and drug combinations, mail order pharmacies, and mass merchandisers, (ii) independent, small, and medium chain retail pharmacies, and(iii) institutional healthcare providers.providers such as hospitals, health systems, integrated delivery networks, and long-term care providers, and (iv) provider solutions.
Retail National Accounts: We provide business solutions that help retail national account customers increase revenues and profitability. Solutions include:
•Central FillSM - Prescription refill service that enables pharmacies to more quickly refill prescriptions remotely, more accurately, and at a lower cost, while reducing inventory levels and improving customer service.
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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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•Redistribution Centers — Two- Three facilities totaling over 750,000930,000 square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologics. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery.
•McKesson SynerGx® —- Generic pharmaceutical purchasing program and inventory management that helps pharmacies maximize their cost savings with a broad selection of generic drugs, 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 small footprint.
Independent, Small and Medium Chain Retail Pharmacies: We provide managed care contracting, branding and advertising, merchandising, purchasing, operational efficiency, and automation that help independent pharmacists focus on patient care while improving profitability. Solutions include:
•Health Mart® —- Health Mart® is a national network of more than 4,800approximately 5,000 independently-owned pharmacies and is one of the industry’s most comprehensive pharmacy franchise programs. Health Mart® provides franchisees support for managed care contracting, branding and local marketing solutions, the Health Mart private label line of products, merchandising solutions, and programs for enhanced patient support.
•Health Mart Atlas® —- Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates, and improve cash flow.
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• | McKesson Reimbursement 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® —- 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® —- Complete line of more than 600 products that provide retail independent retail pharmacies with value-priced alternatives to national brands.
•FrontEdge™ —- Strategic planning, merchandising, and price maintenance program that helps independent pharmacies maximize store profitability.
•McKesson Sponsored Clinical Services (“SCS”) Network —- Access to patient-support services that allowsallow pharmacists to earn service fees and to develop stronger patient relationships.
•McKesson RxOwnership Program - Assist independent pharmacist owners with the opportunity to remain independent via succession planning and business operation loans.
Institutional Healthcare Providers: We provide electronic ordering/purchasing and 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 processes related to unit-based cabinet replenishment and inventory management.
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•Fulfill-RxSM - Ordering and inventory management system that empowers hospitals to optimize the often complicated processes related to unit-based cabinet replenishment and inventory management.
•Asset Management —- Award-winning inventory optimization and purchasing management program that helps institutional providers lower costs while ensuring product availability.
•SKY Packaging — Blister-format- Blister, Unit of Use, and Unit dose packaging containing the most widely prescribed dosages and strengths in generic oral-solid and liquid medications. SKY Packaging enables acute care, long-term care, and institutional pharmacies to provide cost-effective, uniform packaging.
•McKesson Plasma and Biologics —- A full portfolio of plasma-derivatives and biologic products. In the second quarter of 2018, we acquired BDI Pharma, LLC (“BDI”).
•McKesson OneStop Generics® —- Described above.
McKesson Specialty Health (“MSH”)
Our MSH businessProvider Solutions:
The U.S. Pharmaceutical segment provides a range of services and solutions to oncology and other specialty practices operatingand 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. Community-based physicians in communities acrossthis business have broad flexibility and discretion to select the country, to pharmaceuticalproducts and biotechnology suppliers who manufacturecommitment levels that best meet their practice needs. Services in provider solutions include specialty drugs and vaccines, and to payers and hospitals. This business is focused on three core business lines: Manufacturer Solutions, Practice Management and Provider Solutions.
Manufacturer Solutions: This business helps manufacturers accelerate the approval and successful commercialization of specialty pharmaceuticals across the product life cycle. Our offerings include supply chain services, including specialty pharmacydrug distribution, group purchasing organizations (“GPO”) like Onmark®, technology solutions, practice consulting services, and third-party logisticsvaccine distribution, including our exclusive distributor relationship with the Centers for Disease Control and Prevention’s (“3PL”CDC”) Vaccines for Children program. Additionally, to support the U.S. efforts to fight the coronavirus disease 2019 (“COVID-19”) pandemic, this segment is distributing the COVID-19 vaccines manufactured by ModernaTX, Inc. and Janssen Biotech Inc., provider and patient engagement programs, clinical trial support, patient assistance programs, reimbursement services and analytics. In addition, we help manufacturers minimize reimbursement challenges while offering affordable, safe access to therapies through Risk Evaluation and Mitigation Strategies (“REMS”) programs.a Janssen pharmaceutical company of Johnson & Johnson, at the direction of the U.S. government.
In the fourth quarter of 2018, we completed our acquisition of RxCrossroads, a provider of tailored services to pharmaceutical and biotechnology manufacturers. RxCrossroads is headquartered in Louisville, Kentucky. This acquisition enhances our end-to-end solutions for manufacturers of branded, specialty, generic and biosimilar drugs, including comprehensive patient support services, custom pharmacy solutions and third-party logistics. In addition, this acquisition will add plasma logistics to our manufacturer solutions, complementing the Company’s established customer-facing plasma offerings. This is a continuation of our strategy to achieve better patient outcomes through efficiency and coordination across the supply chain, and throughout the patient journey.
Practice Management: 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 oncology clinical trials.
Provider Solutions:
This segment includes our Ontada business, providing software to support the clinical, financial, and operational needs of our oncology practice partners. Ontada also partners with oncology providers and biopharma partners to perform real-world evidence studies, retrospective research, and to provide clinical data insights, advisory solutions and education opportunities.
This segment also offers community specialists (oncologists, rheumatologists, ophthalmologists, urologists, neurologistssolutions which enable its customers to drive greater efficiencies in their day to day operations, effectively managing their inventories and other specialists) an extensive setcomplying with complex government regulations. Solutions include McKesson Pharmacy Systems, MacroHelix and Supply Logix, all of customizable productswhich provide innovative software technology and services designed to strengthen core practice operations, enhance value-based care deliverythat support retail pharmacies and expand their service offering to patients. Tools and services include specialty drug distribution and group purchasing organization (“GPO”) services, 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 physicians in this business line have broad flexibility and discretion to select the products and commitment levels that best meet their practice needs. In the second quarter of 2018, we acquired intraFUSION, Inc. (“intraFUSION”) of Houston, Texas, which provides management services to physician office infusion centers.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
McKesson Canada is one of the largest wholesale distributors and pharmacy retailers in Canada.
The wholesale business delivers their products to retail pharmacies, hospitals, long-term care centers, clinics and institutions in Canada through a network of 13 distribution centers and provides logistics and distribution services for manufacturers. Beyond wholesale pharmaceutical logistics and distribution, McKesson Canada provides automation solutions to its retail and hospital customers. McKesson Canada also provides health information exchange solutions that streamline clinical and administrative communication. Through specialty solutions and services, McKesson Canada works with health care providers, manufacturers and payers to help patients with complex diseases by improving access to life-saving treatments.
The retail business operates approximately 450 owned pharmacies under the Rexall Health brand in Canada where we provide patients with greater choice and access, integrated pharmacy care and industry-leading service levels. We also provide retail banner services that help independent pharmacists compete and grow through innovative services and operations support. In the second quarter of 2018, we expanded our support for Canadian banners to more than 2,400 independent pharmacies by adding more than 300 independent pharmacies in Quebec, Canada, with our acquisition of the Uniprix Group.
MRxTS
This business is comprised of McKesson Pharmacy Technology and Services, RelayHealth Pharmacy and CoverMyMeds. This business supports our customers, including physicians, with a comprehensive, expanded portfolio of solutions designed to help them drive business growth, realize greater business efficiencies, deliver high-quality care, enhance medication adherence and safety, and more effectively connect with other participants in the pharmaceutical supply chain. MRxTS focuses on customers across the pharmacy industry, including manufacturers, payers, providers, retail pharmacies, hospital pharmacies and government agencies.
International pharmaceutical distribution and servicesSegment:
Our International pharmaceutical distribution and services businesssegment provides distribution and services to wholesale, institutional, and retail customers in 13 European countries where we own, partner, or franchise with retail pharmacies as further described below. The business consists of Pharmacy Solutions and Consumer Solutions.operate through two businesses: Pharmaceutical Distribution and Retail Pharmacy. Our operations in Canada, including Rexall retail pharmacies, support better, safer patient care by delivering vital medicines, supplies, and information technology solutions throughout Canada.
Our Pharmacy SolutionsEuropean Pharmaceutical Distribution business delivers pharmaceutical and other healthcare-related products to pharmacies across Europe. This business functions as a vital link, connectingusing technology-enabled management systems at our regional wholesale branches to connect manufacturers to retail pharmacies. This business suppliespharmacies, supplying medicines to patients by procuring pharmaceuticals approved in each country as well as supplyingand other products sold in pharmacies. Pharmaceutical and other healthcare-related products are stored at regional wholesale branches using technology-enabled management systems.
Our European business leverages its scale and provides innovative and effective medical care services to create enhanced customer value.
Our Consumer SolutionsRetail Pharmacy business serves patients and consumers in European countries directly through over 2,000approximately 2,100 of our own pharmacies and over 7,0005,500 participant pharmacies operating under brand partnership arrangements. In addition, this business includes outpatient dispensing, eCommerce and homecare arrangements mainly in the United Kingdom (“U.K.”). This business, and provides traditional prescription pharmaceuticals, non-prescription products and medical services, and operates under the Lloyds Pharmacy brandpharmacy branding in Belgium, Ireland, Italy, Sweden, and the U.K..U.K. In addition, we partner with independent pharmacies under our franchise program.local banner programs.
McKesson Canada is one of the largest pharmaceutical wholesale and retail distributors in Canada. The wholesale business delivers products to retail pharmacies, hospitals, long-term care centers, clinics and institutions in Canada through a national network of distribution centers and provides logistics and distribution services for manufacturers.
Beyond wholesale pharmaceutical logistics and distribution, McKesson Canada provides automation and technology solutions to its retail and hospital customers. Additionally, McKesson Canada provides comprehensive specialty health services to Canadians, including a national network of specialty pharmacies, personalized patient care and support programs, and INVIVA, Canada’s first and largest accredited network of private infusion clinics.
The Canada retail business includes over 2,500 banner pharmacies under the IDA, Guardian, The Medicine Shoppe, Remedy’sRx, Proxim, and Uniprix banners, and more than 400 owned pharmacies under the Rexall 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.ca, a leading Canadian online health and wellness retailer.
Medical-Surgical distribution and servicesSolutions Segment:
Our Medical-Surgical distribution and services business provides medical-surgical supplySolutions segment delivers medical-supply distribution, logistics, biomedical maintenance, and other services to healthcare providers including physicians’across the alternate-site spectrum. Our more than 250,000 customers include physician offices, surgery centers, extendedpost-acute care facilities, hospital reference labs, and homecarehome health agencies. We distribute medical-surgical supplies (such as gloves, needles, syringes and occupational health sites.wound care products), infusion pumps, laboratory equipment and pharmaceuticals. Through a network of distribution centers within the U.S., we offer more than 275,000 products from national brand products plusmanufacturers and McKesson’s own line of high-quality medical-surgical products. As a leading distributorproduct line. Through the right mix of products and solutions to the full range of alternate-site healthcare facilities,services, we care for our customers so they can care for their patients. We serve our customers across the continuum of care to help improve efficiencies, profitability and compliance while promoting bettercompliance. We also never lose focus on helping customers improve patient outcomes. Our comprehensive portfolio of medical-surgical products helps our customers increase revenue with the right product mix. With 85% of patient visits happening beyond the hospital, each of these sites has unique needs and challenges. We serve more than 200,000 medical practices, including physician offices, surgery centers, seven of the top ten urgent care center chains and more than 1,800 community health centers.business outcomes. We develop customized plans to address the product, operational, and clinical support needs of our customers, including tackling reimbursements,inventory management, reducing administrative burdens, and training and educating clinical staff.
On April 25, 2018, we entered into We deliver for our customers, so they can deliver and care for their patients. Additionally, under a definitive agreementcontract with the Department of Health and Human Services (“HHS”), McKesson’s Medical-Surgical business leverages its expertise to purchase Medical Specialties Distributors LLC, a leading national distributormanage the assembly of infusion and medical-surgical suppliessupply kits needed to administer COVID-19 vaccines, as well as providersome of biomedical servicesthe sourcing of those supplies. The kits are being produced and distributed at the direction of HHS to alternate site and home health providers.support the administration of all vaccines approved in the U.S.
Prescription Technology Solutions SegmentSegment:
Our Prescription Technology Solutions segment consistsworks across the healthcare delivery system to connect pharmacies, providers, payers, and biopharma for next generation patient access and adherence solutions and operates primarily through the following businesses:
•CoverMyMeds – Provides solutions to help patients get the medications they need to live healthy lives by seamlessly connecting the healthcare network to improve medication access; thereby increasing speed to therapy and reducing prescription abandonment. By facilitating appropriate access to medications, the company can help its customers avoid millions of dollars each year in administrative waste and avoidable medical spending caused by prescription abandonment.
•RelayHealth Pharmacy Solutions – Provides workflow solutions to connect key healthcare stakeholders with more than 50,000 U.S. retail pharmacies and processes more than 18 billion pharmacy transactions annually.
•RxCrossroads – Uses deep insights and innovative technology to help biopharma manufacturers thrive throughout the product lifecycle and create flexible, connected solutions that increase access, adherence, and safe use conditions for therapies and interventions.
•McKesson Prescription Automation (“MPA”) – Provides customized pharmacy automation technology that allows our partners to control costs, work faster, offer higher-quality products, and better serve patients.
•Multi-Client Central Fill as a Service – McKesson-owned pharmacy that utilizes MPA dispensing automation to enable low-cost fulfillment of up to 50,000 prescriptions daily for retail and independent pharmacy customers, new digital pharmacies, and manufacturers.
Other:
Change Healthcare: Our equity investmentownership interest in Change Healthcare and our Enterprise Information Solutions (“EIS”) business.
Equity investment in Change Healthcare:
On March 1, 2017, we finalized a contribution agreement (“Contribution Agreement”) with Change Healthcare Holdings, Inc. (“Change”), a Delaware corporation, and others including shareholders of Change to formJV, a joint venture, Change Healthcare. Under the terms of the Contribution Agreement, we contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to Change Healthcare. In exchange for the contribution, we own approximately 70% of the joint venture with the remaining equity ownership held by Change shareholders. We retained our RelayHealth Pharmacy (“RHP”) and EIS businesses. Our investment in Change Healthcare ishas been accounted for using the equity method of accounting. Change Healthcare is a healthcare technology company that leveragesJV provided software and analytics, network solutions, and technology-enabled services that deliver wide-ranging financial, operational, and clinical benefits to enable better patient care, choice,payers, providers and outcomes at scale. We transferredconsumers. On March 10, 2020, we completed the separation of our RHP businessinterest in the Change Healthcare JV through a split-off transaction. This transaction reduced our investment in the Change Healthcare JV to our MDS segment, effective April 1, 2017.
zero. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange”“Investment in Change Healthcare Joint Venture,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.information related to this transaction.
EIS:
This business provided clinical and financial information systems for healthcare organizations including professional services, workflow management and supply chain management solutions.
On October 2, 2017, we sold our EIS business to a third party. We received net cash proceeds of $169 million after $16 million of assumed net debt by the third party. We recognized a pre-tax gain of $109 million (after-tax gain of $30 million) upon the disposition of this business in the third quarter of 2018.McKESSON CORPORATION
Fiscal 2019 Operating Segments
As previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2017 and December 31, 2017, the executive who was our segment manager of the Distribution Solutions segment retired from the Company in January 2018. As a result, the Company’s chief operating decision maker (“CODM”) evaluated our management and operating structure. In connection with the completion of this evaluation in the first quarter of 2019, our operating structure is realigned, and we will report our financial results in three reportable segments on a retrospective basis commencing in the first quarter of 2019: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure will be included in Other. Other primarily consists of McKesson Canada, McKesson Prescription Technology Solutions and our equity method investment in Change Healthcare. The segment changes will reflect how our CODM allocates resources and assesses performance commencing in the first quarter of 2019. Refer to Financial Note 28, “Segments of Business” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Restructuring, Business Combinations, Investments, Discontinued Operations and 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, 3, 4, and 5, 6“Investment in Change Healthcare Joint Venture,” “Held for Sale,” “Restructuring, Impairment, and 7, “Healthcare Technology Net Asset Exchange,Related Charges,” “Divestitures,”and “Business Combinations”Acquisitions and “Discontinued Operations”Divestitures,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Competition
Our two reportable segments, Distribution Solutions and Technology Solutions,We face highly competitive global environments withenvironments. Additionally, in recent years the healthcare industry has been subject to increasing consolidation. In the pharmaceutical distribution environment in 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, these segmentsOur retail businesses, which primarily operate in our International segment, face competition from various global, national, regional, and local global retailers, including chain and independent pharmacies. We consider our largest competitors in distribution, wholesaling, and logistics to be AmerisourceBergen Corporation and Cardinal Health, Inc.
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 alternative health sites with competition from a wide range of national and regional medical supply and equipment distributors throughout the U.S.
Our RxTS business experiences substantial competition from many companies, including other 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.
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.
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 party patents and other intellectual property rights. These claims may result in McKesson entering settlement agreements, paying damages, discontinuing use or sale of accused products, or ceasing other activities. While the outcome of any litigation or dispute is inherently uncertain, we do not believe that the resolution of any of these infringement notices would have a material adverse impact on our results of operation.
We hold inbound licenses for certain intellectual property that is used internally, and in some cases, utilized in McKesson’s products or services. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and services, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our operations and products and services are not materially dependent on any single license or other agreement with any third party.
Human Capital
Our vision for a healthier world begins with our employees, who strive to bring our mission to life every day. As a company, 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, 2021, we had approximately 76,000 employees worldwide, including 17,000 part-time employees and 32,000 employees in the U.S.
Diversity, Equity, and Inclusion (“DEI”): At McKesson, we are committed to making 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 as an important element that drives long-term shareholder value. During 2021, we appointed the newly created role of chief impact officer, who will drive our strategy and execution related to DEI as well as sustainability, environmental, social, and governance (“ESG”), and philanthropy.
At March 31, 2021, women and people of color represented the following:
| | | | | | | | | | | |
| | McKesson
Overall | | McKesson Leadership (2) |
Metric (1) | | | |
Women (3) | 63 | % | | 35 | % |
People of Color (4) (5) | 45 | % | | 21 | % |
(1)The data for our metrics is derived from our voluntary, self-identification process as of March 31, 2021 and therefore represents our best estimate at this time.
(2)Represents our leadership at the vice president level and above.
(3)Represents worldwide employees.
(4)Represents U.S. employees only as the data for Canada and Europe is not available.
(5)People of Color includes the following races and ethnicities: Hispanic or Latino, Black or African American, Asian, Native Hawaiian or Other Pacific Islander, American Indian or Alaska Native, 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 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, we provide regular feedback and training, and work to create and maintain inclusive work settings where everyone can bring their authentic self to work and feel welcomed and appreciated, and where their perspectives are sought out, 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 fairness, 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 benefits offerings, when possible. In response to the COVID-19 pandemic, we offered extended medical benefits covering COVID-19 related visits, treatment and testing, expanded telehealth options, emergency paid time off (“PTO”), and a platform for employees to donate their regular PTO to co-workers who were more impacted by COVID-19. We also 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.
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 monitor closely 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. 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. 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 on Form 10-K.
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. Failure to comply with laws, regulations, and guidance promulgated by those entities could have a material adverse impact to the Company’s business operations, reputation, results of operations, and financial position.
Controlled Substances: We are subject to the operating and security standards of the Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”), various state boards of pharmacy, state health departments, HHS, the Centers for Medicare & Medicaid Services (“CMS”), and other comparable agencies. We have received monetary penalties and/or licensing sanctions pursuant to these requirements and future allegations of noncompliance could result in an 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 approximately 3,200 cases alleging claims related to the distribution of controlled substances (opioids), as described in Financial Note 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements in this Annual Report on Form 10-K. The plaintiffs in those cases include governmental entities (such as states, provinces, counties and municipalities) as well as businesses, groups and individuals. As a result of ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework to resolve the claims of governmental entities, and our assessment of certain other opioid-related claims, we have reached a stage at which a broad settlement of opioid claims by governmental entities is probable and 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 in this Annual Report on Form 10-K. Because of the many uncertainties associated with any potential settlement arrangement or other resolution of opioid-related litigation, including the uncertainty of the scope of participation by plaintiffs in any potential settlement, 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. The adverse outcome of legal proceedings might also involve significant expense, management time and distraction, and risk of loss that can be difficult to predict or quantify. In addition to this litigation, legislative or regulatory 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.
Government Contracts: Our contracts with government entities are subject to unique compliance risks and typically are subject to procurement laws that include socio-economic, employment practices, environmental protection, recordkeeping and accounting, and other requirements. 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 and material non-compliance could harm our reputation.
Local, state, and federal governments continue to strengthen their position and scrutiny over practices involving or allegedly involving fraud, waste, and abuse affecting Medicare, Medicaid, other government healthcare programs, and government contracts. Our relationships with pharmaceutical and medical surgical product manufacturers and healthcare providers, as well as our provision of products and services to government entities, subject our business to laws, regulation, and government guidance on 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. Failure to comply with applicable laws, regulations, and government guidance, including but not limited to those involving the regulation of controlled substances, the federal Anti-Kickback Statute, and others, 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 price transparency 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 regulate pharmaceutical prices, patient eligibility and reimbursement levels in order to control government healthcare system costs. Some European governments have implemented or are considering austerity measures to reduce healthcare spending. These measures exert pressure on the pricing and reimbursement timelines for pharmaceuticals and may cause our customers to purchase fewer of our products and services or influence us to reduce prices. There is substantial uncertainty about the likelihood, timing and results of these health reform efforts.
Additionally, there have been increasing efforts by governments 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. 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 the California Consumer Protection Act (“CCPA”). Some privacy laws prohibit the transfer of personal information to certain other jurisdictions. 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, and other costs. We also have contractual obligations to customers that might be breached if we fail to comply with privacy laws. Our efforts to comply with privacy laws complicate our operations and add to our compliance costs.
We and our external service providers 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 customers, company and workforce. Despite physical, technical, and administrative security measures that we implement in order to, among other things, address regulatory requirements, our technology systems and operations may continue to be subject to cybersecurity incidents. The risk of cybersecurity incidents may be increased due to a variety of factors, both internal and external. A cybersecurity incident might involve a material data breach or other material impact to the integrity and operations of the technology systems and operations, which might result in litigation or regulatory action.
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 19, “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, presently are 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, regulations, or government guidance in the future. The amount of our capital expenditures for environmental compliance was not material in 2021 and is not expected to be material in the next year.
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 substantial costs on us. 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 2018,2021, sales to our ten largest customers, including GPOsgroup purchasing organizations (“GPOs”) accounted for approximately 51.7%51% of our total consolidated revenues. Sales to our largest customer, CVS Health Corporation (“CVS”), accounted for approximately 19.9%21% of our total consolidated revenues. At March 31, 2018, trade accounts receivable fromrevenues in 2021. In May 2019, we extended our pharmaceutical distribution relationship with CVS to June 2023. Our ten largest customers werecomprised approximately 24.9%32%, and CVS was approximately 19%, of total trade accounts receivable. Accounts receivable from CVS were approximately 16.4% of total trade accounts receivable.at March 31, 2021. 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 receivable 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%7% of our purchases in 2018.2021. 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 are generally sound. The ten largest suppliers in 20182021 accounted for approximately 41%50% of our purchases.
A significant portionSome of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. In addition, we have certain distribution arrangements with pharmaceutical manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our existing inventory at the new higher prices. For these manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to us, could have an adverse impact on our gross profit margin.
Research and Development: Research and development (“R&D”) costsexpenses were $125$74 million, $341$96 million, and $392$71 million during 2018, 20172021, 2020, and 2016. Development expenditures in 2017 and 2016 were primarily incurred by our MTS segment. R&D costs were lower in 2018 due to the 2017 contribution of the majority of our MTS businesses. 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.2019, 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 2018 and is not expected to be material in the next year.
Employees: On March 31, 2018, we employed approximately 78,000 employees, including approximately 20,000 part-time employees.
Financial Information About Foreign and Domestic Operations: Certain financial information relating to foreign and domestic operations is included in Financial Note 28,22, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. 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 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements in this report. Regulatory proceedings might involve allegations such as false claims, healthcare fraud and abuse, and antitrust violations. Civil litigation proceedings might 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 outcome of legal disputes is difficult to predict. Outcomes can occur that are not justified by the evidence or existing law. The uncertainty and expense associated with unresolved legal disputes might harm our business and reputation even if the matter is favorably resolved. Accordingly, any legal dispute might have a materially adverse impact on our reputation, our business operations and our financial position or results of operations.
We might experience losses not covered by insurance.
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 approximately 3,200 cases alleging claims related to the distribution of controlled substances (opioids), as described in Financial Note 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements in this 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. All proceedings 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. Proceedings can result in monetary damages, penalties and fines, and injunctive or other relief. Although the Company has valid defenses and is vigorously defending itself, some proceedings have been and others may be resolved by negotiated outcome. Our reputation has been and may continue to be 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.
ChangesLegislative, 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 United States healthcare industrydistribution of opioid medications in those states and regulatory environment couldother states have considered similar legislation. Liabilities for taxes or assessments or other costs of compliance under any such laws might have a materialmaterially adverse impact on our reputation, business operations, and our financial position or results of operations.
Many of our products and servicesWe are intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. In recent years, the healthcare industry in the United States has changed significantly in an effort to 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 and consolidation in the healthcare industry. We expect the healthcare industry in the United States to continue to change and for healthcare delivery models to evolve in the future.
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. Additionally, if we experience disruptions in our supply of generic drugs, our margins could be adversely affected. 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 manufacturers are structured to ensure that we are appropriately and predictably compensated for the services we provide. However, failure to successfully renew these contracts in a timely and favorable manner could have a material adverse impact on our results of operations. 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 or decreases, which we do not control. In addition, we distribute generic pharmaceuticals, which can be subject to both price deflationextensive, complex and price inflation. Our generic pharmaceutical sourcing program has benefited from the joint sourcing entity, ClarusONE. If ClarusONE does not continue to be successful, our margins could be adversely affected. Our Distribution Solutions segment experienced weaker pharmaceutical pricing trends over the last three years. 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 (e.g., Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”)) inspections to determine compliance with various federal regulations. Any noncompliance by us with applicable laws or the failure to maintain, renew or obtain necessary permits and licenses could lead to 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, state and federal governments continue to strengthen their position and scrutiny over practices involving or allegedly involving fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare programs. Our relationships with 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 laws and regulations on fraud and abuse, which among other things: (1) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or to induce the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs; (2) impose a number 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 thethese laws, regulations, applicable to us,and government guidance, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. The regulationslaws 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 failFailures to comply with applicable laws subject 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, including the loss of licenses or our ability to participate in Medicare, Medicaid and other federal and state healthcare programs.
Reimbursements: Both our profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals, medical treatments and related services, or changing the methodology by which reimbursement levels are determined. For example, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “Affordable Care Act”), signed into law in 2010, revised, 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 February 1, 2016, the Centers for Medicare and Medicaid Services (“CMS”) published the Covered Outpatient Drugs final rule. The final rule, with limited exceptions, establishes the FUL to be 175% of the weighted average (determined on the basis of utilization across a drug molecule when multiple sources are available) of the most recently reported monthly average manufacturer price (“AMP”). 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). On September 20, 2017, CMS issued a request for information seeking recommendations for payment models, which could include prescription drug models under Medicare Parts B and D and state Medicaid programs. CMS noted its interest in drug pricing and value-based purchasing models involving “novel arrangements between plans, manufacturers, and stakeholders across the supply chain.” Additionally, CMS published a proposed rule on July 20, 2017 that would cut Medicare outpatient hospital reimbursement for separately payable drugs (other than vaccines) purchased through the 340B drug pricing program at ASP minus 22.5% (with certain exceptions), rather than ASP plus 6%. CMS finalized this rule on November 1, 2017. 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 CMSCenters for Medicare & Medicaid Services (“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 has resulted in monetary penalties and/or license revocation. Inlicensing sanctions. For example, under a January 2017 we reached an agreement with the DEA and Department of Justice pursuant to which we paid the sum of $150 million to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reportingour practices for reporting suspicious orders of controlled substances. Thesubstances and the DEA is suspending,suspended, on a staggered basis for limited periods of time, McKesson’s DEAour registrations to distribute certain controlled substances from four McKesson distribution centers.
AlthoughMarch 31, 2021, suspensions at the four distribution centers had all expired by their own terms. If we have enhanced our proceduresare not able 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.
Pedigree Tracking:tracking laws increase our compliance burden and our pharmaceutical distribution costs.
There have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy and departments of health and the FDA,governments 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 andFor example, the President signed into law theU.S. Drug Quality and Security Act of 2013 (“DQSA”). The DQSA establishes federal standards requiring supply-chain stakeholders requires us to participate in an electronic, interoperable, lot-levela federal prescription drug track and trace system. The law alsosystem that 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 U.S. 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 securingsuch as track and trace or authentication technologies, to secure the pharmaceutical supply chain against counterfeit drugs. These standards may include track-and-trace or authentication technologies,We also have record-keeping and other obligations under the E.U. Falsified Medicines Directive. Pedigree tracking laws such as radio frequency identification devices, 2D data matrix barcodes and other similar technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (“SNI”) guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulations inincrease our distribution operations. The DQSA and other pedigree tracking laws and regulations could increase the overall regulatorycompliance burden and costs associated with our pharmaceutical distribution business,costs, and couldthey might have a materialmaterially adverse impact on our business operations and our financial position or results of operations.
Privacy: TherePrivacy and data protection laws increase our compliance burden.
We are numerous federal and state laws and regulations relatedsubject to thea variety of privacy and security of personal information. In particular, regulations promulgated pursuantdata 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”) establish privacy and security standards that limit the use and disclosure of individually identifiable health information (known as “protected health information”) and require the implementation ofwe must maintain administrative, physical and technological safeguards to protect the privacy of individually identifiable health information (“protected health informationinformation”) and ensure the confidentiality, integrity and availability of electronic protected health information. We are directly subject to significant compliance obligations under privacy laws such as the General Data Protection Regulation in the European Union (“GDPR”), the Personal Information Protection and Electronic Documents Act (“PIPEDA”) in Canada, and the California Consumer Protection Act (“CCPA”). Some privacy laws prohibit the transfer of personal information to certain provisions of the regulations as a “Business Associate” through our relationships with customers.other jurisdictions. We are also directly subject to the HIPAA privacy and security regulations as a “Covered Entity” with respect to our operations as a healthcare clearinghouse, specialty pharmacy and medical surgical supply business.
The privacy regulations established under HIPAA also provide patients with rights related to understanding and controlling how their protected health information is used and disclosed. To the extent permitteddata protection compliance audits or investigations by applicable privacy regulations and our contracts with our customers, we may use and disclose protected health information to perform our services and for other limited purposes, such as creating de-identified information. Other uses and disclosures, such as marketing communications, require written authorization from the individual or must meet an exception specified under the privacy regulations. Determining whether protected health information has been sufficiently de-identifiedvarious government agencies. Failure to comply with the HIPAA privacy standardsthese laws subjects us to potential regulatory enforcement activity, fines, private litigation including class actions, and ourother costs. We also have contractual obligations may require complex factual and statistical analyses and mayto customers that might be subject to interpretation.
If we are unable to properly protect the privacy and security of protected health information entrusted to us, we could be found to have breached our contracts with our customers. Further, if we fail to comply with applicable HIPAA privacy and security standards, we could face civil and criminal penalties. HHS performs compliance audits of Covered Entities and Business Associates and enforces the HIPAA privacy and security standards. HHS has become an increasingly active regulator and has signaled its intention to continue this trend. HHS has the discretion to impose penalties without being required to attempt to resolve violations through informal means, such as implementing a corrective action plan. HHS enforcement activity can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources. In addition to enforcement by HHS, state attorneys general are authorized to bring civil actions seeking either injunctions or damages in response to violations that threaten the privacy of state residents. Although we have implemented and maintain policies and processes to assist us in complying with these regulations and our contractual obligations, we cannot provide assurance regarding how these regulations will be interpreted, enforced or applied to our operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoinglaws. Our efforts to comply with evolvingprivacy laws complicates our operations and regulations at the federal and state leveladds to our compliance costs. A significant privacy breach or failure to comply with privacy laws might also require us to make costly system purchases and/or modifications from time to time.
Healthcare Reform: The 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. While certain provisions of the ACA 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). Further, as a result of the November 2016 U.S. presidential election, there are continued uncertainties associated with efforts to change or repeal certain provisions of the ACA or other healthcare reforms, and we cannot predict their full effect on the Company at this time. A top legislative priority of the new presidential administration and Congress may be significant reform of the ACA, as discussed above. While there is currently a substantial lack of clarity around the likelihood, timing and details of any such policies and reforms, such policies and reforms may have a materialmaterially adverse impact on our results of operations.
FDA Regulation of Medical Software: The FDA has increasingly focused on the regulation of medical softwarereputation, business operations and health information technology products as medical devices under the federal Food, Drug and Cosmetic Act. For example, in February 2015, the FDA issued guidance to inform manufacturers and distributors of medical device data systems that it did not intend to enforce compliance with regulatory controls that apply to medical device data systems, medical image storage devices, and medical image communication devices. If the FDA chooses to regulate more of our products as medical devices, or subsequently changes or reverses its guidance regarding not enforcing regulatory controls for certain medical device products, it can impose extensive requirements upon us. If we fail to comply with the applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant pre-market clearance of products, withdrawing clearances and initiating criminal prosecution. Any additional FDA regulations governing health information technology products, once issued, may increase the cost and time to market of new or existing products or may prevent us from marketing our products. In December 2016, Congress passed and the President signed into law the 21st Century Cures Act. The 21st Century Cures Act changes 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.
Medical Billing and Coding: Medical billing, coding and collection activities are governed by numerous federal and state civil and criminal laws. In connection with these laws, we may be subjected to federal or state government investigations and possible penalties may be imposed upon us, false claims actions may have to be defended, private payers may file claims against us and we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Any such proceeding or investigation could have a material adverse impact on our results of operations.
Our foreign operations subject us to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial position 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. Moreover, in Europe, McKesson Europe AG (“McKesson Europe”), formerly known as Celesio AG, operates as a wholesale and retail company and provider of logistics and services to the pharmaceutical and healthcare sector.
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.
On June 23, 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, which proposed exit (and the political, economic and other uncertainties it has raised) has exacerbated and may further exacerbate many of the risks and uncertainties described above. Negotiations on withdrawal and post-exit arrangements likely will be complex and protracted, and there can be no assurance regarding the terms, timing or consummation of any such arrangements. The proposed withdrawal could, among other potential outcomes, adversely affect the tax, tax treaty, currency, operational, legal and regulatory regimes to which our businesses in the region are subject. The withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union and significantly disrupt trade between the United Kingdom and the European Union and other parties. Further, uncertainty around these and related issues could lead to adverse effects on the economy of the United Kingdom and the other economies in which we operate. There can be no assurance that any or all of these events will not have a material adverse effect on our results of operations.
In addition, foreign operations are also subject to risks of violations of laws prohibiting improper payments and bribery, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar regulations in foreign jurisdictions. The U.K. Bribery Act, for example, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that fails to prevent bribery committed by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented adequate procedures to prevent bribery. 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 and will continue to take steps to reform the rules regarding the sale of generic drugs. These changes include increased powers of investigation, reporting and enforcement for provincial regulatory agencies, 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 and the tendering of generic molecules on provincial drug formularies. These reforms may adversely affect the distribution of drugs as well as the pricing for prescription drugs for the Company’s operations in Canada. Additional 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.
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, including the government in the United Kingdom in the past year, 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, beginning May 25, 2018, we are subject to the General Data Protection Regulation, which requires EU member states to impose 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 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.
Achieving the anticipated benefits of any acquisition is subject to a number of risks and uncertainties, including foreign exchange fluctuations, challenges of managing new domestic or international operations, and whether we can ensure continued performance or market growth of products and services. The integration process is subject to a number of uncertainties and no assurance can be given that the anticipated benefits of any 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 an acquisition and which could have a material adverse impact on our results of operations.
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 a transaction 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 changes in regulations and laws, as well as economic trends, could also adversely affect our ability to realize the expected benefits from a transaction.
Our results of operations could be impacted if our investment in Change Healthcare fails to perform as expected.
On March 1, 2017, McKesson contributed the majority of its Core MTS Business and Change contributed substantially all of its businesses, excluding its pharmacy switch and prescription routing businesses, to form a joint venture, Change Healthcare. The purpose of the transaction was to create a new healthcare information technology company, bringing together the complementary strengths of the contributed assets to provide software and analytics, network solutions and technology-enabled services that will help customers obtain actionable insights, exchange mission-critical information, control costs, optimize revenue opportunities, increase cash flow and effectively navigate the shift to value-based healthcare. Change Healthcare is jointly governed by McKesson and Change. Operating a business under joint governance of unaffiliated, controlling members could lead to conflicts of interest or deadlocks on important and time-sensitive operational, financial or strategic decisions, and will require additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. If we are unable to manage our joint venture relationship and to realize the strategic and financial benefits that we expect, including an initial public offering of Change Healthcare, such inability to manage the relationship or realize benefits may have a material adverse impact on our results of operations.
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. 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. For example, the Company is a defendant in many cases alleging claims related to the distribution of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. The Company has been served with many complaints, often brought by governmental entities (including counties and municipalities) that allege violations of controlled substance laws and various other statutes in addition to common law claims, including negligence and public nuisance, and seek monetary damages and equitable relief. Some states and other governmental entities have indicated that they are considering filing similar suits. 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-consuming and disruptive to normal business operations. The defense of these matters could also result in continued diversion of our management’s time and attention away from business operations, which could also harm our business. Even if these matters are not resolved against us, the uncertainty and expense associated with unresolved legal proceedings could harm our business and reputation.
Company and Operational Risks
Competition and industry consolidation may erode our profit.
Our Distribution Solutions segment (and commencing in first quarter of 2019, our reportable segments including U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions, Medical-Surgical Solutions and Other) faces a highly competitive global environment with strong competitionWe might record significant charges 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 pharmaceuticalimpairment to goodwill, 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 McKesson Prescription Technology Solutions business 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 purchases or the loss of a large customer or group purchasing organization, as well as substantial defaults in payment by a large customer or group purchasing organization, could have a material adverse impact on our financial position and results of operations.
In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2018, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 51.7% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 19.9% of our total consolidated revenues. At March 31, 2018, trade accounts receivable from our ten largest customers were approximately 24.9% of total trade accounts receivable. Accounts receivable from CVS were approximately 16.4% 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, our customers and our external service providers use a variety of security measures to protect our and their computer systems, a failure or compromise of our, our customers’ or our external service providers’ 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 personally identifiable information, 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.
Our industry is subject to various evolving federal, state and international data and security laws and regulations, which impose operational costs to achieve compliance. Any failure to comply with these laws and regulations could result in regulatory enforcement activity and fines. In addition, compliance with these requirements could require changes in business practices, complicate our operations, and increase our oversight needs.
The constant evolution of cyberattacks has caused us to spend more time and money to deal with increasingly sophisticated attacks. Despite our implementation of a variety of physical, technical and administrative security measures, our, our customers’ and our external service providers’ 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, our customers’ or our external service providers’ computer systems may result in business disruption or 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, notification costs, remediation expenses, 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.
Transactions like our acquisitions of McKesson Europe and Rexall Health expose 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.
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, some of our 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) cyberattacks, 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.
We may be required to record a significant charge to earnings if our goodwill, intangible and other long-lived assets or investments 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. 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 could have a material adverse impact on our results of operations. There are inherent uncertainties in management’s estimates, judgments and assumptions used in assessing recoverability of goodwill, 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.
Our investment For example, the COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in Change Healthcare representsestimates, 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 fair valueperiod in which any impairment of our 70% equity interest in Change Healthcare upon closing. We may experience declines in its fair value. A decline in the fair value of our Change Healthcare investment may require that we review the carrying value for potential impairment,goodwill or intangible and such review could result in an impairment charge to our consolidated statements of operations.
Tax legislation initiatives or challenges to our tax positions couldother long-lived assets is determined, which might have a materialmaterially adverse impact on our business operations and our financial position or results of operations.
We are a large multinational corporation withexperience cybersecurity incidents that might significantly compromise our technology systems or might result in material data breaches.
We and our external service providers use technology and systems to perform our business operations, insuch as the United Statessecure electronic transmission, processing, storage and international jurisdictions. As such, we arehosting 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 customers, company and workforce. Despite physical, technical, and administrative security measures, our technology systems and operations have been, and likely will continue to be, subject to the tax laws and regulationscyberattacks from sources beyond our control. Cybersecurity incidents include actual or attempted unauthorized access, tampering, malware insertion, ransomware attacks or other system integrity events. The risk of the United States federal, state and local governments and of many international jurisdictions. From time to time, legislationcyberattacks 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. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") was enacted and contains significant changes to U.S. income tax law. Effective in 2018, the 2017 Tax Act reduces the U.S. statutory tax rate from 35% to 21%. Effective in 2019, it creates new taxes focused on foreign-sourced earnings and related-party payments. In addition, we were subjectincreased due to a one-time transition tax in 2018 on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which allows companies to record provisional amounts duringvariety of factors, both internal and external. A cybersecurity incident might involve a measurement period not to extend beyond one year of the enactment date. We have made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements for the year ended March 31, 2018, in accordance with SAB 118. The U.S. Treasury Department and IRS have not yet issued regulations with respectmaterial data breach or other material impact to the 2017 Tax Act. Due to the potential for changes to tax lawsintegrity and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the 2017 Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexityoperations of our intercompany arrangements, uncertainties regarding the geographic mixtechnology systems, which might result in litigation or regulatory action, loss of earnings incustomers or revenue, and increased expense, any particular period, and other factors, material adjustments to our tax estimates impact our provision for income taxes and our earnings per share, as well as our cash flows, in the period inof which any such adjustments are made. Refer to Financial Note 10, “Income Taxes,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
The tax laws and regulations of the various countries where we have major operations are extremely complex and subject to varying interpretations. For example, we operate in various countries 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 couldmight have a material impact 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 Development 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 and cash flows.
Volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit, our cost of credit and the financial soundness of our customers and suppliers.
Volatility and disruption in the global capital and credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by other financial institutions, or decreased liquidity and increased costs in the commercial paper market, may adversely affect the availability and cost of credit already arranged and the availability, terms and cost of credit in the future. Although we believe that our operating cash flow, financial assets, 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, there can be no assurance that volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.
Our business could also be negatively impacted if our customers or suppliers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy. As a result, customers may modify, delay or cancel plans to purchase or implement our products or services and suppliers may increase their prices, reduce their output or change their terms of sale. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of accounts receivable owed to us and suppliers may restrict credit, impose different payment terms or be unable to make payments due to us for fees, returned products or incentives. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms, may have a materialmaterially adverse impact on our results ofbusiness operations, reputation, and cash flow.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our consolidated financial statements.
Our consolidated financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt, such as the amended guidance for leases, 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 a material adverse impact on our financial position andor results of operations.
We could facemight experience significant liability if we withdraw from participation in oneproblems with information systems or more multiemployer pension plans in which we participate, or if one or more multiemployer plans in which we participate is underfunded.networks.
We participate in various multiemployer pension plans. Inrely on sophisticated information systems and networks to perform our business operations, such as to obtain, rapidly process, analyze and manage data that facilitate the event that we withdrawpurchase and distribution of thousands of inventory items 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 employersdistribution centers. If those information systems suffer errors, interruptions, or 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 asunavailable, there might be 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 materialmaterially adverse impact on our consolidatedbusiness operations, reputation, and our financial position or results of operationsoperations.
Our products or cash flows.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 claims or litigation by users of our software or services or their patients. Errors or failures might damage our reputation and negatively affect future sales. A failure of a system or software to conform to specifications might constitute a breach of warranty that 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 materially adverse impact on our reputation, business operations and our financial position or results of operations.
We might be impeded in providing customers online services and data access.
We provide remote services that involve hosting customer data and operating software on our own or third party systems. Our customers rely on their ability to access the systems and their data as needed. The networks and hosting systems are vulnerable to interruption or damage from sources beyond our control, such as power loss, telecommunications failures, fire, natural disasters, software and hardware failures and cyberattacks. If the timely delivery of medical care or other customer business requirements are impaired by data access, network or systems problems, we could be exposed to significant claims and reputational harm. Any such problems might have a materially adverse impact on our business operations and our financial position or results of operations.
We might not realize the expected benefits from our restructuring and business process initiatives.
From time to time, the CompanyWe may enter intoimplement restructuring, and business process initiatives. In April 2018, the Company announced a multi-year strategic growth initiative focused on creating innovative new solutions that improve patient care delivery and drive incremental profit growth. The initiative includes a comprehensive review of the Company’s operations and cost structure, designed to increase efficiency, accelerate execution and improve long-term performance. In March 2016, the Company also committed to a restructuring plan to lower its operating costs (“Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a 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. These types of 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.
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 withmight be adversely impacted by outsourcing andor similar third-party relationships.
Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and managing 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 maymight experience unanticipated operational difficulties, andcompliance requirements or increased costs may adversely affect the results of our operations.
Moreover, we utilize contractors and employees located outside of the United Statesrelated to assist us in performing services or providing support for our customers. Certain of these resources may have access to personal information, including protected health information. Some of our customers have contractually limited or may seek to limitoutsourced services. For example, our ability to use our offshoreoutsourcing resources which may increase our costs due to concerns regarding potential misuse of this information. Further, Congress and a number of states have considered legislation that would restrict the transmission of personal information of United States residents offshore. Some proposals impose liability on healthcare businesses resulting from misuse or prohibited transmission of personal information to individuals or entities outside the United States and may require the prior consent of the identifiable patient. Congress also has considered establishing a private civil cause of action enabling an individual to recover damages sustained as a result of a violation of these proposed restrictions. If our ability to utilize offshore resources isin certain jurisdictions might be limited by our customers or legislative action or customer contracts, with the result that the work currently beingmust be performed offshore may be done at a lower margingreater expense or at a loss and we may be subject to sanctions if we are unable to comply with new legislative requirements. Usefor non-compliance. Any of offshore resources may increasethese risks might have a materially adverse impact on our risk of violating data securitybusiness operations and privacy obligations to our customers, which could adversely affect ourfinancial position or results of operations.
We may face risks associated withbe unsuccessful in retail pharmacy operations or maintaining profitability.
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 that our retail locations will be received as well as, or achieve net sales or profitability levels consistentoperations may result in significant costs, including those associated with our projected targets or be comparable to those of our existing storessite closures and reductions in the time periods estimated by us, or at all.workforce. 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 operations and 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, 2021, sales to our largest customer represented approximately 21% of our consolidated revenues and approximately 19% of our trade receivables, and those of our ten largest customers combined accounted for approximately 51% of our consolidated revenues and approximately 32% 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 growth prospectsour 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 uncertain. Our government contracts might not be renewed or might be terminated for convenience with little or no 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 are 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 of the SARS-CoV‑2 virus and the broad scope of the ongoing COVID-19 vaccine distribution program introduce uncertainty about what volumes of products may become available for distribution by us, the effectiveness of 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 adversely affected.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.
We might be unable to successfully recruit and retain qualified employees.
Our retailability 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 might result 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 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 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 price transparency and drug importation measures. These proposals might result in significant changes in the pharmaceutical value chain as manufacturers, PBM, managed care organizations and other industry stakeholders look to implement new transactional flows and adapt their business models.
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 regulate pharmaceutical prices, patient eligibility and reimbursement levels in order to control government healthcare system costs. Some European governments have implemented or are considering austerity measures to reduce healthcare spending. These measures exert pressure on the pricing and reimbursement timelines for pharmaceuticals and may cause our customers to purchase fewer of our products and services or influence us to reduce prices.
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 require additionalfrom time-to-time decide to develop, for their own internal needs, supply management time and attention. Failurecapabilities that might otherwise be provided by our businesses. Due to properly supervise the operation and maintain the consistencyconsolidation, 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. Our inventory might be requisitioned, diverted or allocated by government order such as under emergency, disaster and civil defense declarations. 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 generic pharmaceutical sourcing joint venture with Walmart, Inc. 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 retail storesgeneric 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 an economic slowdown or recession.
An economic slowdown or recession affecting our businesses in one or more regions could reduce the prices our customers are able or willing to pay for our products and services and the volume of their purchases. This risk is increased by the COVID-19 pandemic. Any economic slowdown or recession 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. 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 losssupplier 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 customerssome products, resulting in product allocation and potentiallydelivery 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 the Brexit withdrawal of the United Kingdom from the European Union.
We have operations in the U.K. and the European Union (“E.U.”) and face risks associated with the uncertainty and potential disruptions that might follow the U.K. withdrawing from the European Union (“Brexit”). Brexit could adversely affect political, regulatory, economic or market conditions and contribute to instability in global political institutions, regulatory agencies and financial markets. For example, we might experience volatility in exchange rates and interest rates and changes in laws regulating our U.K. operations. Customers might reduce purchases due to the uncertainty caused by Brexit. 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 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 has 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. For example, in February 2021, a severe winter storm affecting the United States temporarily impacted our distribution business operations, primarily in Texas. They might affect consumer confidence levels and spending. In response to these events, we might suspend operations, implement extraordinary procedures, seek alternate sources for product supply, or suffer consequences that are unexpected and difficult to mitigate. In particular, the rapid and widespread transmission of the SARS-CoV-2 novel coronavirus beginning in late 2019 impacts us in significant ways. For example, to mitigate the spread of the COVID-19 disease caused by SARS-CoV-2, we implemented travel restrictions and remote working arrangements for most of our employees in order to minimize physical contact, and we implemented additional sanitation and personal protection measures in our warehouse, retail pharmacy and delivery operations. These measures might not fully mitigate COVID-19 risks to our workforce and we could experience unusual levels of absenteeism that might impair operations and delay delivery of products. The COVID-19 pandemic affects product manufacturing, supply and transport availability and cost. The pandemic reduces demand for some products due to delays or cancellations of elective medical procedures, consumer self-isolation and business closures, among other reasons. The COVID-19 pandemic influences shortages of some products, with product allocation resulting in delivery delays for customers. The ongoing impacts of the pandemic might cause a general economic slowdown or recession in one or more markets, disruptions and volatility in global capital markets and other broad and adverse effects on the economy, business conditions, commercial activity and the healthcare industry. The pandemic might impact our business operation, financial position and results of operation in unpredictable ways that depend on highly uncertain future developments, such as determining the effectiveness of current or future government actions to address the public health or economic impacts of the pandemic. 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, 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,11, “Leases,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
24Item 3. Legal Proceedings.
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Item 3. | Legal Proceedings. |
Certain legal proceedings in which we are involved are discussed in Financial Note 24,19, “Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Disclosure of an environmental proceeding where a governmental agency is a party generally is 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. |
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 executive officers are elected on an annual basis generally and their term expires at the first meeting of the Board of Directors (“Board”) following the annual meeting of stockholders, or until their successors are elected and have qualified, or until death, resignation, or removal, whichever is sooner.
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| Name | | Age | | Position with Registrant and Business Experience |
| | | | |
NameBrian S. Tyler | | Age54 | | Position with Registrant and Business Experience |
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John H. Hammergren | | 59 | | Chairman of the Board since July 2002; President and Chief Executive Officer since April 2001;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; Executive Vice President, Corporate Strategy and Business Development from 2012 to 2015; and a director since July 1999.April 2019. Service with the Company — 22- 24 years. |
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| Britt J. Vitalone | | 4952 | | Executive Vice President and Chief Financial Officer since January 2018; Senior Vice President and Chief Financial Officer, U.S. Pharmaceutical from July 2014 to December 2017; Senior Vice President and Chief Financial Officer, U.S. Pharmaceutical and Specialty Health from October 2017 to December 2017; Senior Vice President of Corporate Finance and M&A Finance from March 2012 to June 2014. Service with the Company — 12- 15 years.
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Jorge L. FigueredoTracy Faber | | 5751 | | Executive Vice President and Chief Human Resources Officer since May 2008.October 2019. Previously, Senior Vice President of Human Resources. Service with the Company —- 10 years. |
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Kathleen D. McElligottNancy Flores | | 6254 | | 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 — 2 years.- 1 year. |
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Bansi NagjiTom Rodgers | | 5350 | | Executive Vice President, CorporateChief Strategy Officer since June 2020. Previously Senior Vice President and Business Development since February 2015; Principal, Deloitte Consulting, LLP and Global Leader, Monitor Deloitte (which was formed by the global mergerManaging Director of Monitor Group with Deloitte)McKesson Ventures from January 2013 to February 2015; President, Monitor Group from July 2012 to January 2013; Partner, Monitor Group from 2001 to January 2013.2014-2020. Service with the Company — 3- 7 years. |
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| Lori A. Schechter | | 5659 | | Executive Vice President, Chief Legal Officer and General Counsel and Chief Compliance Officer since June 2014; Associate General Counsel from January 2012 to June 2014; Litigation Partner, Morrison & Foerster LLP from January 1995 to December 2011. Service with the Company — 6- 9 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: The number of record holders of our common stock at March 31, 2021 was approximately 4,841.
Dividends: In July 2020, our quarterly dividend was raised from $0.41 to $0.42 per common share for dividends declared on NYSE for each quarterly periodor after such date by the Board. We declared regular cash dividends of $1.67 and $1.62 per share in the two most recently completed fiscal years:years ended March 31, 2021 and 2020, respectively.
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| | 2018 | | 2017 |
| | High | Low | | High | Low |
| First quarter | $ | 169.29 |
| $ | 133.82 |
| | $ | 188.43 |
| $ | 154.33 |
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| Second quarter | $ | 168.87 |
| $ | 145.13 |
| | $ | 199.43 |
| $ | 163.57 |
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| Third quarter | $ | 164.29 |
| $ | 134.25 |
| | $ | 166.78 |
| $ | 114.53 |
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| Fourth quarter | $ | 178.86 |
| $ | 137.10 |
| | $ | 153.07 |
| $ | 134.17 |
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(b) | Holders: The number of record holders of the Company’s common stock at March 31, 2018 was approximately 5,619.
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(c) | Dividends: In July 2017, the Company’s quarterly dividend was raised from $0.28 to $0.34 per common share for dividends declared on or after such date by the Company’s Board of Directors (the “Board”). The Company declared regular cash dividends of $1.30 and $1.12 per share in the years ended March 31, 2018 and 2017.
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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.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. 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 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, corporate and regulatory requirements, restrictions under the Company’s debt obligations, and other market and economic conditions. |
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(e) | 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.
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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, 2018 | | | | | | $ | 1,096 | |
| Shares repurchase plans authorized in May 2018 | | | | | | 4,000 | |
| Shares repurchased - Open market | | 10.4 | | | $ | 132.14 | | | (1,377) | |
| Shares repurchased - ASR | | 2.1 | | | $ | 117.98 | | | (250) | |
| Balance, March 31, 2019 | | | | | | 3,469 | |
| Shares repurchased - Open market | | 9.2 | | | $ | 144.68 | | | (1,334) | |
| Shares repurchased - ASR | | 4.7 | | | $ | 127.68 | | | (600) | |
| Balance, March 31, 2020 | | | | | | 1,535 | |
| Shares repurchase plans authorized in January 2021 | | | | | | 2,000 | |
Shares repurchased - Open market (3) | | 4.7 | | | $ | 160.33 | | | (750) | |
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| Balance, March 31, 2021 | | | | | | $ | 2,785 | |
(1)This table does not include the Board authorized the repurchasevalue of upequity awards surrendered to $500 million and $2 billionsatisfy tax withholding obligations. It also excludes shares related to our Split-off of the Company’s common stock.Change Healthcare JV as described in Financial Note 20, “Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.
(2)The number of shares purchased reflects rounding adjustments.
(3)$8 million was accrued within “Other accrued liabilities” on our Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April.
In 2016,2019, we repurchased 4.5retired 5.0 million or $542 million of the Company’s shares for $854 million through open market transactions at an average price per share of $192.27. In February 2016, we entered into an ASR program with a third-party financial institution to repurchase $650 million of the Company’s common stock. The ASR program was completed during the fourth quarter of 2016 and we repurchased 4.2 million shares at an average price per share of $154.04. During 2016, we completed the May 2015 share repurchase authorization. At March 31, 2016, $1.0 billion remained available for future authorized repurchases of the Company’s common stock under the October 2015 authorization.
In 2016, we retired 115.5 million or $7.8 billion of the Company’sour treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $6.4 billion and $1.5 billion during 2016.
In October 2016, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock.
In 2017, we repurchased 14.1 million of the Company’s shares for $2.0 billion through open market transactions at an average price per share of $140.96. In March 2017, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. As of March 31, 2017, we had received 1.4 million shares under this program. This ASR program was completed in April 2017 and we received 0.3 million additional shares. The total number of shares repurchased under this ASR program was 1.7 million shares at an average price per share of $143.19. During 2017, we completed the October 2015 share repurchase authorization. The total authorization outstanding for repurchases of the Company’s common stock was $2.7 billion at March 31, 2017.
In 2018, we repurchased 3.5 million of the Company’s shares for $500 million through open market transactions at an average price per share of $144.43. In June 2017, August 2017 and March 2018, we entered into three separate ASR programs with third-party financial institutions to repurchase $250 million, $400$472 million and $500$70 million, of the Company’s common stock. As of March 31, 2018, we completed and received a total of 1.5 million shares under the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. In addition, we received 2.5 million shares representing the initial number of shares due in March 2018 and an additional 0.5 million shares in April 2018 under the March 2018 ASR program. The total number of shares to be ultimately repurchased by the Company under the March 2018 ASR program will be determined at the completion of the program based on the average daily volume-weighted average price of the Company’s common stockrespectively, during this program, less a discount. The program is anticipated to be completed during the first quarter of 2019. The total authorization outstanding for repurchase of the Company’s common stock was $1.1 billion at March 31, 2018.
In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock. The total authorization outstanding for repurchases of the Company’s common stock was increased to $5.1 billion.
The following table provides information on the Company’sour share repurchases during the fourth quarter of 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021 - January 31, 2021 | 0.4 | | | $ | 181.50 | | | 0.4 | | | $ | 2,958 | |
| February 1, 2021 - February 28, 2021 | 0.4 | | | 180.56 | | | 0.4 | | | 2,880 | |
| March 1, 2021 - March 31, 2021 | 0.5 | | | 184.68 | | | 0.5 | | | 2,785 | |
| Total | 1.3 | | | | | 1.3 | | | |
|
| | | | | | | | | | | | | |
| | 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, 2018 - January 31, 2018 | — |
| | $ | — |
| | — |
| | $ | 1,846 |
|
| February 1, 2018 - February 28, 2018 | 0.7 |
| | 152.00 |
| | 0.7 |
| | 1,734 |
|
| March 1, 2018 - March 31, 2018 | 3.5 |
| | 155.87 (2) |
| | 3.5 |
| | 1,096 |
|
| Total | 4.2 |
| | | | 4.2 |
| |
|
|
| |
(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) | The average price paid per share computation includes the initial share settlement of 2.5 million shares from the March 2018 ASR program, of which the actual average price of shares will be determined at the termination of the program. |
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations.
| |
(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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| McKesson Corporation | $ | 100.00 | | | $ | 95.30 | | | $ | 91.37 | | | $ | 75.92 | | | $ | 89.37 | | | $ | 131.03 | |
| S&P 500 Index | $ | 100.00 | | | $ | 117.17 | | | $ | 133.57 | | | $ | 146.25 | | | $ | 136.05 | | | $ | 212.71 | |
| S&P 500 Health Care Index | $ | 100.00 | | | $ | 111.59 | | | $ | 124.17 | | | $ | 142.66 | | | $ | 141.21 | | | $ | 189.28 | |
| * Assumes $100 invested in McKesson Common Stock and in each index on March 31, 2016 and that all dividends are reinvested. |
Item 6. Reserved.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| McKesson Corporation | $ | 100.00 |
| | $ | 164.63 |
| | $ | 211.91 |
| | $ | 148.16 |
| | $ | 140.65 |
| | $ | 133.64 |
|
| S&P 500 Index | $ | 100.00 |
| | $ | 121.86 |
| | $ | 137.37 |
| | $ | 139.82 |
| | $ | 163.83 |
| | $ | 186.75 |
|
| S&P 500 Health Care Index | $ | 100.00 |
| | $ | 129.24 |
| | $ | 163.09 |
| | $ | 154.64 |
| | $ | 172.57 |
| | $ | 192.01 |
|
* Assumes $100 invested in McKesson Common StockItem 7.Management’s Discussion and in each index on March 31, 2013Analysis of Financial Condition and that all dividends are reinvested.
| |
Item 6. | Selected Financial Data. |
FIVE-YEAR HIGHLIGHTS
|
| | | | | | | | | | | | | | | | | | | | |
| | As of and for the Years Ended March 31, |
| (In millions, except per share data and ratios) | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Operating Results | | | | | | | | | | |
| Revenues | | $ | 208,357 |
| | $ | 198,533 |
| | $ | 190,884 |
| | $ | 179,045 |
| | $ | 137,392 |
|
| Percent change | | 4.9 | % | | 4.0 | % | | 6.6 | % | | 30.3 | % | | 12.4 | % |
| Gross profit | | $ | 11,184 |
| | $ | 11,271 |
| | $ | 11,416 |
| | $ | 11,411 |
| | $ | 8,352 |
|
Income from continuing operations before income taxes (2) | | 239 |
| | 6,891 |
| | 3,250 |
| | 2,657 |
| | 2,171 |
|
| Income (loss) after income taxes | | | | | | | | | | |
Continuing operations (2) | | 292 |
| | 5,277 |
| | 2,342 |
| | 1,842 |
| | 1,414 |
|
| Discontinued operations | | 5 |
| | (124 | ) | | (32 | ) | | (299 | ) | | (156 | ) |
| Net income | | 297 |
| | 5,153 |
| | 2,310 |
| | 1,543 |
| | 1,258 |
|
Net (income) loss attributable to noncontrolling interests (1) | | (230 | ) | | (83 | ) | | (52 | ) | | (67 | ) | | 5 |
|
Net income attributable to McKesson Corporation (2) | | 67 |
| | 5,070 |
| | 2,258 |
| | 1,476 |
| | 1,263 |
|
| | | | | | | | | | | |
| Financial Position | | | | | | | | | | |
| Working capital | | $ | 451 |
| | $ | 1,336 |
| | $ | 3,366 |
| | $ | 3,173 |
| | $ | 3,221 |
|
Days sales outstanding for: (3) | | | | | | | | | | |
| Customer receivables | | 25 |
| | 27 |
| | 28 |
| | 26 |
| | 29 |
|
| Inventories | | 30 |
| | 30 |
| | 32 |
| | 31 |
| | 33 |
|
| Drafts and accounts payable | | 60 |
| | 61 |
| | 59 |
| | 54 |
| | 54 |
|
| Total assets | | $ | 60,381 |
| | $ | 60,969 |
| | $ | 56,523 |
| | $ | 53,870 |
| | $ | 51,759 |
|
| Total debt, including capital lease obligations | | 7,880 |
| | 8,545 |
| | 8,114 |
| | 9,844 |
| | 10,594 |
|
Total McKesson stockholders’ equity (4) | | 9,804 |
| | 11,095 |
| | 8,924 |
| | 8,001 |
| | 8,522 |
|
| Payments for property, plant and equipment | | 405 |
| | 404 |
| | 488 |
| | 376 |
| | 278 |
|
| Acquisitions, net of cash and cash equivalents acquired | | 2,893 |
| | 4,237 |
| | 40 |
| | 170 |
| | 4,634 |
|
| | | | | | | | | | | |
| Common Share Information | | | | | | | | | | |
| Common shares outstanding at year-end | | 202 |
| | 211 |
| | 225 |
| | 232 |
| | 231 |
|
| Shares on which earnings per common share were based | | | | | | | | | | |
| Diluted | | 209 |
| | 223 |
| | 233 |
| | 235 |
| | 233 |
|
| Basic | | 208 |
| | 221 |
| | 230 |
| | 232 |
| | 229 |
|
Diluted earnings (loss) per common share attributable to McKesson Corporation (5) | | | | | | | | | | |
| Continuing operations | | $ | 0.30 |
| | $ | 23.28 |
| | $ | 9.84 |
| | $ | 7.54 |
| | $ | 6.08 |
|
| Discontinued operations | | 0.02 |
| | (0.55 | ) | | (0.14 | ) | | (1.27 | ) | | (0.67 | ) |
| Total | | 0.32 |
| | 22.73 |
| | 9.70 |
| | 6.27 |
| | 5.41 |
|
| Cash dividends declared | | 270 |
| | 249 |
| | 249 |
| | 226 |
| | 214 |
|
| Cash dividends declared per common share | | 1.30 |
| | 1.12 |
| | 1.08 |
| | 0.96 |
| | 0.92 |
|
Book value per common share (5) (6) | | 48.53 |
| | 52.58 |
| | 39.66 |
| | 34.49 |
| | 36.89 |
|
| Market value per common share - year-end | | 140.87 |
| | 148.26 |
| | 157.25 |
| | 226.20 |
| | 176.57 |
|
| | | | | | | | | | | |
| Supplemental Data | | | | | | | | | | |
Debt to capital ratio (7) | | 40.6 | % | | 39.2 | % | | 43.6 | % | | 50.3 | % | | 55.4 | % |
Average McKesson stockholders’ equity (8) | | $ | 11,016 |
| | $ | 9,282 |
| | $ | 8,688 |
| | $ | 8,703 |
| | $ | 7,803 |
|
Return on McKesson stockholders’ equity (9) | | 0.6 | % | | 54.6 | % | | 26.0 | % | | 17.0 | % | | 16.2 | % |
Footnotes to Five-Year Highlights:
| |
(1) | Primarily reflects guaranteed dividends for 2015 and annual recurring compensation for 2016, 2017 and 2018 that McKesson became obligated to pay to the noncontrolling shareholders of McKesson Europe upon the effectiveness of the Domination Agreement in December 2014. 2018 and 2017 also include net income attributable to third-party equity interests in our consolidated entities including Vantage and ClarusONE Sourcing Services LLP, which was formed in 2017. |
| |
(2) | 2018 includes non-cash goodwill impairment charges (pre-tax and after-tax) of $1,738 million for our McKesson Europe and Rexall Health reporting units. 2017 includes a pre-tax gain of $3,947 million ($3,018 million after-tax) from the contribution of our Core MTS Business in connection with Healthcare Technology Net Asset Exchange. |
| |
(3) | Based on year-end balances and sales or cost of sales for the last 90 days of the year. |
| |
(4) | Excludes noncontrolling and redeemable noncontrolling interests. |
| |
(5) | Certain computations may reflect rounding adjustments. |
| |
(6) | Represents McKesson stockholders’ equity divided by year-end common shares outstanding. |
| |
(7) | Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity excluding accumulated other comprehensive income (loss). |
| |
(8) | Represents a five-quarter average of McKesson stockholders’ equity. |
| |
(9) | 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. |
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 McKesson Corporation (“McKesson,”together with its subsidiaries (collectively, the “Company,” “McKesson,” “we,” “our,” or “we”“us” and other similar pronouns) together with its subsidiaries.. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K. The Company’s
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.
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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Overview of Our Business:
We conduct our business through twoare a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. We partner with life sciences companies, manufacturers, providers, pharmacies, governments, and other healthcare organizations to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively.
We implemented a new segment reporting structure commencing with the second quarter of 2021, which resulted in four reportable segments: McKesson DistributionU.S. Pharmaceutical, International, Medical-Surgical Solutions, and Prescription Technology Solutions (“MDS”RxTS”). Other, for retrospective periods presented, consists of our equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson in the fourth quarter of 2020. All prior segment information has been recast to reflect our new segment structure and McKesson Technology Solutions.current period presentation. 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 and the changes made to our reporting structure commencing in the second quarter of 2021. Refer to Financial Note 28,22, “Segments of Business,” to the accompanying consolidated financial statements appearingincluded in this Annual Report on Form 10-K for a description of thesefurther information regarding our reportable segments.
•U.S. Pharmaceutical, previously the U.S. Pharmaceutical and Specialty Solutions reportable segment, continues to distribute 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.
•International is a new 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. McKesson Europe was previously reflected as the European Pharmaceutical Solutions reportable segment and McKesson Canada was previously included in Other.
•Medical-Surgical Solutions provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the United States (“U.S.”) and was unaffected by the segment realignment.
•RxTS is a new reportable segment that brings together existing businesses, including CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation, including Multi-Client Central Fill as a Service, to serve our biopharma and life sciences partners and patients. RxCrossroads was previously included in our former U.S. Pharmaceutical and Specialty Solutions reportable segment and CoverMyMeds, RelayHealth, and McKesson Prescription Automation were previously included in Other.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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, 2021.
•Coronavirus disease 2019 (“COVID-19”) impacted our results of operations for the year ended March 31, 2021. Following the declaration of COVID-19 as a global pandemic by the World Health Organization (“WHO”) on March 11, 2020, there was a temporary increase in demand for pharmaceuticals across our businesses. Subsequently, pharmaceutical distribution volumes decreased during the first quarter as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government shutdowns and shelter-in-place orders. The recovery from the COVID-19 pandemic continued to fluctuate throughout our fiscal year. We benefited from demand for COVID-19 tests, favorable contributions from our vaccine and related ancillary supply kit distribution programs as discussed further below, and savings from reduced travel and meetings throughout 2021;
•We expanded our existing contractual relationship with the Centers for Disease Control and Prevention (“CDC”) through an amendment to our existing Vaccines for Children Program contract to support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines. We have also partnered with the Department of Health and Human Services (“HHS”) and Pfizer to manage the assembly and distribution of the ancillary supplies needed to administer COVID-19 vaccines;
•In December 2020, we began distributing certain COVID-19 vaccines under the direction of the CDC. Through the end of the fiscal year, we had distributed approximately 100 million of COVID-19 vaccine doses. 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 $238.2 billion, reflects a 3% increase from the prior year primarily in our U.S. Pharmaceutical segment driven by market growth;
•Gross profit increased 1% from the prior year primarily in our Medical-Surgical Solutions segment driven by sales of COVID-19 tests;
•Total operating expenses in 2021 includes the following:
◦a charge of $8.1 billion related to our estimated liability for opioid-related claims as further described in the Opioid-Related Litigation and Claims section of “Trends and Uncertainties” included below; and
◦charges of $115 million to impair certain long-lived assets within our International segment; partially offset by
◦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;
•Other income, net in 2021 includes net gains of $133 million related to our equity investments;
•Diluted loss per common share from continuing operations attributable to McKesson Corporation in 2021 of $28.26 reflects the aforementioned items, net of any respective tax impacts, and a lower share count compared to the prior year driven largely by the separation of our investment in Change Healthcare JV on March 10, 2020;
•On November 1, 2020, we completed the contribution of our German pharmaceutical wholesale business to a newly formed joint venture with Walgreens Boots Alliance (“WBA”) in which we have a 30% ownership interest;
•On December 3, 2020, we completed a public offering of 0.90% Notes due December 3, 2025 (the “2025 Notes”) in a principal amount of $500 million and repaid $1.0 billion of long-term debt in 2021. Refer to Financial Note 13, “Debt and Financing Activities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information;
•We returned $1.0 billion of cash to shareholders through $770 million of common stock repurchases, including the value of equity awards surrendered for tax withholding, and $276 million of dividend payments during 2021. On July 29, 2020, we raised our quarterly dividend from $0.41 to $0.42 per common share; and
•In January 2021, our Board of Directors (the “Board”) approved an increase of $2.0 billion for the authorized share repurchase of McKesson’s common stock.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Trends and Uncertainties:
COVID-19
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The WHO declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020.
We continue to evaluate the nature and extent of the impacts COVID-19 has on our business and operations. The pandemic developed rapidly during our fourth quarter of 2020 and continued to evolve throughout 2021. Infection rates varied throughout our fiscal year, peaking in January 2021. A significant number of new COVID-19 cases continue to be reported, particularly in the U.S. These also include cases from new and emerging COVID-19 variants, which could have the potential to be more severe, spread more easily, require different treatments, or change the effectiveness of current vaccines. However, vaccines which have met the U.S. Food and Drug Administration’s (“FDA’s”) standards for safety, effectiveness, and manufacturing quality needed to support Emergency Use Authorization (“EUA”), are currently being administered across the country, as further discussed below. As of March 31, 2021, nearly 154 million doses of COVID-19 vaccines have been administered in the U.S. according to the CDC. The full extent to which COVID-19 will impact us depends on many factors and future developments, which are described at the end of this COVID-19 section.
In response to the COVID-19 pandemic, federal, state, and local government directives and policies have been put in place in the U.S. to enhance availability of medications and supplies to meet the increased demand, assist front-line healthcare providers, manage public health concerns by creating social distancing, and address the economic impacts, including sharply reduced business activity, increased unemployment, and overall uncertainty presented by this healthcare emergency. Similar governmental actions have occurred in Canada and Europe, the timing of which has varied across geographies. In December 2020, the FDA issued an EUA for the Pfizer-BioNTech COVID-19 vaccine manufactured by Pfizer, Inc. (“Pfizer Vaccine”) and the Moderna COVID-19 vaccine manufactured by ModernaTX, Inc. (“Moderna Vaccine”) to be distributed in the U.S. These authorizations were followed by an EUA for the Janssen COVID-19 vaccine manufactured by Janssen Biotech Inc., a Janssen pharmaceutical company of Johnson & Johnson, (“Janssen Vaccine”) in February 2021. Government-coordinated administrative or allocation decisions at the federal, state, and local levels may cause variability in the timing and volume of COVID-19 vaccine distribution and administration activities. Our role in the distribution of COVID-19 vaccines in the U.S. as well as the assembly and distribution of related ancillary supply kits is discussed further below. Similar COVID-19 vaccine authorizations have occurred in Canada and Europe. McKesson Canada’s corporately owned retail pharmacy chain, Rexall, as well as independent pharmacy banners are supporting Canada’s vaccination efforts. McKesson Europe is also playing a role in helping support governments and public health entities in not only distributing COVID-19 vaccines across several European countries, but administering them in pharmacies as well.
As a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions, we are 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 personal protective equipment (“PPE”), and medicine reach our customers and patients.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Our Response to COVID-19 in the Workplace
During this unprecedented time, we are committed in 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, including telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures, are intended to limit employee exposure to the virus that causes COVID-19. We expanded employee medical benefits covering COVID-19 related visits, treatments, and testing as well as expanded telehealth options to protect employee safety. We provided further support including additional emergency leave and an internal paid time off donation platform for employees impacted by COVID-19. For employees whose roles require presence at our facilities, we enhanced safety by promoting the practice of social distancing, providing reminders to wash or disinfect hands and avoid unnecessary face touching, making face masks available, placing hand sanitizers within our operating environments, and periodically cleaning and disinfecting our facilities. For employees whose roles do not require presence at our facilities, we added technology resources to support their working remotely. These responses were initially put in place during our fourth quarter of 2020. During the second quarter of 2021, we also implemented on-site workplace temperature screening as we continue to adapt our health and safety practices in response to the COVID-19 pandemic. When working in frozen vaccine storage environments, employees are provided with protective gear, including special clothing, gloves, and facial gear. These steps to protect employee safety have resulted in limited disruption from COVID-19 to our normal business operations, productivity trends, and have not materially impacted our operating expenses or operating margins.
We have evaluated the impact of our telecommuting and work-from-home policies on our system of internal controls and we have concluded that these policies did not have a material effect on our internal control over financial reporting during the year ended March 31, 2021. We also took various actions to mitigate the impact of COVID-19 on our results from operations through cost-containment and payroll-related expenses.
Trends in our Business
At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we experienced higher pharmaceutical distribution volumes and increased retail pharmacy foot traffic as our customers increased supplies on hand in March, which drove unfavorability in our results of operations when comparing 2021 versus 2020.
During the first quarter of 2021, we experienced growth in pharmaceutical distribution and specialty drug volumes at a lower rate in the U.S., while pharmaceutical distribution volumes decreased in Europe and Canada due to the COVID-19 pandemic, as compared to the same prior year period. Specialty drug volumes increased, but were negatively impacted by lower demand for elective specialty drugs, as compared to the same prior year period. We also experienced decreased 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.
While we experienced improvements in prescription volumes and primary care patient visits during our second quarter of 2021, the impact and recovery of COVID-19 for the second half of our fiscal year was non-linear and tracked with patient mobility. We also saw increased demand for COVID-19 tests and continued sales of PPE throughout the year in our Medical-Surgical Solutions segment partially offset by the impacts of social distancing measures which resulted in a less severe cough, cold, and flu season, savings for reduced travel and meetings across the enterprise, as well as improvements of retail pharmacy foot traffic in Europe and Canada. The vaccine and related ancillary kit distribution in the U.S. favorably impacted our results in the second half of fiscal 2021 as further discussed below.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits
On August 14, 2020, we expanded our contractual relationship with the CDC through an amendment to our existing Vaccines for Children Program contract for the distribution of certain COVID-19 vaccines. The COVID-19 vaccine distribution agreement with the CDC was finalized during the third quarter of 2021. We support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines. In the centralized model, the U.S. government directs us on the distribution of the vaccines and related supplies to point-of-care sites across the country. We make no decisions on where products are to be distributed nor how the products are allocated between the various provider sites and ultimately administered to the individuals receiving a vaccine. We utilize our expertise and capabilities to support the CDC’s efforts to vaccinate everyone in the U.S. who wants to receive a COVID-19 vaccine. The CDC and McKesson collaborated similarly in response to the 2009 H1N1 pandemic.
In December 2020, we began distributing the Moderna Vaccine in the U.S. and in March 2021, we began distributing the Janssen Vaccine. We may distribute other future authorized COVID-19 vaccines that are refrigerated or frozen. Ancillary supply kits may be shipped either together with the Moderna Vaccine and Janssen Vaccine or in advance of the vaccines. The results of operations related to our vaccine distribution are reflected in our U.S. Pharmaceutical segment. The Pfizer Vaccine, which is ultra-frozen, is not being distributed by McKesson, although we are providing ancillary supplies needed for its administration.
On September 23, 2020, we announced our contract with the HHS under which our Medical-Surgical Solutions segment manages the assembly and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies. We also have an agreement with Pfizer to assemble and distribute ancillary supply kits needed to administer that particular COVID-19 vaccine. Ancillary supply kits include alcohol prep pads, face shields, surgical masks, needles and syringes, and other vaccine administration items. For the Pfizer Vaccine, ancillary supply kits also include the diluent needed to administer the ultra-frozen vaccine. We began assembling the ancillary supply kits in September 2020 in preparation for vaccine authorization and subsequent distribution. Ancillary supply kits to administer the Pfizer Vaccine are shipped directly to point-of-care sites, and all other ancillary supply kits are shipped to our dedicated vaccine distribution centers. 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 at the end of this COVID-19 section.
To manage the COVID-19 vaccine and ancillary supply kit distribution, we have set up special, dedicated vaccine distribution centers that include large-scale, custom freezers and refrigerators to safely store and process millions of vaccine doses. These facilities can scale to meet the demand of increasing volumes of vaccines being manufactured. We have also set up distribution centers for kitting and inventory management as part of our contract with the HHS. We are working with delivery partners to manage the delivery of vaccines and ancillary supply kits from our centralized vaccine distribution centers to point-of-care destinations as directed by the CDC. The capital expenditures we made during 2021 to prepare for vaccine and ancillary supply kit distribution were not material to our financial condition or liquidity.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Impact to our Results of Operations, Financial Condition, and Liquidity
For the year ended March 31, 2021, the demand for COVID-19 tests, the year over year impact from PPE and other related products, net of inventory charges, as well as the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately 20% in segment revenues and segment operating profit. Additionally, the distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment contributed approximately 2% in segment operating profit for the year ended March 31, 2021. During our fourth quarter of 2020, we experienced a temporary increase in demand for pharmaceuticals. Subsequently, 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 for the year ended March 31, 2021. During the year ended March 31, 2021, selling, distribution, general, and administrative expenses decreased as a result of the pandemic, largely due to savings from restricted travel and decreased meetings. The favorable reduction in selling, distribution, general, and administrative expenses was partially offset by increased costs of transport, costs for enhanced procedures to sanitize operating facilities, and costs of providing PPE and other related products for employee use. Additionally, increased costs for certain PPE compressed our margins. 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, 2021, we recorded charges totaling $136 million in cost of sales on certain PPE and other related products due to inventory impairments and excess inventory in our Medical-Surgical Solutions segment. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods, we are taking measures to mitigate such risk. Overall, these COVID-19 related items had a net favorable impact on consolidated income (loss) from continuing operations before income taxes for the year ended March 31, 2021 compared to the prior year. Impacts to future periods due to COVID-19 may differ based on future developments, which is described at the end of this COVID-19 section.
We were able to maintain appropriate labor and overall vendor supply levels during the year ended March 31, 2021. Our inventory levels have fluctuated in response to supply availability and customer demand patterns for certain products, with varying inventory level impacts depending on the specific product within our portfolio. We collaborated closely with the federal government and other healthcare stakeholders to source more critical PPE to the U.S. This collaboration expedited the shipment of critical medical supplies to areas hit hardest by COVID-19, as identified by the Federal Emergency Management Agency. As our supply levels improve, and the federal government evolves guidance on the prioritization of providers or geographic markets, we will continue to adapt our distribution policies.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the economic impact of the COVID-19 pandemic. Among other things, the CARES Act provides certain changes to tax laws and includes provisions to provide relief for citizens, companies, healthcare providers and patients, and others. We have deferred certain employer payroll taxes and continue to monitor the potential impact of other tax legislation changes as result of the CARES Act, including refundable payroll tax credits on certain qualified wages. We anticipate changes due to the CARES Act in the timing of certain cash flows, with no material impact to our financial results for the year ended March 31, 2021. On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021 (the “CA Act”), which enhances and expands certain provisions of the CARES Act. The CA Act did not have a material impact on our financial condition, results of operations, or liquidity for the year ended March 31, 2021 nor do we currently expect a material impact on our future financial results.
Our consolidated balance sheets and ability to maintain financial liquidity remains strong. We have experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. 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, 2021, 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)
Impact to our Supply Chain
We also continue to monitor 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. We have assembled a Critical Care Drug Task Force, made up of our procurement specialists, clinical health systems pharmacists, and supply chain professionals, that is focused on securing additional product where available, sourcing back-up products, and protecting our operations across all locations and facilities. We are also working with manufacturers through several channels, including our ClarusONE Sourcing Services LLP (“ClarusONE”) and global sourcing teams in London, and our leaders are actively engaged in addressing potential shortages. We have engaged with industry partners and government agencies to gain visibility into supply and demand. Additionally, we have a robust Business Continuity and Disaster Recovery Program (“BCRP”) and we have proactively enhanced our BCRP in response to the COVID-19 pandemic to protect the supply chain to minimize disruption in healthcare, protect our customers, ensure the safety and security of our employees and workplaces, and ensure the continuity of critical business processes.
The situation remains fluid and we are taking a proactive approach to protect inventory during this crisis and ensure our provider partners have needed supplies and medications to help prevent the spread of the disease and treat those that are ill. COVID-19 has put an unprecedented strain on the supply of high-demand PPE, including N95 masks, gloves, as well as disinfecting sprays and wipes. The supply chain has improved over the initial impact of pandemic-related demand, and we continue to closely monitor demand by customer type and certain PPE and infection prevention items are still in short supply. Our allocation approach has helped us avoid stock outs in many critical product categories, allowing us to provide PPE supplies to many more customers for a much longer time. We anticipate these market conditions will remain for the foreseeable future. Our efforts to help the supply chain have included sourcing products from new suppliers all over the world, working closely with the federal government to help with the nation’s response and collaborating with partners to source, develop, and deliver new products to market.
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 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 virus; governmental actions to limit the spread of the virus; potential seasonality of viral outbreaks; potential new strains or variants of the original virus; the amount of COVID-19 vaccines authorized, manufactured, distributed, and administered; the amount of ancillary supply kits assembled and distributed; the effectiveness of COVID-19 vaccines and governmental measures in controlling the spread of the virus; and the effectiveness of treatments of infected individuals. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when stability will return remains 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 global 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 as disclosed in Financial Note 4, “Restructuring, Impairment, and Related Charges,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K, and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for a disclosure of risk factors related to COVID-19.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Opioid-Related Litigation and Claims
We are a defendant in approximately 3,200 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. Those proceedings include approximately 2,900 federal cases and approximately 300 state court cases throughout the U.S., and cases in Puerto Rico and Canada. We continue to be involved in discussions with the objective of achieving broad resolution of opioid-related claims of states, their political subdivisions and other government entities (“governmental entities”). We are in ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework under which, in order to resolve the claims of governmental entities, the three largest U.S. pharmaceutical distributors would pay up to approximately $21.0 billion over a period of 18 years, with up to approximately $8.0 billion to be paid by us, of which more than 90% is anticipated to be used to remediate the opioids crisis. Most of the remaining amount relates to plaintiffs’ attorneys fees and costs, and would be payable over a shorter time period. In addition, the proposed framework would require the three distributors, including the Company, to adopt changes to anti-diversion programs.
We have concluded that discussions under that framework have reached a stage at which a broad settlement of opioid claims by governmental entities is probable, and the loss related thereto can be reasonably estimated as of March 31, 2021. As a result of that conclusion, and our assessment of certain other opioid-related claims, 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, related to our share of the settlement framework described above, as well as other opioid-related claims. Because of the many uncertainties associated with any potential settlement arrangement or other resolution of opioid-related litigation, including the uncertainty of the scope of participation by plaintiffs in any potential settlement, 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 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. Moreover, in light of this uncertainty, the amount of any ultimate loss may differ materially from the amount accrued.
While we continue to be involved in discussions regarding a potential broad settlement framework, we also continue to prepare for trial in these 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 19, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K for more information.
State Opioid Statutes
Legislative, regulatory, or industry measures to address the misuse of prescription opioid medications could affect our business in ways that we may not be able to predict. In April 2018, the State of New York adopted the Opioid Stewardship Act (“OSA”) which required the imposition of an annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids in New York. 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 of New York appealed to the U.S. Court of Appeals for the Second Circuit. The State of New York has subsequently adopted an excise tax on sales of opioids in the State, which became effective July 1, 2019. The law adopting the excise tax made clear that the OSA would apply only to opioid sales on or before December 31, 2018. The excise tax applies only to the first sale occurring in New York, and thus may not apply to sales from our distribution centers in New York to New York customers.
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 Healthcare Distribution Alliance filed a petition for panel rehearing, or, in the alternative, for rehearing en banc with the U.S. Court of Appeals for the Second Circuit; that petition was denied on December 18, 2020. On February 12, 2021, the U.S. Court of Appeals for the Second Circuit granted a motion by the Healthcare Distribution Alliance to stay its mandate pending the filing and disposition of a petition for writ of certiorari before the U.S. Supreme Court. The due date for filing such a petition is May 17, 2021. Unless the appellate court’s decision is overturned, the OSA will be reinstated for calendar years 2017 and 2018 (but not beyond those years), and, subject to any further legal challenge, we will have to pay our ratable share of the annual surcharge for those two years. During the second quarter of 2021, we reflected an estimated liability of $50 million for the OSA surcharge in our accompanying consolidated financial statements on the assumption that the appellate court’s decision will stand. Refer to Note 19, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K for more information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
RESULTS OF OPERATIONS
Overview:Overview of Consolidated Results:
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions, except per share data and ratios) | Years Ended March 31, | | Change |
| 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | | | | | | | | | | | |
| Revenues | $ | 208,357 |
| | $ | 198,533 |
| | $ | 190,884 |
| | 5 |
| % | | 4 |
| % |
| | | | | | | | | | | | |
| Gross Profit | $ | 11,184 |
| | $ | 11,271 |
| | $ | 11,416 |
| | (1 | ) | % | | (1 | ) | % |
| | | | | | | | | | | | |
| Gross Profit Margin | $ | 5.37 |
| | $ | 5.68 |
| | $ | 5.98 |
| | (31 | ) | bp | | (30 | ) | bp |
| | | | | | | | | | | | |
| Operating Expenses | | | | | | | | | | | |
| Operating Expenses | $ | (8,263 | ) | | $ | (7,801 | ) | | $ | (7,771 | ) | | 6 |
| % | | — |
| % |
| Goodwill impairment charges | (1,738 | ) | | (290 | ) | | — |
| | 499 |
| | | NM |
| |
| Restructuring and asset impairment charges | (567 | ) | | (18 | ) | | (203 | ) | | 3,050 |
| | | (91 | ) | |
| Gains from sales of businesses | 109 |
| | — |
| | 103 |
| | NM |
| | | NM |
| |
| Gain on healthcare technology net asset exchange, net | 37 |
| | 3,947 |
| | — |
| | (99 | ) | | | NM |
| |
| Total Operating Expenses | $ | (10,422 | ) | | $ | (4,162 | ) | | $ | (7,871 | ) | | 150 |
| % | | (47 | ) | % |
| | | | | | | | | | | | |
| Loss from Equity Method Investment in Change Healthcare | $ | (248 | ) | | $ | — |
| | $ | — |
| | NM |
| | | NM |
| |
| | | | | | | | | | | | |
| Loss on Debt Extinguishment | $ | (122 | ) | | $ | — |
| | $ | — |
| | NM |
| | | NM |
| |
| | | | | | | | | | | | |
| Income from Continuing Operations Before Income Taxes | $ | 239 |
| | $ | 6,891 |
| | $ | 3,250 |
| | (97 | ) | % | | 112 |
| % |
| Income Tax Benefit (Expense) | 53 |
| | (1,614 | ) | | (908 | ) | | (103 | ) | | | 78 |
| |
| Income from Continuing Operations | 292 |
| | 5,277 |
| | 2,342 |
| | (94 | ) | | | 125 |
| |
| Income (Loss) from Discontinued Operations, Net of Tax | 5 |
| | (124 | ) | | (32 | ) | | (104 | ) | | | 288 |
| |
| Net Income | 297 |
| | 5,153 |
| | 2,310 |
| | (94 | ) | | | 123 |
| |
| Net Income Attributable to Noncontrolling Interests | (230 | ) | | (83 | ) | | (52 | ) | | 177 |
| | | 60 |
| |
| Net Income Attributable to McKesson Corporation | $ | 67 |
| | $ | 5,070 |
| | $ | 2,258 |
| | (99 | ) | % | | 125 |
| % |
| | | | | | | | | | | | |
| Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation | | | | | | | | | | | |
| Continuing Operations | $ | 0.30 |
| | $ | 23.28 |
| | $ | 9.84 |
| | (99 | ) | % | | 137 |
| % |
| Discontinued Operations | 0.02 |
| | (0.55 | ) | | (0.14 | ) | | (104 | ) | | | 293 |
| |
| Total | $ | 0.32 |
| | $ | 22.73 |
| | $ | 9.70 |
| | (99 | ) | % | | 134 |
| % |
| | | | | | | | | | | | |
| Weighted Average Diluted Common Shares | 209 |
| | 223 |
| | 233 |
| | (6 | ) | % | | (4 | ) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share data) | Years Ended March 31, | | Change |
| 2021 | | 2020 | | 2019 | | 2021 | 2020 |
| Revenues | $ | 238,228 | | | $ | 231,051 | | | $ | 214,319 | | | 3 | | % | 8 | | % |
| Gross profit | 12,148 | | | 12,023 | | | 11,754 | | | 1 | | | 2 | | |
| Gross profit margin | 5.10 | | % | 5.20 | | % | 5.48 | | % | (10) | | bp | (28) | | bp |
| Total operating expenses | $ | (17,188) | | | $ | (9,534) | | | $ | (10,868) | | | 80 | | % | (12) | | % |
| Total operating expenses as a percentage of revenues | 7.21 | | % | 4.13 | | % | 5.07 | | % | 308 | | bp | (94) | | bp |
| Other income, net | $ | 223 | | | $ | 12 | | | $ | 182 | | | NM | | (93) | | % |
| Equity earnings and charges from investment in Change Healthcare Joint Venture | — | | | (1,108) | | | (194) | | | (100) | | | 471 | | |
| | | | | | | | | | |
| Interest expense | (217) | | | (249) | | | (264) | | | (13) | | | (6) | | |
| Income (loss) from continuing operations before income taxes | (5,034) | | | 1,144 | | | 610 | | | (540) | | | 88 | | |
| Income tax benefit (expense) | 695 | | | (18) | | | (356) | | | NM | | (95) | | |
| Income (loss) from continuing operations | (4,339) | | | 1,126 | | | 254 | | | (485) | | | 343 | | |
| Income (loss) from discontinued operations, net of tax | (1) | | | (6) | | | 1 | | | (83) | | | (700) | | |
| Net income (loss) | (4,340) | | | 1,120 | | | 255 | | | (488) | | | 339 | | |
| Net income attributable to noncontrolling interests | (199) | | | (220) | | | (221) | | | (10) | | | - | |
| Net income (loss) attributable to McKesson Corporation | $ | (4,539) | | | $ | 900 | | | $ | 34 | | | (604) | | % | NM | |
| | | | | | | | | | |
| Diluted earnings (loss) per common share attributable to McKesson Corporation | | | | | | | | | | |
| Continuing operations | $ | (28.26) | | | $ | 4.99 | | | $ | 0.17 | | | (666) | | % | NM | |
| Discontinued operations | — | | | (0.04) | | | — | | | (100) | | | NM | |
| Total | $ | (28.26) | | | $ | 4.95 | | | $ | 0.17 | | | (671) | | % | NM | |
| | | | | | | | | | |
| Weighted-average diluted common shares outstanding | 160.6 | | | 181.6 | | | 197.3 | | | (12) | | % | (8) | | % |
bp - basis points
NM - computation not meaningful
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues
Revenues increased for 2018the years ended March 31, 2021 and 2017 increased 5% and 4%2020 compared to the same periods a year agorespective prior years primarily due to market growth, reflecting growing drug utilization and price increases, our business acquisitions andincluding expanded business with existing customers, within our North America pharmaceutical distribution businesses. TheseU.S. Pharmaceutical segment. Market growth includes growing drug utilization, price increases, for 2018 and 2017 werenewly launched products, partially offset by price deflation associated with brandbranded to generic drug conversion and loss of customers andconversion.
Gross Profit
Gross profit increased for 2018 alsothe year ended March 31, 2021 compared to the prior year primarily in our Medical-Surgical Solutions segment driven by the demand for COVID-19 tests and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by the unfavorable impact from PPE and other related products largely due to inventory charges. Gross profit was favorably impacted by growth of specialty pharmaceuticals and the contribution from our vaccine distribution programs in our U.S. Pharmaceutical segment. Gross profit was unfavorably impacted by the adverse impacts from COVID-19 largely during the first quarter of 2021, including disruptions of doctors’ office operations, deferred or cancelled elective procedures, lower demand for pharmaceuticals, and overall reduction of foot traffic in pharmacies.
Gross profit increased for the year ended March 31, 2020 compared to the prior year primarily due to market growth in our Medical-Surgical Solutions segment, partially offset by unfavorable effects of foreign currency exchange fluctuations. Gross profit and gross profit margin for the year ended March 31, 2020 compared to the prior year were unfavorably impacted by lower gains from antitrust legal settlements, partially offset by higher last-in, first-out (“LIFO”) credits in 2020. The impact from COVID-19 increased gross profit by less than 1% and decreased gross profit margin by less than 10 basis points for the year ended March 31, 2020.
Gross profit for the years ended March 31, 2021, 2020, and 2019 included LIFO inventory credits of $38 million, $252 million, and $210 million, respectively. The lower LIFO credits in 2021 compared to 2020 is primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. The higher LIFO credits in 2020 compared to 2019 is primarily driven by higher generic deflation. Refer to the “Critical Accounting Policies and Estimates” section included in this Financial Review for further information. Gross profit for the years ended March 31, 2021, 2020, and 2019 also included net cash proceeds received of $181 million, $22 million, and $202 million, respectively, representing our share of antitrust legal settlements.
Total Operating Expenses
A summary and description of the majoritycomponents of our McKesson Technology Solutions businessestotal operating expenses for the years ended March 31, 2021, 2020, and 2019 is as follows:
•Selling, distribution, general, and administrative expenses (“Core MTS Business”SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, and administrative expenses.
•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 expensed as incurred, are included within SDG&A. We have reclassified prior period amounts to conform to the current period presentation.
•Goodwill impairments charges: We perform an impairment test on goodwill balances annually in the 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: Restructuring charges that are incurred for programs in which we change our operations, the scope of a joint venturebusiness undertaken by our business units, or the manner in March 2017,which that business is conducted as further discussed below.well as long-lived asset impairments.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended March 31, | | Change |
| (Dollars in millions) | 2021 | | 2020 | | 2019 | | 2021 | 2020 |
| Selling, distribution, general, and administrative expenses | $ | 8,849 | | | $ | 9,182 | | | $ | 8,437 | | | (4) | | % | 9 | | % |
| Claims and litigation charges, net | 7,936 | | | 82 | | | 37 | | | NM | | 122 | | |
| Goodwill impairment charges | 69 | | | 2 | | | 1,797 | | | NM | | (100) | | |
| Restructuring, impairment, and related charges, net | 334 | | | 268 | | | 597 | | | 25 | | | (55) | | |
| Total operating expenses | $ | 17,188 | | | $ | 9,534 | | | $ | 10,868 | | | 80 | | % | (12) | | % |
| Percent of revenues | 7.21 | | % | 4.13 | | % | 5.07 | | % | 308 | | bp | (94) | | bp |
Gross profitbp - basis points
NM - computation not meaningful
Total operating expenses and gross profit margin decreased in 2018 and 2017total operating expenses as a percentage of revenues increased for the year ended March 31, 2021 compared to the same periods aprior year, ago. The decreaseand decreased for 2018 wasthe year ended March 31, 2020 compared to the prior year. Total operating expenses for the years ended March 31, 2021, 2020, and 2019 were affected by the following significant items:
2021
•SDG&A includes opioid-related costs of $153 million, primarily related to litigation expenses;
•SDG&A reflects cost savings of $95 million on travel 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 Core MTS Business, significant government reimbursement reductions in the United Kingdom (“U.K.”), the competitive sell-side environment and weakermajority of our German pharmaceutical manufacturer pricing trends. These decreases in 2018 were partially offset by market growth, procurement benefits realized through the joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”), higher last-in, first-out (“LIFO”) credits and ourwholesale business acquisitions.
Gross profit and gross profit margin decreased in 2017 primarily due to weaker pharmaceutical manufacturer pricing trends, the competitive sell-side pricing environment, our mix of business and lower compensation fromcreate a branded pharmaceutical manufacturer from our U.S. Pharmaceutical distribution business. These decreases for 2017 were partially offset by our business acquisitions, LIFO inventory credits, higher cash receipts from antitrust legal settlements and higher procurement benefits. Gross profit for 2017 and 2016 benefited from $144 million and $76 million of cash receipts representing our share of antitrust legal settlements. LIFO credits were $99 million and $7 million in 2018 and 2017 and LIFO charges were $244 million in 2016. LIFO credits were higher in 2018 compared to 2017 due to higher net effect of price declines, partially offset by the lower inventory level. LIFO expense was recognized in 2016 primarily due to net effects of price increases.
Our Distribution Solutions segment experienced weaker pharmaceutical manufacturer pricing trends over the last three years.
On March 1, 2017, we contributed our Core MTS Business to the newly formed joint venture Change Healthcare, LLC (“Change Healthcare”) under the terms ofwith WBA in which we have a contribution agreement entered into between McKesson and Change Healthcare Holdings, Inc. (“Change”) and others including shareholders of Change. We retained30% ownership interest within our RelayHealth Pharmacy (“RHP”) and Enterprise Information Solutions (“EIS”) businesses. The RHP business was transferred to our MDS segment, effective April 1, 2017, and the EIS business was sold to a third party in the third quarter of 2018. We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a 70% interest in the newly formed joint venture.International segment. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,3, “Held for Sale,” to the accompanying consolidated financial statements appearingincluded in this Annual Report on Form 10‑K10-K for additional information.more information;
Total•SDG&A includes a charge of $50 million related to our estimated liability under the OSA as previously discussed in the “Trends and Uncertainties” section;
•SDG&A also includes lower operating expenses increased in 2018 and decreased in 2017 compared to the same periods a year ago primarily due to a pre-tax gain of $3,947 million (after-tax gain of $3,018 million) recognized in 2017 from 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;
•Claims and litigation charges, net includes a charge of $8.1 billion related to our estimated liability for opioid-related claims as previously discussed in the Core MTS Business.“Trends and Uncertainties” section;
2018 total operating•Claims and litigation charges, net includes a net gain of $131 million reflecting insurance proceeds received, net of attorneys' fees and expenses also increased due to: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;
Total non-cash goodwill•Goodwill impairment charges (pre-tax and after-tax) of $1,738$69 million for our McKesson Europe AG (“McKesson Europe”) and Rexall Health reporting units, as further described below. The charges were recorded withinin connection with our Distribution Solutions segment. There were no tax benefits associated with these goodwillsegment realignment that commenced in the second quarter of 2021. Refer to the “Goodwill Impairment” section below for further details;
•Restructuring, impairment, charges.
Non-cash pre-taxand related charges, net includes long-lived asset impairment charges of $446$115 million ($410 million after-tax) and pre-tax restructuring charges of $74 million ($67 million after-tax) primarily representing employee severance and lease exit costs for our McKesson Europe business;
Higher expenses duerelated to our business acquisitions;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; and
Pre-tax charitable contribution expense of $100 million ($64 million after-tax) to a public benefit California foundation (“Foundation”), as further described below.
These increases in 2018 total•Total operating expenses were partially offsetunfavorably impacted by a pre-tax gainforeign currency exchange fluctuations.
2020
•SDG&A includes charges of $109$275 million (after-tax gainto remeasure assets and liabilities held for sale to fair value less costs to sell related to the completed contribution of $30 million) from the 2018 third quarter salemajority of our EISGerman pharmaceutical wholesale business in our Technology Solutions segment.to create a joint venture with WBA;
Excluding the gain on Healthcare Technology Net Asset Exchange, 2017 total operating expenses increased•SDG&A includes opioid-related costs of $150 million, primarily due to a non-cash pre-tax goodwill impairment charge of $290 million ($282 million after-tax) related to our EIS business within our Technology Solutions segment and higher expenses due to our business acquisitions. 2017 total operating expenses benefited from lower restructuring charges and cost savings associated with a cost alignment plan implemented in the fourth quarter of 2016 and ongoing expense management efforts.
litigation expenses;
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
•Claims and litigation charges, net includes a settlement charge of $82 million recorded in connection with an agreement to settle all opioid-related claims filed by two Ohio counties;
Our investment in Change Healthcare is accounted for using the equity method•Restructuring, impairment, and related charges, net includes long-lived asset impairment charges of accounting. During 2018, we recorded our proportionate share of loss from Change Healthcare of $248 million under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our consolidated statements of operations. We recorded our proportionate share of a provisional net benefit recognized by Change Healthcare from the enactment of the December 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) of $76$112 million, primarily due to a reduction in future applicable tax rate.
Infor our United Kingdom (“U.K.”) business (mainly pharmacy licenses) and Rexall Health retail business (“Rexall Health”) (mainly customer relationships) within our International segment, and the fourth quarter of 2018, we recognized a pre-tax loss of $122remaining $156 million ($78 million after-tax) on debt extinguishmentprimarily represents employee severance and exit-related costs related to our February 2018 tender offers2019 restructuring initiatives, as further discussed below; and
•Total operating expenses includes higher SDG&A due to redeemour business acquisitions and to support business growth, as well as our technology initiatives, partially offset by favorable effects of foreign currency exchange fluctuations.
2019
•SDG&A includes opioid-related costs of $114 million, primarily related to litigation expenses, and increased expenses due to our business acquisitions and to support growth, partially offset by a portiongain from an escrow settlement of $97 million representing certain indemnity and other claims related to our existing outstanding long-term debt. Refer to Financial Note 16, “Debt2017 acquisition of Rexall Health and Financing Activities,”a credit of $90 million for the derecognition of a liability related to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.
Income from continuing operations before income taxes decreased in 2018 and increased in 2017 comparedtax receivable agreement (“TRA”) payable to the same periods a year agoshareholders of Change Healthcare, Inc. (“Change”);
•Goodwill impairment charges of $1.8 billion in our European Retail Pharmacy (“European RP”) and European Pharmaceutical Distribution (“European PD”) reporting units within the International segment. Of these impairment charges, $238 million was recognized upon the 2019 first quarter segment changes, which resulted in two new reporting units. The remaining charges primarily were due to declines in the pre-tax gain recognized in 2017 fromreporting units’ estimated future cash flows and the contributionselection of the Core MTS Business. Income from continuing operations before income taxes decreased in 2018 also due to the goodwillhigher discount rates. These impairment charges generally were not deductible for income tax purposes. The declines in estimated future cash flows primarily were attributed to additional government reimbursement reductions and competitive pressures within the U.K. The risk of successfully achieving certain business initiatives was the primary factor in the use of a higher discount rate. At March 31, 2019, both the European RP and European PD reporting units had no remaining goodwill balances; and
•Restructuring, impairment, and related charges, net primarily includes employee severance and exit-related costs of $352 million for our Distribution Solutions segment, the2019 restructuring initiatives, as further discussed below and long-lived asset impairment charges of $245 million primarily for our proportionate share of loss fromU.K. business (mainly pharmacy licenses) within our equity method investment in Change HealthcareInternational segment driven by additional government reimbursement reductions and loss on debt extinguishment.
Our reported income tax benefit rate was 22.2% in 2018 and income tax expense rates were 23.4% and 27.9% in 2017 and 2016. Fluctuations in our reported income tax rates are primarily due to change in tax laws, including the recently enacted 2017 Tax Act, the impact of nondeductible impairment charges and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate.
During 2018, as a result of the 2017 Tax Act, we have recognized a provisional tax benefit of $1,324 million due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate and a provisional tax expense of $457 million for the one-time tax imposed on certain accumulated earnings and profits (“E&P”) of our foreign subsidiaries. Refer to Financial Note 10, “Income Taxes,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.
Loss from discontinued operations, net of tax, for 2017 includes an after-tax loss from discontinued operations of $113 million resulting from the 2017 first quarter sale of our Brazilian pharmaceutical distribution business.
Net income attributable to McKesson Corporation was $67 million, $5,070 million and $2,258 million in 2018, 2017 and 2016 and diluted earnings per common share attributable to McKesson Corporation from continuing operations were $0.30, $23.28 and $9.84. Diluted income (loss) per common share attributable to McKesson Corporation from discontinued operations were $0.02, ($0.55) and ($0.14) in 2018, 2017 and 2016. Additionally, our 2018 diluted earnings per share reflect the cumulative effects of share repurchases.
Foundation
During the fourth quarter of 2018, the Foundation was established to provide opioid education to patients, caregivers, and providers, address policy issues, and increase patient access to life-saving treatments. In March 2018, we made a pledge to the Foundation and incurred a pre-tax charitable contribution expense of $100 million ($64 million after-tax) for 2018, which was recorded in operating expenses within Corporate Expenses. The pledge is binding and enforceable and is expected to be paidcompetitive pressures in the first quarter of 2019.U.K.
Goodwill Impairments
McKesson Europe: In 2018, we recorded total non-cash pre-tax and after-tax chargesAs discussed in the “Overview of $1,283 million to impair the carrying value of goodwill forOur Business” section, our McKesson Europe reporting unit.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
During the second quarter of 2018, our McKesson Europe reporting unit had a decline in its estimated future cash flows, primarily in our United Kingdom (“U.K.”) retail business, driven by significant government reimbursement reductions affecting retail pharmacy economics across the U.K. market. As a result, we performed the interim impairment testoperating structure was realigned commencing in the second quarter of 20182021 into four reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and RxTS. These reportable segments encompass all operating segments of the Company. The second quarter 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 non-cash goodwill impairment charge in our European RP reporting unit of $350$69 million (pre-tax and after-tax). Duringduring the fourthsecond quarter of 2018, this reporting unit had a further decline in its estimated future cash flows driven by weakening script growth projections in our U.K. business and by a more competitive environment in France. Based on the annual goodwill impairment test, we recorded non-cash charges of $933 million (pre-tax and after-tax) in the fourth quarter of 2018 to impair this reporting unit’s goodwill balance. The discount rates and terminal growth rates were 7.5% and 1.25% for the 2018 second quarter interim test and 8.0% and 1.25% for the 2018 annual test, compared to 7.0% and 1.5% in our 2017 annual impairment test.2021. At March 31, 2018, this reporting unit had a remaining goodwill2021, the balance of $1,851 million.
Rexall Health: As a resultgoodwill for our reporting units in Europe was approximately nil and the remaining balance of the 2018 annual impairment test, we recognized a non-cash goodwill impairment charge (pre-tax and after-tax) of $455 million in 2018. During the fourth quarter of 2018, this reporting unit had a decline in its estimated future cash flows primarily driven by significant generics reimbursement reductions across Canada and minimum wage increases in multiple provinces which can only be partially mitigated through the business’ cost saving efforts. The discount rate and terminal growth rate used 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 were 10.0% and 2.0%. At March 31, 2018,performed in 2021 did not indicate any impairment of goodwill. As of the Rexall Health reporting unit had no remaining goodwill related to our acquisition of Rexall Health.
Othertesting date, other risks, expenses, and future developments, that we were unablesuch as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to anticipate as of the testing dates in 2018 may require us to further revise the estimated futureestimate projected cash flows, which could adversely affect the fair value of ourvarious reporting units in future periods. Asperiods, including our McKesson Canada reporting unit within our International segment and our RxCrossroads reporting unit within our RxTS segment, where the risk of a result,material goodwill impairment is higher than other reporting units. Refer to “Critical Accounting Policies and Estimates” included in this Financial Review for further information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
On October 1, 2019, we voluntarily changed our annual goodwill impairment testing date from January 1 to October 1 to better align with the timing of our annual long-term planning process. This change was not material to our consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge. Refer to Note 12, “Goodwill and Intangible Assets, Net,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K 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 led us to rationalize our office space in North America. Where we determine to cease using office space, we plan to exit the portion of the facility no longer used. We also may retain and repurpose certain other office locations. We expect to incur total charges of approximately $180 million to $280 million for this initiative, consisting primarily of exit related costs, accelerated depreciation and amortization of long-lived assets, and asset impairments. This initiative is expected to be requiredcompleted in 2022.
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 includes reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. We expect to incur total charges of approximately $85 million to $90 million, of which $57 million of charges were recorded to date. The initiative is expected to be substantially complete in 2022 and estimated remaining charges primarily consist of accelerated amortization of long-lived assets, facility and other exit costs, and employee-related costs.
In the fourth quarter of 2019, we committed to certain programs to continue our operating model and cost optimization efforts. We continue 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. Total charges of $297 million were recorded to date. This initiative was substantially complete in 2021 and remaining costs we expect to record additionalunder this initiative are not material.
We also committed to certain actions in connection with the previously announced relocation of our corporate headquarters from San Francisco, California to Irving, Texas, which became effective April 1, 2019. Total charges of $105 million were recorded to date. The relocation was substantially complete in January 2021 and remaining costs we expect to record under this initiative, primarily relating to lease costs, are not material.
In the second quarter of 2018, we committed to a restructuring plan, which primarily consisted of the closures of underperforming retail pharmacy stores in the U.K., and a reduction in workforce. The plan was substantially complete in 2020.
On April 25, 2018, we 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 our operating models and cost structures primarily through centralization, cost management, and outsourcing of certain administrative functions. As part of the growth initiative, we 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.
Restructuring, impairment, charges. and related charges for the years ended March 31, 2021, 2020, and 2019 also includes long-lived asset impairment charges of $115 million, $112 million, and $245 million, respectively, primarily related to our retail pharmacy businesses in Canada and Europe within our 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 years ended March 31, 2021, 2020, and 2019.
Refer to Financial Note 3, “Goodwill4, “Restructuring, Impairment, and Related Charges,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Restructuring and Asset Impairments
McKesson Europe: Due to the previously described decline in future estimated cash flows related to our U.K. retail business, we also recorded total non-cash pre-tax charges of $189 million ($157 million after-tax) to impair the carrying value of certain intangible assets (primarily pharmacy licenses) and store assets during the second quarter of 2018. Additionally, during the fourth quarter of 2018, due to further declines in estimated future cash flows in our European business, we also recorded a non-cash pre-tax charge of $257 million ($253 million after-tax) to impair the carrying value of certain intangible assets (primarily customer relationships) and capitalized software assets.
On September 29, 2017, we committed to a restructuring plan, which primarily consists of the closures or sales of underperforming retail stores in the U.K. and a reduction in workforce. The plan is expected to be substantially implemented prior to the first half of 2019. As part of this plan, we recorded pre-tax restructuring charges of $74 million ($67 million after-tax) in operating expenses during 2018 primarily representing employee severance and lease exit costs.
Refer to Financial Note 4, “Restructuring and Asset Impairment Charges,” to the accompanying consolidated financial statements appearingincluded in this Annual Report on Form 10-K for more information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Other Income, Net
Revenues:
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Distribution Solutions | | | | | | | | | | | |
North America pharmaceutical distribution & services | $ | 174,186 |
| | $ | 164,832 |
| | $ | 158,469 |
| | 6 |
| % | | 4 |
| % |
| International pharmaceutical distribution & services | 27,320 |
| | 24,847 |
| | 23,497 |
| | 10 |
| | | 6 |
| |
| Medical-Surgical distribution & services | 6,611 |
| | 6,244 |
| | 6,033 |
| | 6 |
| | | 3 |
| |
| Total Distribution Solutions | 208,117 |
| | 195,923 |
| | 187,999 |
| | 6 |
| | | 4 |
| |
| | | | | | | | | | | | |
| Technology Solutions - products and services | 240 |
| | 2,610 |
| | 2,885 |
| | (91 | ) | | | (10 | ) | |
| Total Revenues | $ | 208,357 |
| | $ | 198,533 |
| | $ | 190,884 |
| | 5 |
| % | | 4 |
| % |
Revenues increased 5% and 4% in 2018 and 2017 compared to the same periods a year ago primarily driven by our Distribution Solutions segment.
Distribution Solutions
North America pharmaceutical distribution and services revenues increased over the last two years primarily due to market growth, reflecting growing drug utilization, price increases, higher revenues associated with our acquisitions and expanded business with existing customers. These increases were partially offset by price deflation associated with brand to generic drug conversion and loss of customers.
International pharmaceutical distribution and services revenues increased 10% and 6% in 2018 and 2017. Excluding foreign currency effects, revenues increased 5% in 2018 and 11% in 2017 primarily due to our business acquisitions and market growth.
Medical-Surgical distribution and services revenues increased over the last two years primarily due to market growth.
Technology Solutions
Technology Solutions revenues for 2018 and 2017 decreased primarily due to the 2017 fourth quarter contribution of the Core MTS Business to form the Change Healthcare joint venture, the April 2017 transition of our RHP business to our Distribution Solutions segment and the 2018 third quarter sale of our EIS business. As a result, this segment’s 2018 revenues included only our EIS business.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Gross Profit:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions, except ratios) | 2018 | | | 2017 | | | 2016 | | | 2018 | | 2017 |
| Gross Profit | | | | | | | | | | | | | | |
Distribution Solutions (1) | $ | 11,064 |
| | | $ | 9,856 |
| | | $ | 9,948 |
| | | 12 |
| % | | (1 | ) | % |
| Technology Solutions | 120 |
| | | 1,415 |
| | | 1,468 |
| | | (92 | ) | | | (4 | ) | |
| Total | $ | 11,184 |
| | | $ | 11,271 |
| | | $ | 11,416 |
| | | (1 | ) | % | | (1 | ) | % |
| | | | | | | | | | | | | | | |
| Gross Profit Margin | | | | | | | | | | | | | | |
| Distribution Solutions | 5.32 |
| % | | 5.03 |
| % | | 5.29 |
| % | | 29 |
| bp | | (26 | ) | bp |
| Technology Solutions | 50.00 |
| | | 54.21 |
| | | 50.88 |
| | | (421 | ) | | | 333 |
| |
| Total | 5.37 |
| | | 5.68 |
| | | 5.98 |
| | | (31 | ) | | | (30 | ) | |
bp - basis points
| |
(1) | Distribution Solutions segment’s gross profit includes LIFO credits of $99 million and $7 million in 2018 and 2017 and LIFO charges of $244 million in 2016. Gross profit for 2017 and 2016 also includes $144 million and $76 million ofOther income, net cash proceeds representing our share of antitrust legal settlements. |
Gross profit and gross profit margin decreased in 2018 and 2017 compared to the same periods a year ago. The decreases in 2018 were primarily due the previously described contribution of our Core MTS Business to Change Healthcare.
Distribution Solutions
Distribution Solutions segment’s gross profit increased 12% in 2018 and decreased 1% in 2017. As a percentage of revenues, gross profit increased by 29 bp in 2018 and decreased by 26 bp in 2017.
Gross profit and gross profit margin for 2018 increased compared to the same period a year ago primarily due to market growth, procurement benefits realized through ClarusONE, higher LIFO inventory credits, our business acquisitions and the transfer of our RHP business from our Technology Solutions segment. These increases were partially offset by significant government reimbursement reductions in the U.K., the competitive sell-side pricing environment, weaker pharmaceutical manufacturer pricing trends and our mix of business. Gross profit and gross profit margin for 2017 decreased primarily due to weaker pharmaceutical manufacturer pricing trends, the competitive sell-side pricing environment and lower compensation from a branded pharmaceutical manufacturer in our U.S. Pharmaceutical distribution business, partially offset by LIFO inventory credits, higher cash receipts representing our share of antitrust legal settlements, higher procurement benefits and our business acquisitions. Gross profit also reflects the impact of recent customer consolidation activities.
Our Distribution Solutions segment experienced weaker pharmaceutical manufacturer pricing trends over the last three years.
Our LIFO inventory credits were $99 million and $7 million in 2018 and 2017 and LIFO charges were $244 million in 2016. 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 charge 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 charge or credit is affected by changes in year-end inventory quantities, product mix and manufacturer pricing practices, which may be influenced by market and other external factors. Changes to any of the above factors could have a material impact to our annual LIFO credit or expense. LIFO credits were higher in 2018 compared to 2017 due to higher net effect of price declines, partially offset by lower inventory level. LIFO expense was recognized in 2016 primarily due to net effects of price increases. As ofyear ended March 31, 2018 and 2017, pharmaceutical inventories at LIFO did not exceed current replacement cost.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Technology Solutions
Technology Solutions segment’s gross profit decreased in 2018 and 2017. Gross profit and gross profit margin for 2018 decreased primarily due to the 2017 fourth quarter contribution of the Core MTS Business, the transfer of our RHP business to our Distribution Solutions segment and the 2018 third quarter sale of our EIS business. As a result, this segment’s 2018 gross profit and gross profit margin included only our EIS business.
Gross profit for 2017 decreased due to one less month of gross profit from the Core MTS Business, which was contributed to the joint venture on March 1, 2017. Gross profit margin for 20172021 increased primarily due to a decline in hospital software revenues, lower severance charges, ongoing cost management efforts and the prior year sales of businesses, partially offset by a lower margin from our hospital software business. Gross profit margin for 2017 also benefited from lower depreciation and amortization expenses related to the Core MTS Business’ assets, which were classified as held for sale since the second quarter of 2017. Depreciation and amortization related to the long-lived assets ceased as of the date they were determined as held for sale.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Operating Expenses, Other Income, Net and Loss from Equity Method Investment:
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions, except ratios) | 2018 | | 2017 | | 2016 | | | 2018 | | 2017 |
| Operating Expenses | | | | | | | | | | | | |
| Distribution Solutions | | | | | | | | | | | | |
Operating Expenses (1) | $ | 7,648 |
| | $ | 6,540 |
| | $ | 6,280 |
| | | 17 |
| % | | 4 |
| % |
| Goodwill impairment charges | 1,738 |
| | — |
| | — |
| | | NM |
| | | NM |
| |
| Restructuring and asset impairment charges | 567 |
| | 19 |
| | 156 |
| | | 2,884 |
| | | (88 | ) | |
| Total Distribution Solutions | 9,953 |
| | 6,559 |
| | 6,436 |
| | | 52 |
| % | | 2 |
| % |
| Technology Solutions | | | | | | | | | | | | |
Operating Expenses (2) | 42 |
| | 858 |
| | 1,002 |
| | | (95 | ) | % | | (14 | ) | % |
| Gains from sales of businesses | (109 | ) | | — |
| | (51 | ) | | | NM |
| | | NM |
| |
| Gain on healthcare technology net asset exchange, net | (37 | ) | | (3,947 | ) | | — |
| | | (99 | ) | | | NM |
| |
| Goodwill impairment charge | — |
| | 290 |
| | — |
| | | NM |
| | | NM |
| |
| Total Technology Solutions | (104 | ) | | (2,799 | ) | | 951 |
| | | (96 | ) | % | | (394 | ) | % |
| Corporate | 573 |
| | 402 |
| | 484 |
| | | 43 |
| | | (17 | ) | |
| Total | $ | 10,422 |
| | $ | 4,162 |
| | $ | 7,871 |
| | | 150 |
| % | | (47 | ) | % |
| | | | | | | | | | | | | |
| Operating Expenses as a Percentage of Revenues | | | | | | | | | | | | |
| Distribution Solutions | 4.78 |
| % | 3.35 |
| % | 3.42 |
| % | | 143 |
| bp | | (7 | ) | bp |
| Technology Solutions | (43.33 | ) | | (107.24 | ) | | 32.96 |
| | | NM |
| | | NM |
| |
| Total | 5.00 |
| | 2.10 |
| | 4.12 |
| | | 290 |
| | | (202 | ) | |
| | | | | | | | | | | | | |
| Other Income, Net | | | | | | | | | | | | |
| Distribution Solutions | $ | 120 |
| | $ | 64 |
| | $ | 41 |
| | | 88 |
| % | | 56 |
| % |
| Technology Solutions | 1 |
| | 1 |
| | 2 |
| | | - |
| | | (50 | ) | |
| Corporate | 9 |
| | 25 |
| | 15 |
| | | (64 | ) | | | 67 |
| |
| Total | $ | 130 |
| | $ | 90 |
| | $ | 58 |
| | | 44 |
| % | | 55 |
| % |
| | | | | | | | | | | | | |
| Loss from Equity Method Investment in Change Healthcare - Technology Solutions | $ | 248 |
| | $ | — |
| | $ | — |
| | | NM |
| | | NM |
| |
bp - basis points
NM - not meaningful
| |
(1) | The amounts exclude the goodwill impairment charges and restructuring and asset impairment charges. 2016 includes a pre-tax gain of $52 million from the 2016 third quarter sale of our ZEE Medical business. |
| |
(2) | The amounts exclude the gain from sale of business, gain on healthcare technology net asset exchange, net, and goodwill impairment charge. |
Operating Expenses
Total operating expenses increased in 2018 and decreased in 2017 compared to the same periods a year ago primarily due to the gain recognized from the 2017 fourth quarter contribution of the Core MTS Business.
Distribution Solutions
Distribution Solutions segment’s total operating expenses increased 52% for 2018 and 2% for 2017 compared to the same periods a year ago. Excluding foreign currency effects, operating expenses increased 47% for 2018 and 5% for 2017.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Total operating expenses increased in 2018 compared to 2017 primarily due to:
Non-cash goodwill impairment charges (pre-tax and after-tax) of $1,283 million for our McKesson Europe reporting unit and $455 million for our Rexall Health reporting unit;
Non-cash pre-tax long-lived asset impairment charges of $446 million ($410 million after-tax) and pre-tax restructuring charges of $74 million ($67 million after-tax) for our McKesson Europe business;
Non-cash charges of $33 million (pre-tax and after-tax) to impair the carrying value of certain intangible assets (primarily customer relationships) for our Rexall Health business. The impairment was primarily due to the decline in the estimated future cash flows from certain pharmacies of Rexall Health’s business, driven primarily by generics reimbursement reductions implemented across Canada; and
Higher expenses due to our business acquisitions.
We expect to record total pre-tax restructuring charges of approximately $90 million to $130 million for our McKesson Europe business, of which $74 million of pre-tax charges were recorded through the end of 2018. Estimated remaining restructuring charges primarily consist of lease termination and other exit costs.
Total operating expenses increased in 2017 compared to 2016 primarily due to our acquisitions and higher acquisition-related expenses and intangible amortization, partially offset by lower restructuring charges and cost savings associated with the 2016 Cost Alignment Plan, ongoing expense management efforts and lower bad debt expense. Total operating expenses for 2016 include a pre-tax gain from the 2016 sale of a business.
Technology Solutions
Technology Solutions segment had operating credits of $104 million and $2,799 million in 2018 and 2017 primarily due to gains that offset operating expenses.
Total operating expenses for 2018 benefited from a pre-tax gain of $109 million (after-tax gain of $30 million) from the 2018 third quarter sale of our EIS business, a pre-tax credit of $46 million ($30 million after-tax) from the re-measurement of the liability related to a tax receivable agreement with Change Healthcare shareholders and a pre-tax gain of $37 million (after-tax gain of $22 million) representing the final net working capital and other adjustments from the 2017 Healthcare Technology Net Asset Exchange.
On August 1, 2017, we entered into an agreement with a third party to sell our EIS business for $185 million, subject to adjustments for net debt and working capital. On October 2, 2017, the transaction closed upon satisfaction of all closing conditions including the termination of the waiting period under U.S. antitrust laws. We received net cash proceeds of $169 million after $16 million of assumed net debt by the third party. We recognized a pre-tax gain of $109 million (after-tax gain of $30 million) upon the disposition of this business in the third quarter of 2018 within operating expenses in our Technology Solutions segment.
Total operating expenses for 2017 benefited from the pre-tax gain of $3,947 million (after-tax gain of $3,018 million) from the contribution of Core MTS Business, partially offset by a non-cash pre-tax goodwill impairment charge of $290 million ($282 million after-tax) for the EIS reporting unit, cost savings from the 2016 Cost Alignment Plan and ongoing cost management efforts and one less month of expenses from the Core MTS Business. Total operating expenses for 2016 include a pre-tax gain from the 2016 sale of a business.
Corporate
Corporate expenses increased 43% in 2018 compared to the prior year primarily due to a charitable contribution expensenet gains recognized from our equity investments of $100 million ($64 million after-tax)$133 million. 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 exit of some of these investments as further described in Financial Note 17, “Fair Value Measurements,” to the Foundationaccompanying consolidated financial statements included in this Annual Report on Form 10-K. 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 also increased year over year due to pension settlement charges of $122 million recognized in 2020 related to our previously approved termination of the frozen U.S. defined benefit pension plan. In connection with the pension plan termination, we purchased annuity contracts from an insurer that will pay and higher professional fees incurredadminister the future pension benefits of the remaining participants.
Other income, net, for Corporate initiatives.
Corporate expensesthe year ended March 31, 2020 decreased 17% in 2017 compared to the prior year primarily due to lower restructuringthe 2020 pension settlement charges described above and cost savings associated with the 2016 Cost Alignment Plan, including lower compensation and benefit costs and outside service fees. Corporate expenses for 2017 also benefited from a pre-tax gain of $15 million from the sale-leaseback transaction of our corporate headquarters building.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Other Income, Net: Other income, net for 2018 increased primarily due to a pre-tax gain of $43 million ($26 million after-tax)higher gains recognized from the sale of an equity method investment within our Distribution Solutions segment,investments in 2019, partially offset by lower rental income for Corporate. Other income,higher net for 2017 increased primarily due to higher equity investment income withinsettlement gains in 2020 from our Distribution Solutions segment.derivative contracts.
LossEquity Earnings and Charges from Equity Method Investment in Change Healthcare: 2018 includedHealthcare Joint Venture
Until the separation of our investment in Change Healthcare JV on March 10, 2020, we accounted for this investment using the equity method of accounting. Excluding the impairment and transaction-related items described below, our proportionate share of loss from our investment in Change Healthcare of $248JV for the years ended March 31, 2020 and 2019 was $119 million and $194 million, respectively, which primarily consisted ofincludes transaction and integration expenses incurred by the joint venture and basis differences between the joint venture and McKesson including amortization of fair value adjustments including amortization expenses associated withadjustments. During the first quarter of 2020 and for the year ended March 31, 2019, we owned approximately 70% of this joint venture.
On June 27, 2019, common stock and certain other securities of Change began trading on the NASDAQ (“IPO”). On July 1, 2019, upon the completion of its IPO, Change contributed net cash proceeds it received from its offering of common stock to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities were also used by Change to acquire certain securities of Change Healthcare JV. As a result, McKesson’s equity method intangible assets, partially offset by a tax benefit of $76 million primarily dueinterest in Change Healthcare JV was reduced from 70% to a reductionapproximately 58.5%, which was used to recognize our proportionate share in net loss from Change Healthcare JV, commencing in the future applicable tax rate relatedsecond quarter of 2020. As a result of the ownership dilution to the 2017 Tax Act.
Acquisition-Related Expenses and Adjustments
Acquisition-related expenses, which included transaction and integration expenses directly related to business acquisitions and the gain on the Healthcare Technology Net Asset Exchange were $168 million, $(3,797) million and $11458.5% from 70%, we recognized a dilution loss of approximately $246 million in 2018, 2017 and 2016. 2018 includes $37 million gain associated with the final net working capital and other adjustments from the Healthcare Technology Net Asset Exchange andsecond quarter of 2020. Additionally, our proportionate share of transactionincome or loss from this investment was subsequently reduced as immaterial settlements of stock option exercises occurred after the IPO and integration expenses incurred byfurther diluted our ownership.
In the second quarter of 2020, we recorded an other-than-temporary-impairment (“OTTI”) charge of $1.2 billion to our investment in Change Healthcare. 2017 includes a pre-tax gainHealthcare JV, representing the difference between the carrying value of $3,947 millionour investment and the fair value derived from the corresponding closing price of Change’s common stock at September 30, 2019. This charge was included within “Equity earnings and charges from investment in Change Healthcare Technology Net Asset Exchange. ExpensesJoint Venture” in 2018 were higher primarily due to our proportionate shareConsolidated Statements of transaction and integration expenses incurred byOperations for the year ended March 31, 2020.
On March 10, 2020, we completed the previously announced separation of our interest in Change Healthcare. ExpensesHealthcare JV, which eliminated our investment in 2017 were higher primarily due to our business acquisitionsthe joint venture. The separation was effected through the split-off of UDG, Vantage, Biologics and Rexall Health, partially offset by a decline in expenses associated with our February 2014 acquisition of McKesson Europe and February 2013 acquisition of PSS World Medical,PF2 SpinCo, Inc. (“PSSI”SpinCo”), a wholly owned subsidiary of the Company that held all of our interest in Change Healthcare JV, to certain of our stockholders through an exchange offer (“Split-off”), followed by the merger of SpinCo with and into Change, with Change surviving the merger (“Merger”). Our integration of PSSI and McKesson Europe were substantially completed in 2017.
Acquisition-related expenses and adjustments were recorded as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Operating Expenses | | | | | |
| Gain on Change Healthcare Net Asset Exchange, net | $ | (37 | ) | | $ | (3,947 | ) | | $ | — |
|
| Transaction closing expenses | 15 |
| | 30 |
| | 10 |
|
| Restructuring, severance and relocation | 36 |
| | 25 |
| | — |
|
| Other | 54 |
| | 85 |
| | 100 |
|
| Total | 68 |
| | (3,807 | ) | | 110 |
|
Other Expenses (1) | 100 |
| | 10 |
| | 4 |
|
| Total Acquisition-Related Expenses and Adjustments | $ | 168 |
| | $ | (3,797 | ) | | $ | 114 |
|
| |
(1) | Fiscal 2018 includes our proportionate share of transaction and integration expenses incurred by Change Healthcare, excluding certain fair value adjustments, which was recorded within “Loss from Equity Method Investment in Change Healthcare”. |
Acquisition-related expenses and adjustments by segment were as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Distribution Solutions | $ | 99 |
| | $ | 133 |
| | $ | 112 |
|
| Technology Solutions | 60 |
| | (3,936 | ) | | — |
|
| Corporate | 9 |
| | 6 |
| | 2 |
|
Total Acquisition-Related Expenses and Adjustments (1) | $ | 168 |
| | $ | (3,797 | ) | | $ | 114 |
|
| |
(1) | The amounts were recorded in operating expenses, other income, net and loss from equity method investment in Change Healthcare. |
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Amortization ExpensesIn connection with the exchange offer, on March 9, 2020, we distributed all 176.0 million outstanding shares of Acquired Intangible Assets
Amortization expensescommon stock of acquired intangible assets directlySpinCo to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson common stock. Following consummation of the exchange offer, on March 10, 2020, the Merger was consummated, with each share of SpinCo common stock converted into one 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 Merger are intended to be generally tax-free transactions to McKesson and its shareholders for U.S. federal income tax purposes. Following the Split-off, we do not beneficially own any of Change’s outstanding securities. In connection with this transaction, we recognized a net gain for financial reporting purposes of $414 million during the fourth quarter of 2020, which was largely driven by the reversal of a related to business acquisitionsdeferred tax liability. Under the agreement with Change Healthcare JV, McKesson, Change, and the formationcertain subsidiaries of the Change Healthcare joint venture were $792 million, $440 millionJV, there may be changes in future periods to the amount reversed. Any such change is not expected to be material.
After the separation, Change Healthcare JV is required under the TRA to pay McKesson 85% of the net cash tax savings realized, or deemed to be realized, resulting from depreciation or amortization allocated to Change by McKesson. The receipt of any payments under the TRA is dependent upon Change benefiting from this depreciation or amortization in future tax return filings, which creates uncertainty over the amount, timing and $423 millionprobability of the gain recognized. As such, we accounted for the TRA as a gain contingency, with no receivable recognized as of March 31, 2021 nor 2020.
Interest Expense
Interest expense decreased in 2018, 2017 and 2016. These expenses were primarily recorded in our operating expenses and in our proportionate share of loss from2021 compared to the equity method investment in Change Healthcare. Amortization expenses increased in 2018prior year primarily due to amortization expensesthe repayment of equity method intangibles associated with$1.0 billion of long-term debt in the Change Healthcare joint venturethird quarter of 2021 and our acquisitiona decrease in the issuance of CMM. Amortization expenses increasedcommercial paper. Interest expense decreased in 2017 primarily due to our acquisitions of UDG, Biologics, Vantage and Rexall Health, partially offset by lower amortization expense related to Core MTS Business assets which were classified as held for sale since the 2017 second quarter.
Amortization expense by segment were as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Distribution Solutions | $ | 503 |
| | $ | 418 |
| | $ | 389 |
|
Technology Solutions (1) | 289 |
| | 22 |
| | 34 |
|
| Total | $ | 792 |
| | $ | 440 |
| | $ | 423 |
|
| |
(1) | Fiscal 2018 primarily represents amortization expenses of equity method intangibles associated with the Change Healthcare joint venture, which were recorded in our proportionate share of the loss from Change Healthcare. |
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Segment Operating Profit, Corporate Expenses, Net and Interest Expense:
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | | Change |
| (Dollars in millions, except ratios) | 2018 | | 2017 | | 2016 | | | 2018 | | 2017 |
Segment Operating Profit (Loss) (1) (2) | | | | | | | | | | | | |
Distribution Solutions (3) | $ | 1,231 |
| | $ | 3,361 |
| | $ | 3,553 |
| | | (63 | ) | % | | (5 | ) | % |
Technology Solutions (4) | (23 | ) | | 4,215 |
| | 519 |
| | | (101 | ) | | | 712 |
| |
| Subtotal | 1,208 |
| | 7,576 |
| | 4,072 |
| | | (84 | ) | | | 86 |
| |
Corporate Expenses, Net (2) (5) | (564 | ) | | (377 | ) | | (469 | ) | | | 50 |
| | | (20 | ) | |
| Loss on Debt Extinguishment | (122 | ) | | — |
| | — |
| | | NM |
| | | NM |
| |
| Interest Expense | (283 | ) | | (308 | ) | | (353 | ) | | | (8 | ) | | | (13 | ) | |
| Income From Continuing Operations Before Income Taxes | $ | 239 |
| | $ | 6,891 |
| | $ | 3,250 |
| | | (97 | ) | % | | 112 |
| % |
| | | | | | | | | | | | | |
| Segment Operating Profit (Loss) Margin | | | | | | | | | | | | |
| Distribution Solutions | 0.59 |
| % | 1.72 |
| % | 1.89 |
| % | | (113 | ) | bp | | (17 | ) | bp |
| Technology Solutions | NM |
| | 161.49 |
| | 17.99 |
| | | NM |
| | | 14,350 |
| |
bp - basis points
NM - not meaningful
| |
(1) | Segment operating profit (loss) includes gross profit, net of operating expenses, as well as other income, net, for our two reportable segments. |
| |
(2) | In connection with the 2016 Cost Alignment Plan, we recorded pre-tax restructuring charges of $229 million in 2016. 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. |
| |
(3) | Distribution Solutions segment’s operating profit for 2018 includesnon-cash pre-tax goodwill impairment charges of $1,283 million for our McKesson Europe reporting unit and $455 million for our Rexall Health reporting unit. This segment’s operating profit for 2018 also includes non-cash pre-tax long-lived asset impairment charges of $446 million and pre-tax restructuring charges of $74 million for our McKesson Europe business. 2016 includes a pre-tax gain of $52 million from the 2016 third quarter sale of our ZEE Medical business.
|
| |
(4) | Technology Solutions segment’s operating profit for 2018 includes our proportionate share of loss from Change Healthcare of $248 million, partially offset by a pre-tax gain of $109 million from the 2018 third quarter sale of our EIS business. Operating profit for 2017 includes a pre-tax gain of $3,947 million recognized from the Healthcare Technology Net Asset Exchange, net of transaction and related expenses and a non-cash pre-tax charge of $290 million for goodwill impairment related to the EIS reporting unit. Operating profit for 2016 includes a pre-tax gain of $51 million recognized from the sale of our nurse triage business. |
| |
(5) | Corporate expenses, net for 2018 include a pre-tax charitable contribution of $100 million to the Foundation. |
Segment Operating Profit (Loss)
Distribution Solutions: Operating profit and operating profit margin decreased for 20182020 compared to the same period aprior year ago primarily due to higher operating expenses as a percentage of revenues driven primarily by a goodwill impairment charges and restructuring and long-lived asset impairment charges related to our McKesson Europe and Rexall Health businesses. These decreases were partially offset by the improved gross profit margin primarily due to market growth within our North America distribution businesses, procurement benefits, our business acquisitions and higher LIFO credits. 2018 operating profit and operating profit margin were also unfavorably affected by government reimbursement reductions in the U.K. and the competitive sell-side pricing environment.
Operating profit margin decreased for 2017 primarily due to a declinedecrease in gross profit margin reflecting weaker pharmaceutical manufacturer pricing trends, the competitive sell-side pricing environment and lower compensation from a branded pharmaceutical manufacturer from our U.S. Pharmaceutical distribution business. Operating profit and operating profit margin in 2017 benefited from LIFO credits, our acquisitions, lower restructuring charges and cost savings associated with the 2016 Cost Alignment Plan and higher cash receipts representing our shareissuance of antitrust legal settlements.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Technology Solutions: Operating profit decreased for 2018 primarily due to the 2017 contribution of our Core MTS Business and loss from the equity method investment in Change Healthcare. The decrease iscommercial paper, partially offset by a gaindecrease in interest income from the sale of our EIS business. Operating profit and operating profit margin increased in 2017 primarily due to the gain from the 2017 contribution of the Core MTS Business, which was partially offset by the non-cash EIS goodwill impairment pre-tax charge of $290 million. 2017 operating profit benefited from lower restructuring charges and cost savings from the 2016 Cost Alignment Plan. Operating profit for 2017 was unfavorably affected by one less month of operating profit from the Core MTS business, which was contributed to Change Healthcare on March 1, 2017.
Corporate: Corporate expenses, net, increased for 2018 primarily due to higher operating expenses driven by a charitable contribution expense of $100 million, Corporate initiatives and lower other income compared to the same period a year ago. Corporate expenses, net, decreased in 2017 primarily due to lower restructuring charges and a pre-tax gain from a sale-leaseback transaction.
Loss on Debt Extinguishment: We recognized a pre-tax loss on debt extinguishment of $122 million ($78 million after-tax) primarily representing premiums related to our February 2018 tender offers to redeem a portion of our existing outstanding long-term debt.
Interest Expense: Interest expense over the last two years decreased primarily due to the refinancing of debt at lower interest rates, partially offset by an increase relating to the issuance of commercial paper.derivative contracts. 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Income TaxesTax (Benefit) Expense
During 2018, 2017 and 2016, ourWe recorded income tax benefit was $53(benefit) expense of ($695 million), $18 million, and income tax expenses were $1,614$356 million for the years ended March 31, 2021, 2020, and $908 million related to continuing operations.2019, respectively. Our reported income tax benefit rate was 22.2% in 2018 and income tax(benefit) expense rates were 23.4%(13.8%), 1.6%, and 27.9%58.4% in 20172021, 2020, and 2016. Fluctuations in our reported income tax rates are primarily due to change in tax laws, including the recently enacted 2017 Tax Act, the impact of nondeductible impairment charges and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate.2019, respectively.
Our reported income tax benefit rate for 20182021 was favorably impacted by the 2017 Tax Act enacted on December 22, 2017. As a resultcharge for opioid-related claims of the 2017 Tax Act, we recognized a provisional tax benefit of $1,324 million due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate and a provisional tax expense of $457 million for the one-time tax imposed on certain accumulated E&P of our foreign subsidiaries.$8.1 billion ($6.8 billion after-tax).
Our reported income tax benefitexpense rate for 20182020 was favorably impacted by a net gain on the Change Healthcare JV divestiture of $414 million (pre-tax and after-tax), which was intended to generally be a tax-free split-off for U.S. federal income tax purposes, and unfavorably impacted by charges of $275 million (pre-tax and after-tax) 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. Refer to Financial Note 2,“Investment in Change Healthcare Joint Venture” and Note 3,“Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K for more information.
Our reported income tax expense rate for 2019 was unfavorably impacted by non-cash pre-tax charges totaling $1,738 millionof $1.8 billion (pre-tax and after-tax) to impair the carrying value of goodwill related toof our McKesson EuropeEuropean RP and Rexall HealthEuropean PD reporting units within our Distribution Solutionsthe International segment, given that no tax benefit was recognized for these charges. Our reported income tax expense rate for 2017 was unfavorably affected by a non-cash pre-tax charge of $290 million to impair the carrying value of goodwill related to our EIS business within our Technology Solutions segment given that the majority of this charge wascharges are generally not deductible for income tax purposes. Refer to Financial Note 3,12, “Goodwill Impairment Charges,and Intangible Assets, Net,” to the accompanying consolidated financial statements appearingincluded in this Annual Report on Form 10‑K for additional information.
On December 19, 2016, we sold various software relating to our Technology Solutions business between wholly owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. An entity based in the U.S. was the recipient of the software and is entitled to amortize the fair value of the assets for book and tax purposes. For U.S. GAAP purposes, the tax benefit associated with the amortization of these assets is recognized over the tax lives of the assets. As a result, a net tax benefit of $137 million was recognized prior to the contribution of a portion of these assets to Change Healthcare as described in Financial Note 2, “Healthcare Technology Net Asset Exchange”. In 2018, a net tax benefit of $178 million was recognized associated with the amortization of the software.
In October 2016, amended guidance was issued to require entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amended guidance is effective for us commencing in the first quarter of 2019 on a modified retrospective basis. Upon adoption, the Company anticipates recording approximately $130 million to $160 million of deferred tax assets with a corresponding cumulative-effect increase to retained earnings in the beginning of the period of adoption on its consolidated financial statements for the tax consequences relating to the intra-entity transfer of software.
On March 1, 2017, we contributed assets to Change Healthcare as further described in Financial Note 2, “Healthcare Technology Net Asset Exchange”. While this transaction was predominantly structured as a tax free asset contribution for U.S. federal income tax purposes under Section 721(a) of the Internal Revenue Code, we recorded tax expense of $929 million on the gain. The tax expense was primarily driven by the recognition of a deferred tax liability on the excess book over tax basis in our equity investment in Change Healthcare.
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 the United Kingdom,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 signed the Revenue Agent’s Report from the U.S. Internal Revenue Service (“IRS”) relating to their audit of the fiscal years 2010 through 2012 on December 29, 2017. We file income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions and various foreign jurisdictions. We are subject to audit by the IRS for fiscal years 2013 through the current fiscal year. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2010 through the current fiscal year.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Income (Loss) from Discontinued Operations, Net of Tax
Income (Losses)(loss) from discontinued operations, net of tax, were $5was $(1) million, ($124 million)$(6) million, and ($32 million) in 2018, 2017 and 2016.
Loss from discontinued operations, net for 2017 includes an after-tax loss of $113$1 million related to the sale of our Brazilian pharmaceutical distribution business within our Distribution Solutions segment, which we acquired through our February 2014 acquisition of McKesson Europe. In 2015, we committed to a plan to sell this business and the results of operations and cash flows for this business had been classified as discontinued operations since 2015. On May 31, 2016, we completed the sale of this business and recognized the loss primarily for the settlement of certain indemnification matters as well as the release of the cumulative translation losses. We made a payment of approximately $100 million related to the sale in 2017.years ended March 31, 2021, 2020, and 2019, respectively.
Refer to Financial Note 7, “Discontinued Operations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Net Income Attributable to Noncontrolling Interests: Interests
Net income attributable to noncontrolling interests for all periods presented includesprimarily represents ClarusONE, Vantage Oncology Holdings, LLC, and the accrual 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 McKesson Europe under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”). In 2018 and 2017, net income attributable to noncontrolling interests also includes third-party equity interests in our consolidated entities including Vantage and ClarusONE Sourcing Services LLP, 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’sour control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of Stockholders’ EquityMcKesson Corporation stockholders’ equity (deficit) on our consolidated balance sheet. Refer to Financial Note 11,9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying consolidated financial statements appearingincluded in this Annual Report on Form 10-K for additional information.
Net Income (Loss) Attributable to McKesson Corporation: Corporation
Net income (loss) attributable to McKesson Corporation was $67 million, $5,070$(4.5) billion, $900 million, and $2,258$34 million in 2018, 2017for the years ended March 31, 2021, 2020, and 2016 and diluted2019, respectively. Diluted earnings (loss) per common share were $0.32, $22.73attributable to McKesson Corporation was $(28.26), $4.95, and $9.70.$0.17 for the years ended March 31, 2021, 2020, and 2019, 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 2021, 2020, and 2019 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 209160.6 million, 223181.6 million, and 233197.3 million for 2018, 2017the years ended March 31, 2021, 2020, and 2016. Weighted average2019, respectively. Weighted-average diluted common shares outstanding is affectedimpacted by the exercise and settlement of share-based awards and in 2018 and 2017, and the cumulative effect of share repurchases.repurchases, including the impact of shares exchanged as part of the split-off from our investment in Change Healthcare JV, as discussed above.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Overview of Segment Results:
Segment Revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2021 | | 2020 | | 2019 | | 2021 | 2020 |
| Segment revenues | | | | | | | | | | |
| U.S. Pharmaceutical | $ | 189,274 | | | $ | 181,700 | | | $ | 166,189 | | | 4 | | % | 9 | | % |
| International | 35,965 | | | 38,341 | | | 38,023 | | | (6) | | | 1 | | |
| Medical-Surgical Solutions | 10,099 | | | 8,305 | | | 7,618 | | | 22 | | | 9 | | |
| Prescription Technology Solutions | 2,890 | | | 2,705 | | | 2,489 | | | 7 | | | 9 | | |
| Total revenues | $ | 238,228 | | | $ | 231,051 | | | $ | 214,319 | | | 3 | | % | 8 | | % |
U.S. Pharmaceutical
2021 vs. 2020
U.S. Pharmaceutical revenues for the year ended March 31, 2021 increased 4% compared to the prior year primarily due to market growth, including branded pharmaceutical price increases, growth in specialty pharmaceuticals, and higher volumes from retail national account customers, partially offset by branded to generic drug conversions. Revenues for this segment were unfavorably impacted by fluctuations in demand for pharmaceuticals in retail pharmacies and institutional healthcare providers due to COVID-19 largely during the onset of the pandemic in late March 2020 and during our first quarter of 2021 combined with the loss of certain customers.
2020 vs. 2019
U.S. Pharmaceutical revenues for the year ended March 31, 2020 increased 9% compared to the prior year primarily due to market growth, including branded pharmaceutical price increases, growth in specialty pharmaceuticals, higher volumes from retail national account customers, partially offset by branded to generic drug conversions.
International
2021 vs. 2020
International revenues for the year ended March 31, 2021 decreased 6% compared to the prior year. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 9% primarily due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA and to a lesser extent, the exit of unprofitable customers in our Canadian business. Revenues for this segment were also unfavorably impacted by lower volumes from the adverse impacts from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses within Europe.
2020 vs. 2019
International revenues for the year ended March 31, 2020 increased 1% compared to the prior year. Excluding the unfavorable effects of foreign currency exchange fluctuations, revenues for this segment increased 4% primarily due to market growth in our European pharmaceutical distribution and retail pharmacy businesses.
Medical-Surgical Solutions
2021 vs. 2020
Medical-Surgical Solutions revenues for the year ended March 31, 2021 increased 22% compared to the prior year largely due to sales of COVID-19 tests and PPE.
2020 vs. 2019
Medical-Surgical Solutions revenues for the year ended March 31, 2020 increased 9% compared to the prior year primarily due to market growth in our primary care business.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Prescription Technology Solutions
2021 vs. 2020
RxTS revenues for the year ended March 31, 2021 increased 7% compared to the prior year driven by increased volume with new and existing customers primarily in our CoverMyMeds business.
2020 vs. 2019
RxTS revenues for the year ended March 31, 2020 increased 9% compared to the prior year primarily driven by increased volume with new and existing customers.
Segment Operating Profit (Loss) and Corporate Expenses, Net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, | | Change |
| (Dollars in millions) | 2021 | | 2020 | | 2019 | | 2021 | 2020 |
Segment operating profit (loss) (1) | | | | | | | | | | |
U.S. Pharmaceutical (2) | $ | 2,763 | | | $ | 2,745 | | | $ | 2,710 | | | 1 | | % | 1 | | % |
International (3) | (37) | | | (161) | | | (1,903) | | | (77) | | | (92) | | |
Medical-Surgical Solutions (4) | 707 | | | 499 | | | 455 | | | 42 | | | 10 | | |
Prescription Technology Solutions (5) | 395 | | | 396 | | | 355 | | | - | | 12 | | |
Other (6) | — | | | (1,113) | | | (104) | | | (100) | | | 970 | | |
| Subtotal | 3,828 | | | 2,366 | | | 1,513 | | | 62 | | | 56 | | |
Corporate expenses, net (7) | (8,645) | | | (973) | | | (639) | | | 788 | | | 52 | | |
| Interest expense | (217) | | | (249) | | | (264) | | | (13) | | | (6) | | |
| Income (loss) from continuing operations before income taxes | $ | (5,034) | | | $ | 1,144 | | | $ | 610 | | | (540) | | % | 88 | | % |
| | | | | | | | | | |
| Segment operating profit (loss) margin | | | | | | | | | | |
| U.S. Pharmaceutical | 1.46 | | % | 1.51 | | % | 1.63 | | % | (5) | | bp | (12) | | bp |
| International | (0.10) | | | (0.42) | | | (5.00) | | | 32 | | | 458 | | |
| Medical-Surgical Solutions | 7.00 | | | 6.01 | | | 5.97 | | | 99 | | | 4 | | |
| Prescription Technology Solutions | 13.67 | | | 14.64 | | | 14.26 | | | (97) | | | 38 | | |
bp - basis points
(1)Segment operating profit (loss) includes gross profit, net of operating expenses, as well as other income (expense), net, for our reportable segments. For retrospective periods presented, operating loss for Other reflects equity earnings and charges from our equity method investment in Change Healthcare JV, which we split-off in the fourth quarter of 2020.
(2)Operating profit for our U.S. Pharmaceutical segment includes a charge of $50 million for the year ended March 31, 2021 related to our estimated liability under the OSA.
(3)Operating loss for our International segment for the years ended March 31, 2021 and 2020 includes charges of $58 million and $275 million, respectively, to remeasure to fair value the assets and liabilities of our German pharmaceutical wholesale business which was contributed to a joint venture with WBA. This segment’s operating loss for the years ended March 31, 2021 and 2019 includes goodwill impairment charges of $69 million and $1.8 billion, respectively, as well as long-lived asset impairment charges for the years ended March 31, 2021, 2020, and 2019 of $115 million, $112 million, and $245 million, respectively, primarily related to our retail pharmacy businesses in Canada and Europe.
(4)Operating profit for our Medical-Surgical Solutions segment for the year ended March 31, 2021 includes charges totaling $136 million on certain PPE and other related products due to inventory impairments and excess inventory.
(5)Operating profit for our RxTS segment for the year ended March 31, 2019 includes a gain of $56 million from the divestiture of an equity investment.
(6)Operating loss for Other for the year ended March 31, 2020 includes an OTTI charge of $1.2 billion and a dilution loss of $246 million related to our investment in Change Healthcare JV, partially offset by a net gain of $414 million related to the completed separation of our interest in Change Healthcare JV during the fourth quarter of 2020. Operating loss for the year ended March 31, 2019 includes a credit of $90 million for the derecognition of a liability related to the TRA payable to the shareholders of Change.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(7)Corporate expenses, net for the year ended March 31, 2021 includes a charge of $8.1 billion related to our estimated liability for opioid-related claims, net gains of $133 million from our equity investments, and 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. Corporate expenses, net for the year ended March 31, 2020 includes pension settlement charges of $122 million and a settlement charge of $82 million related to opioid claims.
U.S. Pharmaceutical
2021 vs. 2020
Operating profit increased for the year ended March 31, 2021 compared to the prior year primarily due to an increase in net cash proceeds received of $159 million in 2021 compared to 2020 representing our share of antitrust legal settlements, growth in specialty pharmaceuticals, and the contribution from our vaccine distribution programs. This was partially offset by a decrease in LIFO credits of $214 million, a charge of $50 million recorded in 2021 related to our estimated liability under the OSA, net impacts from COVID-19, including a less severe cough, cold, and flu season, as well as increased costs for strategic growth initiatives.
2020 vs. 2019
Operating profit increased for the year ended March 31, 2020 compared to the prior year primarily due to market growth in our specialty business. Operating profit and operating profit margin were favorably impacted by a charge of $61 million related to a customer bankruptcy in 2019 and an increase in LIFO credits of $42 million. Operating profit and operating profit margin were unfavorably impacted by customer mix and a decrease in net cash proceeds received of $180 million representing our share of antitrust legal settlements.
International
2021 vs. 2020
Operating loss and operating loss margin improved for the year ended March 31, 2021 compared to the prior year primarily due to a decrease in the charges recorded to remeasure to fair value the assets and liabilities of our German pharmaceutical wholesale business which was contributed to a joint venture with WBA, of which $58 million and $275 million was reflected for the years ended March 31, 2021 and 2020, respectively. This was partially offset by a goodwill impairment charge of $69 million recorded in the second quarter of 2021 related to our European retail pharmacy business. The impacts from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses within Europe also caused unfavorability in our segment results year over year.
2020 vs. 2019
Operating loss and operating loss margin improved for the year ended March 31, 2020 compared to the prior year primarily due to goodwill impairment charges of $1.8 billion in 2019 and a decrease in long-lived asset impairment charges of $112 million in 2020 compared to $245 million in 2019. This was partially offset by the fair value remeasurement charges in 2020 described above and a gain from an escrow settlement of $97 million in 2019 related to our 2017 acquisition of Rexall Health.
Medical-Surgical Solutions
2021 vs. 2020
Operating profit and operating profit margin increased for the year ended March 31, 2021 compared to prior year primarily due to COVID-19, including demand for COVID-19 tests and PPE, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines. This was partially offset by inventory charges on certain PPE and other related products, unfavorability in our primary care business due to customer closures largely during the first quarter of 2021, and a less severe cough, cold, and flu season. Additionally, operating profit was favorable year over year due to lower operating expenses, including a decrease in our provision for bad debts.
2020 vs. 2019
Operating profit and operating profit margin increased for the year ended March 31, 2020 compared to prior year primarily due to market growth in our primary care business and lower restructuring charges, partially offset by the remeasurement of assets and liabilities to fair value related to a divestiture that was completed in 2020 and higher operating expenses, including an increase in our provision for bad debts.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Prescription Technology Solutions
2021 vs. 2020
Operating profit remained relatively flat for the year ended March 31, 2021 compared to prior year primarily due to higher operating expenses to support business growth, offset by increased volume with new and existing customers. Operating profit margin decreased for the year ended March 31, 2021 compared to prior year primarily due to higher operating expenses.
2020 vs. 2019
Operating profit and operating profit margin increased for the year ended March 31, 2020 compared to prior year primarily due to increased volumes with new and existing customers, integration costs incurred in 2019 for our acquisition of RxCrossroads that closed during the fourth quarter of 2018, partially offset by a gain of $56 million from the divestiture of an equity investment in 2019.
Other
Operating loss for Other for the year ended March 31, 2020 includes an OTTI charge of $1.2 billion and a dilution loss of $246 million related to our investment in Change Healthcare JV, partially offset by a net gain of $414 million related to the completed separation of our interest in Change Healthcare JV during the fourth quarter of 2020. Operating loss for Other for the year ended March 31, 2019 includes a credit of $90 million for the derecognition of a liability related to the TRA payable to the shareholders of Change. Operating loss for Other also includes our proportionate share of loss from Change Healthcare JV of $119 million and $194 million for the years ended March 31, 2020 and 2019, respectively.
Corporate
2021 vs. 2020
Corporate expenses, net increased for the year ended March 31, 2021 compared to the prior year due to a charge of $8.1 billion related to our estimated liability for opioid-related claims.
Corporate expenses, net for 2021 also includes net gains recognized from our equity investments of $133 million and a net gain of $131 million recognized in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program. Corporate expenses, net, for 2020 includes pension settlement charges of $122 million, an opioid claim settlement charge of $82 million, and net settlement gains of $26 million recognized from our derivative contracts.
2020 vs. 2019
Corporate expenses, net, increased for the year ended March 31, 2020 compared to the prior year primarily due to the pension settlement charges and opioid claim settlement charge mentioned above, as well as higher costs for technology initiatives, partially offset by net settlement gains recognized in 2020 from our derivative contracts. Corporate expenses, net, for 2020 also included charitable contribution expenses of approximately $20 million primarily for the McKesson Foundation.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Foreign Operations
Our foreign operations represented approximately 18%15%, 17%, and 17%18% of our consolidated revenues in 2018, 20172021, 2020, and 2016.2019, respectively. Foreign operations are subject to certain risks, including currency fluctuations. We monitor our operations and adopt strategies responsive to changes in the economic and political environment in each of the countries in which we operate. 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.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. Additional information regarding our foreign operations is included in Financial Note 28,22, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Business Combinations
Recently Announced Business Acquisition
On April 25, 2018, we entered into a definitive agreement to purchase Medical Specialties Distributors LLC (“MSD”) for $800 million, which will be funded from cash on hand. MSD is a leading national distributor of infusion and medical-surgical supplies as well as provider of biomedical services to alternate site and home health providers. The acquisition is subject to regulatory approval and expected to close during the first half of 2019. Upon closing, the financial results of MSD will be included in our consolidated statements of operations within our Medical-Surgical Solutions business.
Other Business Acquisitions
Refer to Financial Note 6,5, “Business Combinations,Acquisitions and Divestitures,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Fiscal 2019 Operating Segments
As previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2017 and December 31, 2017, the executive who was our segment manager of the Distribution Solutions segment retired from the Company in January 2018. As a result, the Company’s chief operating decision maker (“CODM”) evaluated our management and operating structure. In connection with the completion of this evaluation in the first quarter of 2019, our operating structure is realigned, and we will report our financial results in three reportable segments on a retrospective basis commencing in the first quarter of 2019, as follows:
U.S. Pharmaceutical and Specialty Solutions;
European Pharmaceutical Solutions; and
Medical-Surgical Solutions.
All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure will be included in Other. Other primarily consists of McKesson Canada, McKesson Prescription Technology Solutions and our equity method investment in Change Healthcare. The segment changes will reflect how our CODM allocates resources and assesses performance commencing in the first quarter of 2019. The segment changes will not affect the previously issued consolidated financial statements nor earnings per common share of McKesson for historical periods.
Strategic Growth Initiative
On April 25, 2018, the Company announced a multi-year strategic growth initiative, focused on creating innovative new solutions that improve patient care delivery and drive incremental profit growth. The initiative includes a comprehensive review of the Company’s operations and cost structure, designed to increase efficiency, accelerate execution and improve long-term performance. As part of the preliminary phase of this initiative, in April 2018, we committed to a restructuring plan to optimize our operating model and cost structure which will be substantially implemented by the end of 2019. We expect to record total after-tax charges of approximately $150 million to $210 million during 2019. The charges under this plan primarily consist of employee severance, exit-related costs and other charges.
Fiscal 20192022 Outlook
Information regarding the Company’s fiscal 20192022 outlook is contained in our Form 8-K dated May 24, 2018. This6, 2021. 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.
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 that were uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial condition or results from operations. Below are the estimates that we believe are critical to the understanding of our operating results and financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to customers who purchase our products and services. Other customer financing primarily relates to guarantees provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing to certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate the receivables for which we do not expect full collection based on historical collection rates and specific knowledge regarding the current creditworthiness of our customers and record an allowance in our consolidated financial statements for these amounts.
In determiningThe Company considers historical experience, the appropriatecurrent economic environment, customer credit ratings or bankruptcies, and reasonable and supportable forecasts to develop its allowance for doubtful accounts, which includes general and specific reserves,accounts. 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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 2018, sales to ourCompany’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 51.7%51% of our total consolidated revenues.revenues in 2021 and comprised approximately 32% of total trade accounts receivable at March 31, 2021. Sales to our largest customer, CVS Health Corporation (“CVS”), accounted for approximately 19.9%21% of our total consolidated revenues. At March 31, 2018, trade accounts receivable from our ten largest customers wererevenues in 2021 and comprised approximately 24.9%19% of total trade accounts receivable. Accounts receivable from CVS were approximately 16.4% of total trade accounts receivable.at March 31, 2021. As a result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. The accounts receivables balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. A 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 20182021 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, 2018,2021, trade and notes receivables were $14,480 million$17.5 billion prior to allowances of $187$211 million. In 2018, 20172021, 2020 and, 2016,2019, our provision for bad debts was $44$4 million, $93$91 million, and $113 million.$132 million, respectively. At March 31, 20182021 and 2017,2020, the allowance as a percentage of trade and notes receivables was 1.3%1.2% and 1.7%.1.4%, respectively. An increase or decrease of a hypothetical 0.1% in the 20182021 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $14$18 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst-case scenarios. Additional information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report on Form 10-K.
Inventories: Prior to 2018, we reported inventories at the lower Inventories consist of cost or market (“LCM”). Effective in the first quarter of 2018, wemerchandise held for resale. We report inventories at the lower of cost or net realizable value, except for inventories determined using the LIFO method. Inventories for our Distribution Solutions segment consistmethod 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”). method 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
At March 31, 2021 and 2020, total inventories, net were $16,310 million$19.2 billion and $15,278 million at March 31, 2018 and 2017.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
$16.7 billion, respectively, in our Consolidated Balance Sheets. The LIFO method was used to value approximately 63%58% and 70%60% of our inventories at March 31, 20182021 and 2017.2020, respectively. If we had used the FIFOmoving average method of inventory valuation, inventories would have been approximately $906$406 million and $1,005$444 million higher than the amounts reported at March 31, 20182021 and 2017.2020, respectively. These amounts are equivalent to our LIFO reserves. The lower LIFO credits in 2021 compared to 2020 is 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. We recognized net LIFO credits of $99$38 million, $252 million, and $7$210 million, respectively, in 20182021, 2020, and 2017 and net LIFO charges2019 in our Consolidated Statements of $244 million in 2016 within our consolidated statements of operations.Operations. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Excluding LIFO reserves, our inventory reserves as of March 31, 2021 and 2020 were $263 million and $96 million, respectively. The increase was primarily due to 2021 charges totaling $136 million on certain PPE and other related products due to inventory impairments and excess inventory within our Medical-Surgical Solutions segment.
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, 20182021 and 2017,2020, inventories at LIFO did not exceed market.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
In determining whether an inventory valuation 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.
Business Combinations: We accountThe Company accounts 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 oncethe Company obtains 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.life. Refer to Financial Note 6,5, “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 Long-Lived Assets: As a result of acquiring businesses, we have $10,924 million$9.5 billion and $10,586 million$9.4 billion of goodwill at March 31, 20182021 and 2017, $4,102 million2020, respectively, and $3,665 million$2.9 billion and $3.2 billion of intangible assets, net at March 31, 20182021 and 2017.2020, 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 declines 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.
In 2018, we elected to early adopt on a prospective basis,We apply the amended guidance that simplifies goodwill impairment testingtest by eliminatingcomparing the second step of the impairment test. The one-step impairment test under the amended guidance requires an entity to compare theestimated fair value of a reporting unit withto its carrying amountvalue and recognizesrecording an impairment charge forequal to the amount by whichof excess carrying value above the carrying amount exceeds the reporting unit’sestimated fair value, if any.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 (“DCF”) 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 fair values.
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, negative changes in government reimbursement rates, deterioration in the U.S. and global financial markets, an increase in interest raterates 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, some ofUnder the moremarket approach, significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approachalso include the selection of appropriate guideline companies and the determination of market valueappropriate valuation multiples for both the guideline companies andto apply to 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 DCF method, which reflects capital market conditions and the specific risks associated with the business.unit. Under the income approach, significant estimates and assumptions also include the fair value estimates in the goodwill impairment analysis are highly sensitive to thedetermination of discount rates used in the discounting of expected cash flows attributable to the reporting units.rates. The discount rates arerepresent the weighted averageweighted-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. Thecapital structure. Included in the estimate of the weighted-average cost of capital is the assumption of an unsystematic risk premium is an input factor used in calculating discount rate that specifically addressesto address incremental uncertainty related to the reporting units’ future cash flow projections. IncreasesAn increase in the unsystematic risk premium increases the discount rate.
In 2016, we concluded that there were no impairmentsBased on the 2019 annual goodwill impairment tests, the estimated fair values of our reporting units, excluding the Europe Retail Pharmacy and Europe Pharmaceutical Distribution reporting units in our International segment, exceeded their carrying values. The impairment testing performed in 2020 did not indicate any material impairment of goodwill. The segment change in the second quarter of 2021 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. 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, 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 our reporting units in Canada.
The estimated fair values of our McKesson Canada reporting unit in our International segment and our RxCrossroads reporting unit in our RxTS segment exceeded the carrying values of these reporting units by 11% and 14%, respectively, in 2021. The goodwill balance of these reporting units was $1.5 billion for McKesson Canada and $312 million for RxCrossroads at March 31, 2021 or approximately 19% of the consolidated goodwill balance. Generally, a decline in estimated future cash flows in excess of 16% for McKesson Canada and 17% for RxCrossroads or an increase in the discount rate in excess of approximately 1.5% could result in an indication of goodwill impairment for these reporting units in future reporting periods. Other risks, expenses and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions that we were unable to anticipate as of the testing date 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. In 2017, we recorded a non-cash charge to impair the carrying value of our EIS reporting unit’s goodwill. In 2018, we recorded non-cash charges to impair the carrying value of goodwill balance for our McKesson Europe and Rexall Health reporting units.units in future periods. Refer to Financial Note 3,12, “Goodwill Impairment Charges”and Intangible Assets, Net,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Commencing in the first quarter of 2019, our operating structure will be realigned into three reportable segments, U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to be reportable segments are combined into Other.
This change in our operating segment structure will result in two new reporting units within the European Pharmaceutical Solutions segment. As a result, we will be required to perform a goodwill impairment test for the impacted new reporting units immediately before and after the segment change. While we believe the assumptions used in our 2018 impairment analysis are reasonable and representative of expected results for our 2018 reporting unit structure, we may recognize an additional goodwill impairment charge immediately after the segment change as the reassigned carrying values of the reporting units may exceed their respective estimated fair values. We are currently evaluating the impact and are unable to reasonably estimate the additional goodwill impairment charge upon the segment change. At March 31, 2018, the total remaining goodwill balance for these two reporting units was $1,851 million.
A further decrease in the estimated future cash flows, an increase in the discount rate and/or a decrease in the terminal growth rate, could also result in an additional goodwill impairment charge for these reporting units.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Currently, all of our intangible and other long-lived assets 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 38 years. We review 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 of intangible assets 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 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. During 2018, we performed an impairment test of intangible and other long-lived assets, and recognized non-cash asset impairment charges of $479 million pre-tax ($443 million after-tax) for McKesson Europe and Rexall Health businesses to impair the carrying value of certain intangible and other long-lived assets. We utilized an income approach (DCF method) or a combination of an income approach and a market approach for estimating the fair value of intangible assets. The fair value of the intangible assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information. There were no material impairments of intangibles and other long-lived assets in 2017 or 2016 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. Refer to Financial Note 4, “Restructuring, Impairment, and Asset ImpairmentRelated Charges” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Valuation of Equity Method Investments: We evaluate our investments for other-than-temporary impairments when circumstances indicate those assets may be impaired. When the amounts due from suppliers ondecline 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 continual basisloss in value of an investment is other than temporary including: the length of time and adjust the reserveextent 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 when appropriate based onin 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 factual circumstances. As of March 31, 2018 and 2017, supplier reserves were $227 million and $201 million. The final outcome of any outstanding claims may differ from our estimate. All of the supplier reserves at March 31, 2018 and 2017 pertain to our Distribution Solutions segment. An increaseassumptions or decreasejudgments in the supplier reserve as a hypothetical 0.1% of trade payables at March 31, 2018 wouldassessing impairments could result in an increaseimpairment charge.
Restructuring Charges: We have certain restructuring reserves which require significant estimates related to the timing and amount of future employee severance and other exit-related costs to be incurred when the restructuring actions take place. We generally recognize employee severance costs when payments are probable and amounts are estimable. Costs related to contracts without future benefit or decreasecontract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred. In connection with these restructuring actions, we also assess the recoverability of long-lived assets used in the costbusiness, and as a result, we may recognize accelerated depreciation and amortization reflecting shortened useful lives of sales of approximately $32 million in 2018. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios.underlying assets.
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 and include 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, which remains unfinalized, and which 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.
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. For example, on December 22, 2017, the U.S. government enacted comprehensive new tax legislation referred to as the 2017 Tax Act. The 2017 Tax Act makes broad and complex changes to the U.S. tax code. Although our accounting for the impact of the 2017 Tax Act is incomplete, we have made estimates based on management judgment and recorded provisional amounts. Refer to Financial Note 10, “Income Taxes,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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. 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.
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
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 directly on whether itIn conjunction with the preparation of the accompanying financial statements, we considered matters related to ongoing controlled substances claims to which we are a party. As a result of ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework to resolve the claims of governmental entities, and our assessment of certain other opioid-related claims, we have reached a stage at which a broad settlement of opioid claims by governmental entities is probable and 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 in this report. Because of the many uncertainties associated with any potential settlement arrangement or other resolution of opioid-related litigation, including the uncertainty of the scope of participation by plaintiffs in any potential settlement, 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, consolidated financial position, cash flows or liquidity. Refer to Financial Note 19, “Commitments and boundaries of high and low estimate.Contingent Liabilities,” to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.
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 credit 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 mayAs described within the “Trends and Uncertainties” section above, the COVID-19 pandemic continues to develop rapidly. We continue to monitor its impact on demand within parts of our business, as well as trends potentially impacting the timing or ability for some of our customers to pay amounts owed to us. We remain well-capitalized with access theto liquidity from our $4.0 billion revolving credit facility. Additionally, 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. We have seen continued improvement in conditions in the debt markets from timeand commercial paper markets as the Federal Reserve has taken steps to time.stabilize the markets. At March 31, 2021, 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)
The following table summarizes the net change in cash, cash equivalents, and restricted cash for the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended March 31, | | Change |
| (Dollars in millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Net cash provided by (used in): | | | | | | | | | |
| Operating activities | $ | 4,542 | | | $ | 4,374 | | | $ | 4,036 | | | $ | 168 | | | $ | 338 | |
| Investing activities | (415) | | | (579) | | | (1,381) | | | 164 | | | 802 | |
| Financing activities | (1,693) | | | (2,734) | | | (2,227) | | | 1,041 | | | (507) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (61) | | | (19) | | | (119) | | | (42) | | | 100 | |
| Net change in cash, cash equivalents, and restricted cash | $ | 2,373 | | | $ | 1,042 | | | $ | 309 | | | $ | 1,331 | | | $ | 733 | |
Operating Activities
Net cash flow provided from operating activities was $4,345 million in 2018 compared to $4,744 million in 2017$4.5 billion, $4.4 billion, and $3,672 million in 2016. Operating activities$4.0 billion for 2018 were primarily affected by a decrease in receivables primarily due to timing of receiptsthe years ended March 31, 2021, 2020, and loss of customers and increases in drafts and accounts payable reflecting longer payment terms for certain purchases. Operating activities for 2017 and 2016 were primarily affected by an increase in drafts and accounts payable reflecting longer payment terms for certain purchases and increases in receivables primarily associated with our revenue growth.2019, respectively. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements, and vendor payment terms. Operating activities for 2017the 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 2016 included cash generated froman 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 Core MTS business.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. Operating activities for 2017the year ended March 31, 2020 were also affected by $150increases in drafts and accounts payable of $4.0 billion primarily associated with timing, replenishing inventory stocks, and effective working capital management, and an increase in receivables of $2.5 billion primarily due to revenue growth. Operating activities for the year ended March 31, 2019 were affected by increases in drafts and accounts payable of $2.0 billion primarily due to increased inventory purchases and timing of payments, and an increase in receivables of $1.0 billion due to the overall increase in sales volume and timing of receipts.
Other non-cash items within operating activities 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. Other non-cash items for the year ended March 31, 2020 primarily includes fair value remeasurement charges of $275 million described above, pension settlement payment.charges of $122 million, and stock-based compensation of $119 million. Additionally, we made a cash payment of $114 million from the executive benefit retirement plan in 2020. Other non-cash items for the year ended March 31, 2019 primarily includes stock-based compensation of $95 million.
Investing Activities
Net cash used in investing activities was $1,522$415 million, in 2018 compared to $3,796$579 million, in 2017 and $1,557 million in 2016.$1.4 billion for the years ended March 31, 2021, 2020, and 2019, respectively. Investing activities for 2018the year ended March 31, 2021 include $2,893$451 million and $190 millionin capital expenditures for property, plant, and equipment and capitalized software, respectively. Investing activities for the year ended March 31, 2021 also includes net cash proceeds of $400 million from sales of businesses and investments, including $286 million in exchange for the contribution of our German pharmaceutical wholesale business to a joint venture with WBA.
Investing activities for the year ended March 31, 2020 include $362 million and $144 millionin capital expenditures for property, plant, and equipment and capitalized software, respectively, and $133 million of net cash payments for acquisitions.
Investing activities for the year ended March 31, 2019 include $905 million of net cash payments for acquisitions, including $1.3 billion and $724$784 million for our acquisitionsacquisition of CoverMyMeds,Medical Specialties Distributors LLC, and RxCrossroads, $405$426 million and $175$131 million in capital expenditures for property, plant, and equipment and capitalized software, $374respectively, and $101 million of net cash proceeds from sales of businesses and other assets and $126 million cash payment received related to the Healthcare Technology Net Asset Exchange.
Investing activities for 2017 included $4,237 million of net cash payments for acquisitions including $2.1 billion for our acquisition of Rexall Health, $1,228 million of net payments received on Healthcare Technology Net Asset Exchange, $404 million and $158 million in capital expenditures for property, plant and equipment, and capitalized software, and $206 million of net cash proceeds from sales of businesses and equity investments. Investing activities for 2016 included $40 million of net cash payments for acquisitions, $488 million and $189 million in capital expenditures for property, plant and equipment, and capitalized software, and $210 million of cash proceeds from sales of our automation business and an equity investment.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Financing Activities
Net cash used in financing activities utilized $3,084 million, $2,069 millionwas $1.7 billion, $2.7 billion, and $3,453 million of cash in 2018, 2017$2.2 billion for the years ended March 31, 2021, 2020, and 2016.2019, respectively. Financing activities for 2018the year ended March 31, 2021 include cash receipts of $20,542 million$6.3 billion and payments of $20,725 million$6.3 billion from short-term borrowings, (primarilyprimarily commercial paper).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 November 30, 2020 at a fixed interest rate of 3.65% upon maturity, and the redemption of our 4.75% $323 million 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 for the year ended March 31, 2021 also include $770 million of cash paid for stock repurchases and $276 million of dividends paid. Cash used for other financing activities generally includes payments to noncontrolling interests and activity from our finance leases. Other financing activities for the year ended March 31, 2021 also include restricted cash net inflow related to funds temporarily held on behalf of unaffiliated medical practice groups and a payment of $49 million to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders.
Financing activities for the year ended March 31, 2020 include cash receipts of $21.4 billion and payments of $21.4 billion from short-term borrowings, primarily commercial paper. Financing activities for the year ended March 31, 2020 also include $2.0 billion of cash paid for stock repurchases, repayments of long-term debt of $298 million, and $294 million of dividends paid.
Financing activities for the year ended March 31, 2019 include cash receipts of $37.3 billion and payments of $37.3 billion from short-term borrowings, primarily commercial paper. We received cash from long-term debt issuances of $1,522 million$1.1 billion and made repayments on long-term debt of $2,287 million$1.1 billion in 2018. Financing activities in 2018 also include $1,650 million of cash paid for stock repurchases, $262 million of dividends paid and $112 million of payments for debt extinguishments.
2019. Financing activities for 2017 include cash receipts of $8,294 million and payments of $8,124 million from short-term borrowings. We received cash from long-term debt issuances of $1,824 million and made repayments on long-term debt of $1,601 million in 2017. Financing activities in 2017the year ended March 31, 2019 also include $2,250 million$1.6 billion of cash paid for stock repurchases and $253 million of dividends paid.
Financing activities for 2016 include cash receipts of $1,561 million and payments of $1,688 million from short-term borrowings. We made repayments on long-term debt of $1,598 million in 2016. Financing activities in 2016 also include $1,504 million of cash paid for stock repurchases and $244$292 million of dividends paid.
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.
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, 2018 | | | | | | $ | 1,096 | |
| Shares repurchase plans authorized in May 2018 | | | | | | 4,000 | |
| Shares repurchased - Open market | | 10.4 | | | $ | 132.14 | | | (1,377) | |
| Shares repurchased - ASR | | 2.1 | | | $ | 117.98 | | | (250) | |
| Balance, March 31, 2019 | | | | | | 3,469 | |
| Shares repurchased - Open market | | 9.2 | | | $ | 144.68 | | | (1,334) | |
| Shares repurchased - ASR | | 4.7 | | | $ | 127.68 | | | (600) | |
| Balance, March 31, 2020 | | | | | | 1,535 | |
| Shares repurchase plans authorized in January 2021 | | | | | | 2,000 | |
Shares repurchased - Open market (3) | | 4.7 | | | $ | 160.33 | | | (750) | |
| | | | | | |
| Balance, March 31, 2021 | | | | | | $ | 2,785 | |
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations. It also excludes shares related to the Split-off of the Change Healthcare JV as described below.
(2)The Boardnumber of shares purchased reflects rounding adjustments.
(3)$8 million was accrued within “Other accrued liabilities” on our Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April.
During the last three years, our share repurchases were transacted through both open market transactions and ASR programs with third party financial institutions.
In 2019, we retired 5.0 million or $542 million of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $472 million and $70 million during 2019, respectively.
On March 9, 2020, we completed the Split-off of our interest in the Change Healthcare JV. In connection with the Split-off, we 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 in exchange for 15.4 million shares of McKesson stock, which are now held as treasury stock on our consolidated balance sheet. Following consummation of the exchange offer, on March 10, 2020, SpinCo merged with and into Change and each share of SpinCo common stock was converted into one share of Change common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. See Note 2, “Investment in Change Healthcare Joint Venture” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information.
The total authorization outstanding for repurchase of the Company’s common stock up to $4was $2.8 billion in October 2016. In 2016, we repurchased 8.7 million of our shares through a combination of an ASR program and open market transactions. In 2017, we repurchased 14.1 million of our shares through open market transactions and 1.4 million of our shares through an ASR program. We received 0.3 million additional shares in April 2017 for the 2017 ASR program. In 2018, we repurchased 3.5 million of our shares through open market transactions and 6.7 million of our shares through ASR programs. We received an additional 0.5 million shares in April 2018 under the March 2018 ASR program.
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions, except per share data) | 2018 | | 2017 | | 2016 |
Number of shares repurchased (1) | 10.5 |
| | 15.5 |
| | 8.7 |
|
| Average price paid per share | $ | 151.06 |
| (2) | $ | 141.16 |
| | $ | 173.64 |
|
Total value of shares repurchased (1) | $ | 1,650 |
| | $ | 2,250 |
| | $ | 1,504 |
|
| |
(1) | Excludes shares surrendered for tax withholding. |
| |
(2) | The average price paid per share computation includes the initial share settlement of 2.5 million shares from the March 2018 ASR program, of which the actual average price of shares will be determined at the termination of the program in the first quarter of 2019. |
At March 31, 2018, the total authorization outstanding was $1.1 billion available under the October 2016 share repurchase plan for future repurchases of the Company’s common stock. In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock. The total authorization outstanding for repurchases of the Company’s common stock was increased to $5.1 billion.2021.
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.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
our business, as well as trends potentially impacting the timing or ability for some of our customers to pay amounts owed to us.
Selected Measures of Liquidity and Capital Resources:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, |
| (Dollars in millions) | 2021 | | 2020 | | 2019 |
| Cash, cash equivalents, and restricted cash | $ | 6,396 | | | | $ | 4,023 | | | | $ | 2,981 | | |
| Working capital | 1,279 | | | | (402) | | | | 839 | | |
Days sales outstanding for: (1) | | | | | | | | |
| Customer receivables | 26 | | | | 26 | | | | 26 | | |
| Inventories | 31 | | | | 27 | | | | 31 | | |
| Drafts and accounts payable | 63 | | | | 61 | | | | 62 | | |
Debt to capital ratio (2) | 83.1 | | % | | 52.1 | | % | | 43.3 | | % |
Return on McKesson stockholders’ equity (deficit) (3) | (142.5) | | % | | 13.3 | | % | | 0.4 | | % |
(1)Based on year-end balances and sales or cost of sales for the last 90 days of the year.
(2)This ratio describes the relationship and changes within our capital resources, and is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive loss.
(3)Ratio is computed as net income (loss) attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests.
|
| | | | | | | | | | | | | | |
| | March 31, |
| (Dollars in millions, except ratios) | 2018 | | 2017 | | 2016 |
| Cash and cash equivalents | $ | 2,672 |
| | | $ | 2,783 |
| | | $ | 4,048 |
| |
| Working capital | 451 |
| | | 1,336 |
| | | 3,366 |
| |
Debt to capital ratio (1) | 40.6 |
| % | | 39.2 |
| % | | 43.6 |
| % |
Return on McKesson stockholders’ equity (2) | 0.6 |
| | | 54.6 |
| | | 26.0 |
| |
| |
(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). |
| |
(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. |
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 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, 2021 and 2020 included approximately $2.3 billion and $1.7 billion of cash held by our subsidiaries outside of the U.S., respectively. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the vast majority of cash held outside the U.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 income 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 current 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. The COVID-19 pandemic has potential to increase the variations in our working capital, which we continue to monitor closely.
Consolidated working capital decreasedimproved at March 31, 20182021 compared to March 31, 2017the prior year primarily due to increasesan increase in cash and cash equivalents and inventory, partially offset by an increase in drafts and accounts payable and a decrease in receivables, partially offset by an increase in inventories.receivables. Consolidated working capital decreased at March 31, 20172020 compared to March 31, 2016the prior year primarily due to a decrease in the cash and cash equivalents balance and an increase in drafts and accounts payable and deferred tax liabilities,the current portion of long-term debt for term notes due in 2021, partially offset by increasesan increase in receivables.receivables and cash and cash equivalents.
Our debt to capital ratio increased for 2018the year ended March 31, 2021 primarily due to a decrease in stockholders’ equity driven by net loss for the year and decreasedshare repurchases. Our unfavorable return on McKesson’s stockholder’s equity (deficit) as of March 31, 2021 was also driven by net loss for 2017the year. Net loss for the year ended March 31, 2021 includes an after-tax non-cash charge of $6.8 billion related to our estimated liability for opioid-related claims, as discussed in “Trends and Uncertainties” of this Financial Review and Financial Note 19, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K. Our debt to capital ratio increased for 2020 primarily due to an increasea decrease in stockholders’ equity.equity driven by the Split-off of our interest in Change Healthcare JV and share repurchases.
InOn July 2017, the Company’s29, 2020, we raised our quarterly dividend was raised from $0.28$0.41 to $0.34$0.42 per common share for dividends declared on or after such date by the Board. Dividends were $1.30$1.67 per share in 2018, $1.122021, $1.62 per share in 20172020, and $1.08$1.51 per share in 2016. The Company anticipates2019. 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 2018, 20172021, 2020, and 2016,2019, we paid total cash dividends of $262$276 million, $253$294 million, and $244$292 million,. respectively. Additionally, as required under the Domination Agreement, we are obligated to pay an annual recurring compensation amount of €0.83 per McKesson Europe share (effective January 1, 2015) to the noncontrolling shareholders of McKesson Europe.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Contractual Obligations:
The table and information below presents our significant financial obligations and commitments at March 31, 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years |
| (In millions) | Total | | Within 1 | | Over 1 to 3 | | Over 3 to 5 | | After 5 |
| On balance sheet | | | | | | | | | |
Total debt (1) | $ | 7,148 | | | $ | 742 | | | $ | 1,970 | | | $ | 1,253 | | | $ | 3,183 | |
Operating lease obligations (2) | 2,505 | | | 433 | | | 733 | | | 516 | | | 823 | |
Other (3) | 250 | | | 30 | | | 53 | | | 51 | | | 116 | |
| | | | | | | | | |
| Off balance sheet | | | | | | | | | |
Interest on borrowings (4) | 1,617 | | | 199 | | | 367 | | | 268 | | | 783 | |
Purchase obligations (5) | 7,354 | | | 7,268 | | | 76 | | | 10 | | | — | |
Other (6) | 472 | | | 268 | | | 59 | | | 26 | | | 119 | |
| Total | $ | 19,346 | | | $ | 8,940 | | | $ | 3,258 | | | $ | 2,124 | | | $ | 5,024 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Years |
| (In millions) | Total | | Within 1 | | Over 1 to 3 | | Over 3 to 5 | | After 5 |
| On balance sheet | | | | | | | | | |
Long-term debt (1) | $ | 7,880 |
| | $ | 1,129 |
| | $ | 690 |
| | $ | 1,037 |
| | $ | 5,024 |
|
Other (2) (3) | 666 |
| | 230 |
| | 229 |
| | 62 |
| | 145 |
|
| | | | | | | | | | |
| Off balance sheet | | | | | | | | | |
Interest on borrowings (4) | 2,090 |
| | 223 |
| | 396 |
| | 355 |
| | 1,116 |
|
Purchase obligations (5) | 4,369 |
| | 4,356 |
| | 9 |
| | 4 |
| | — |
|
Operating lease obligations (6) | 3,072 |
| | 502 |
| | 826 |
| | 610 |
| | 1,134 |
|
Other (7) | 338 |
| | 178 |
| | 25 |
| | 28 |
| | 107 |
|
| Total | $ | 18,415 |
| | $ | 6,618 |
| | $ | 2,175 |
| | $ | 2,096 |
| | $ | 7,526 |
|
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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. The estimated benefit payments do not reflect the potential effect of the termination of the U.S. defined benefit pension plan approved by the Company’s Board of Directors on May 23, 2018. Refer to Financial Note 30, “Subsequent Events” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information. |
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(3) | Includes our contingent consideration liability relating to our business acquisition and a pledge payable to a public benefit California foundation. |
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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 11, “Leases” to the consolidated financial statements appearing in this Annual Report on Form 10-K for more information.
(3)Includes our estimated benefit payments for the unfunded benefit plans and minimum funding requirements for the pension plans.
(4)Primarily represents interest that will become due on our fixed rate long-term debt obligations.
(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 and capital commitments.
(6)Includes agreements under which we have guaranteed the repurchase of our customers’ inventory and our customers’ debt in the event these customers are unable to meet their obligations to those financial institutions.
The contractual obligations table above excludes the following obligations:
At March 31, 2018,2021, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $970$738 million. Additionally, any future payments that may be made related to our estimated litigation liability of $8.1 billion for opioid-related claims, as described in the “Trends and Uncertainties” section in this Financial Review and Financial Note 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report on Form 10-K, are excluded. The ultimate amount and timing of any related future cash settlements related to these items cannot be predicted with reasonable certainty.
At March 31, 2018, we had a $90 million noncurrent liability payable to Change Healthcare shareholders associated with a tax receivable agreement entered into in connection with Healthcare Technology Net Asset Exchange. The amount is based on certain estimates and could become payable in periods after a disposition of our investment in Change Healthcare.
Our banks and insurance companies have issued $259$146 million of standby letters of credit and surety bonds at March 31, 2018.2021. 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, and our workers’ compensation and automotive liability programs.
Our redeemable noncontrolling interests primarily relate to our consolidated subsidiary, McKesson Europe. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have 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”). The carrying valueexercise of the Put Right will reduce the balance of redeemable noncontrolling interests relatedinterests. During 2021, we paid $49 million to purchase 1.8 million shares of McKesson Europe was $1.46 billion at March 31, 2018, which exceededthrough exercises of the maximum redemption valuePut Right by the noncontrolling shareholders. During 2020 and 2019, there were no material exercises of $1.35 billion. the Put Right.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 McKesson Europe received a put right that enables them to put their McKesson Europe 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 semiannually by the German Bundesbank, 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 amountcarrying value of redeemable noncontrolling interests is also adjusted each period for the portion of other comprehensive income attributable to the noncontrolling shareholders, which is primarily due to changes in foreign currency exchange rates. At March 31, 2021 and timing2020, the carrying value of any future cash paymentsredeemable noncontrolling interests related to McKesson Europe of $1.3 billion and $1.4 billion, respectively, exceeded the Put Amount are uncertain.
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
$1.2 billion. In future periods, unfavorable foreign currency exchange rate fluctuations between the Euro and the U.S. dollar could adversely impact the carrying value of our redeemable noncontrolling interests and require an adjustment to increase the balance of our redeemable noncontrolling interests to its maximum redemption value. Such adjustments would be recorded in “Net income attributable to noncontrolling interests” in our consolidated statements of operations.
Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling shareholders of McKesson Europe under the Domination Agreement, which became effective in December 2014.Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not have an expiration date and canexpire, but it may be terminated at the end of any fiscal year by giving at least six month’s advance notice. The Put Amount, Compensation Amount, and the guaranteed dividend were subject to ongoing appraisal proceedings. On April 12, 2021, we received the Stuttgart Court of Appeals’ final ruling confirming the original put value of €22.99 per share and the annual recurring compensation of €0.83 per McKesson without causeEurope share. The Put Right exercise window will expire on June 15, 2021. While the ultimate amount of any future cash payments related to exercises of the Put Right are uncertain, Put Right exercises could result in writing no earlier than March 31, 2020.cash payments of up to approximately $1.3 billion prior to the expiration of the Put Right.
Refer to Financial Note 11,9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K for additional information.information on redeemable noncontrolling interests.
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 are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and other capital market transactions. Detailed information regarding our debt and financing activities is included in Financial Note 16,13, “Debt and Financing Activities,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in Financial Note 26,2, “Investment in Change Healthcare Joint Venture,” and Financial Note 21, “Related Party Balances and Transactions,” to the consolidated financial statements appearingincluded in this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements that we have recently adopted, as well as those that have been recently issued but not yet adopted by us, are included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 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.
Our cash and cash equivalents balances earn interest at variable rates. At March 31, 20182021 and 2017,2020, we had $2.7$6.3 billion and $2.8$4.0 billion, andrespectively, in cash and cash equivalents. The effect of a hypothetical 50 bp increase in the underlying interest rate on our cash and cash equivalents, net of short-term borrowings and variable rate debt, would have resulted in a favorable impact to earnings in 20182021 and 20172020 of approximately $10$17 million and $19 million.$6 million, respectively.
McKESSON CORPORATION
FINANCIAL REVIEW (Concluded)
Foreign exchange risk:We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling, and Canadian dollars.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 exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies.
We have certain foreign exchange rate risk programs that use foreign currency forward contracts and cross-currency swaps. The forward contracts and cross-currency swaps are designatedintended to reduce the income statement effects from fluctuations in foreign exchange rates and have been designated as cash flow hedges. These programs reduce but do not entirely eliminate foreign exchange risk.
As of March 31, 20182021 and 2017,2020, 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 $458$267 million and $357 million.$435 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 20,16, “Hedging Activities,” for more information on our foreign currency forward contracts and cross-currency swaps.
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.
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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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, 2018.2021.
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, 2018.2021. This audit report appears on the following page 61 of this Annual Report on Form 10-K.
May 24, 2018
| | |
|
| /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 |
| Britt J. Vitalone |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholdersStockholders and the Board of Directors of McKesson Corporation
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, 20182021 and 2017,2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended March 31, 2018,2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2018,2021, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway 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, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018,2021, 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, 2018,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 11 to the financial statements, effective April 1, 2019, the Company adopted the Financial Accounting Standards Board’s (“FASB”) new standard related to leases using the modified retrospective basis.
Basis for Opinions
The Company’s management is responsible for these financial statements, 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 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 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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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
The critical audit matters communicated below are matters arising from the current-period audit of the 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 our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, 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 - Broad Settlement of Opioid Claims brought by Governmental Entities - Refer to Note 1 and Note 19 to the financial statements
Critical Audit Matter Description
The Company and its affiliates are defendants in 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 these actions include state attorneys general, county and municipal governments, hospitals, tribal nations, health and welfare funds, third-party payors and individuals. The Company is in ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives, who represent states, their political subdivisions and other government entities (“governmental entities”), regarding a framework under which the three largest U.S. pharmaceutical distributors would pay up to approximately $21.0 billion over a period of 18 years, with up to approximately $8.0 billion to be paid by the Company to resolve the claims brought by governmental entities (“broad settlement of opioid claims”). 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, the 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, 2021, management believes that a loss through broad settlement of opioid claims brought by governmental entities is both probable and reasonably estimable, and accordingly, recorded a charge in the amount of $8.0 billion, which represents management’s best estimate of future loss related to these specific matters.
We identified the potential broad settlement of opioid claims as a critical audit matter because of the significant judgment and challenges auditing management’s determination of whether such loss is probable and reasonably estimable. Specifically, auditing management’s determination and disclosure of whether the contingent loss arising from the potential broad settlement of opioid claims is probable, and the related measurement of such loss, is subjective and requires significant judgment given that the potential loss is based upon settlement terms that have not yet been finalized.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the potential broad settlement of opioid claims included the following, among others:
•We tested the effectiveness of internal controls related to the potential broad settlement of opioid claims, and approval of the accounting treatment and related disclosures based on the most recent facts and circumstances.
•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 a potential broad settlement of opioid claims, is probable and reasonably estimable as of March 31, 2021. In addition, we inspected responses to inquiry letters sent to both internal and external legal counsel as it relates to the status of discussions with plaintiffs’ counsel and the Company’s intent regarding the framework for a potential broad settlement of opioid claims.
•We evaluated management’s analysis of the potential broad settlement of opioid claims, including the methodology used by management to determine the probability of such loss. We also evaluated the methodology used by management to estimate the most likely loss to be incurred by the Company as a result of a potential broad settlement of opioid claims.
•We examined Board of Directors meeting minutes, including relevant sub-committee meeting minutes, held inquiries with a director serving on the sub-committee, and compared to internal and external counsel’s written responses to our inquiry letters.
•We performed public domain searches for evidence contrary to management’s analysis.
•With the assistance of our specialists in accounting for loss contingencies, we evaluated the facts, evidence and the Company’s related accounting treatment for the potential broad settlement of opioid claims.
•We evaluated any events subsequent to March 31, 2021 that might impact our evaluation of the potential broad settlement of opioid claims.
•We obtained written representations from executives and internal counsel of the Company.
•We examined proposed terms related to the potential broad settlement framework.
•We evaluated the Company’s related disclosures for consistency with our testing.
Uncertain Tax Position - Broad Settlement of Opioid Claims brought by Governmental Entities - Refer to Note 1 and Note 8 to the financial statements
Critical Audit Matter Description
For the year ended March 31, 2021, the Company recognized $1.3 billion of tax benefit related to a potential broad settlement of opioid claims and had an additional $0.5 billion of potential benefit relating to an uncertain tax position that had not been recognized. 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 the charge for the potential broad settlement of opioid claims 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, auditing management’s uncertain tax position in this area was challenging because the assumptions and estimates involved in management’s analysis required significant judgment as they are based upon the potential terms of a broad settlement, including provisions related to deductibility, that have not yet been finalized. There is also significant judgment associated with the assessment of the technical tax merits of such a settlement, including the related interpretation of applicable tax laws and regulations.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's uncertain tax position associated with a potential broad settlement of opioid claims 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.
•With the assistance of our tax specialists, we evaluated the facts, evidence and the Company’s related income tax analysis for the charge related to the potential broad settlement of opioid claims, 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 potential broad settlement of opioid claims would be deductible based on the most recent discussions with plaintiffs’ counsel.
•We held inquiries with the Company’s external income tax advisors and we also read and evaluated management’s documentation of information received from these external advisors, which informed the basis of management’s position related to the uncertain tax position associated with the potential broad settlement of opioid claims.
•We compared management's income tax assessment of this matter to the 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, 2021 that might impact our evaluation of the Company’s uncertain tax position related to the charge for the potential broad settlement of opioid claims.
•We obtained written representations from executives and internal counsel of the Company.
•We examined proposed terms related to the potential broad settlement framework.
•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 potential broad settlement of opioid claims.
Goodwill - Refer to Note 1 and Note 12 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 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 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, 2021, 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 expected 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 more senior members of the team and 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 consideration 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 consideration 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 24, 201812, 2021 |
We have served as the Company’s auditor since 1968.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| | 2021 | | 2020 | | 2019 |
| Revenues | $ | 238,228 | | | $ | 231,051 | | | $ | 214,319 | |
| Cost of sales | (226,080) | | | (219,028) | | | (202,565) | |
| Gross profit | 12,148 | | | 12,023 | | | 11,754 | |
| Operating expenses | | | | | |
| Selling, distribution, general, and administrative expenses | (8,849) | | | (9,182) | | | (8,437) | |
| Claims and litigation charges, net | (7,936) | | | (82) | | | (37) | |
| Goodwill impairment charges | (69) | | | (2) | | | (1,797) | |
| Restructuring, impairment, and related charges, net | (334) | | | (268) | | | (597) | |
| | | | | |
| | | | | |
| Total operating expenses | (17,188) | | | (9,534) | | | (10,868) | |
| Operating income (loss) | (5,040) | | | 2,489 | | | 886 | |
| Other income, net | 223 | | | 12 | | | 182 | |
Equity earnings and charges from investment in Change Healthcare
Joint Venture | 0 | | | (1,108) | | | (194) | |
| | | | | |
| Interest expense | (217) | | | (249) | | | (264) | |
| Income (loss) from continuing operations before income taxes | (5,034) | | | 1,144 | | | 610 | |
| Income tax benefit (expense) | 695 | | | (18) | | | (356) | |
| Income (loss) from continuing operations | (4,339) | | | 1,126 | | | 254 | |
| Income (loss) from discontinued operations, net of tax | (1) | | | (6) | | | 1 | |
| Net income (loss) | (4,340) | | | 1,120 | | | 255 | |
| Net income attributable to noncontrolling interests | (199) | | | (220) | | | (221) | |
| Net income (loss) attributable to McKesson Corporation | $ | (4,539) | | | $ | 900 | | | $ | 34 | |
| | | | | |
| Earnings (loss) per common share attributable to McKesson Corporation | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | (28.26) | | | $ | 4.99 | | | $ | 0.17 | |
| Discontinued operations | 0 | | | (0.04) | | | 0 | |
| Total | $ | (28.26) | | | $ | 4.95 | | | $ | 0.17 | |
| Basic | | | | | |
| Continuing operations | $ | (28.26) | | | $ | 5.01 | | | $ | 0.17 | |
| Discontinued operations | 0 | | | (0.03) | | | 0 | |
| Total | $ | (28.26) | | | $ | 4.98 | | | $ | 0.17 | |
| | | | | |
| Weighted-average common shares outstanding | | | | | |
| Diluted | 160.6 | | | 181.6 | | | 197.3 | |
| Basic | 160.6 | | | 180.6 | | | 196.3 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2018 | | 2017 | | 2016 |
| Revenues | $ | 208,357 |
| | $ | 198,533 |
| | $ | 190,884 |
|
| Cost of Sales | (197,173 | ) | | (187,262 | ) | | (179,468 | ) |
| Gross Profit | 11,184 |
| | 11,271 |
| | 11,416 |
|
| Operating Expenses | | | | | |
| Selling, distribution and administrative expenses | (8,138 | ) | | (7,460 | ) | | (7,379 | ) |
| Research and development | (125 | ) | | (341 | ) | | (392 | ) |
| Goodwill impairment charges | (1,738 | ) | | (290 | ) | | — |
|
| Restructuring and asset impairment charges | (567 | ) | | (18 | ) | | (203 | ) |
| Gains from sales of businesses | 109 |
| | — |
| | 103 |
|
| Gain on healthcare technology net asset exchange, net | 37 |
| | 3,947 |
| | — |
|
| Total Operating Expenses | (10,422 | ) | | (4,162 | ) | | (7,871 | ) |
| Operating Income | 762 |
| | 7,109 |
| | 3,545 |
|
| Other Income, Net | 130 |
| | 90 |
| | 58 |
|
| Loss from Equity Method Investment in Change Healthcare | (248 | ) | | — |
| | — |
|
| Loss on Debt Extinguishment | (122 | ) | | — |
| | — |
|
| Interest Expense | (283 | ) | | (308 | ) | | (353 | ) |
| Income from Continuing Operations Before Income Taxes | 239 |
| | 6,891 |
| | 3,250 |
|
| Income Tax Benefit (Expense) | 53 |
| | (1,614 | ) | | (908 | ) |
| Income from Continuing Operations | 292 |
| | 5,277 |
| | 2,342 |
|
| Income (Loss) from Discontinued Operations, Net of Tax | 5 |
| | (124 | ) | | (32 | ) |
| Net Income | 297 |
| | 5,153 |
| | 2,310 |
|
| Net Income Attributable to Noncontrolling Interests | (230 | ) | | (83 | ) | | (52 | ) |
| Net Income Attributable to McKesson Corporation | $ | 67 |
| | $ | 5,070 |
| | $ | 2,258 |
|
| | | | | | |
Earnings (Loss) Per Common Share Attributable to McKesson Corporation | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | 0.30 |
| | $ | 23.28 |
| | $ | 9.84 |
|
| Discontinued operations | 0.02 |
| | (0.55 | ) | | (0.14 | ) |
| Total | $ | 0.32 |
| | $ | 22.73 |
| | $ | 9.70 |
|
| Basic | | | | | |
| Continuing operations | $ | 0.30 |
| | $ | 23.50 |
| | $ | 9.96 |
|
| Discontinued operations | 0.02 |
| | (0.55 | ) | | (0.14 | ) |
| Total | $ | 0.32 |
| | $ | 22.95 |
| | $ | 9.82 |
|
| | | | | | |
| Weighted Average Common Shares | | | | | |
| Diluted | 209 |
| | 223 |
| | 233 |
|
| Basic | 208 |
| | 221 |
| | 230 |
|
63
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | | | | | | |
| | Years Ended March 31, |
| 2021 | | 2020 | | 2019 |
| Net income (loss) | $ | (4,340) | | | $ | 1,120 | | | $ | 255 | |
| | | | | |
| Other comprehensive income (loss), net of tax | | | | | |
| Foreign currency translation adjustments | 184 | | | (66) | | | (190) | |
| Unrealized gains (losses) on cash flow hedges | (36) | | | 86 | | | 24 | |
| Changes in retirement-related benefit plans | 22 | | | 129 | | | (32) | |
| Other comprehensive income (loss), net of tax | 170 | | | 149 | | | (198) | |
| | | | | |
| Comprehensive income (loss) | (4,170) | | | 1,269 | | | 57 | |
| Comprehensive income attributable to noncontrolling interests | (146) | | | (223) | | | (155) | |
| Comprehensive income (loss) attributable to McKesson Corporation | $ | (4,316) | | | $ | 1,046 | | | $ | (98) | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2018 | | 2017 | | 2016 |
| Net Income | $ | 297 |
| | $ | 5,153 |
| | $ | 2,310 |
|
| | | | | | |
| Other Comprehensive Income (Loss), Net of Tax | | | | | |
| Foreign currency translation adjustments arising during the period | 624 |
| | (632 | ) | | 113 |
|
| |
|
| |
|
| |
|
|
| Unrealized gains (losses) on cash flow hedges arising during the period | (30 | ) | | (19 | ) | | 9 |
|
| |
|
| |
|
| |
|
|
| Retirement-related benefit plans | 15 |
| | (8 | ) | | 50 |
|
| Other Comprehensive Income (Loss), Net of Tax | 609 |
| | (659 | ) | | 172 |
|
| | | | | | |
| Comprehensive Income | 906 |
| | 4,494 |
| | 2,482 |
|
| Comprehensive (Income) Attributable to Noncontrolling Interests | (415 | ) | | (4 | ) | | (72 | ) |
| Comprehensive Income Attributable to McKesson Corporation | $ | 491 |
| | $ | 4,490 |
| | $ | 2,410 |
|
64
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts) | | | | | | | | | | | |
| March 31, |
| 2021 | | 2020 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 6,278 | | | $ | 4,015 | |
| Receivables, net | 19,181 | | | 19,950 | |
| Inventories, net | 19,246 | | | 16,734 | |
| Assets held for sale | 12 | | | 906 | |
| Prepaid expenses and other | 665 | | | 617 | |
| Total current assets | 45,382 | | | 42,222 | |
| Property, plant, and equipment, net | 2,581 | | | 2,365 | |
| Operating lease right-of-use assets | 2,100 | | | 1,886 | |
| Goodwill | 9,493 | | | 9,360 | |
| Intangible assets, net | 2,878 | | | 3,156 | |
| Other non-current assets | 2,581 | | | 2,258 | |
| Total assets | $ | 65,015 | | | $ | 61,247 | |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY | | | |
| Current liabilities | | | |
| Drafts and accounts payable | $ | 38,975 | | | $ | 37,195 | |
| | | |
| Current portion of long-term debt | 742 | | | 1,052 | |
| Current portion of operating lease liabilities | 390 | | | 354 | |
| Liabilities held for sale | 9 | | | 683 | |
| Other accrued liabilities | 3,987 | | | 3,340 | |
| Total current liabilities | 44,103 | | | 42,624 | |
| Long-term debt | 6,406 | | | 6,335 | |
| Long-term deferred tax liabilities | 1,411 | | | 2,255 | |
| Long-term operating lease liabilities | 1,867 | | | 1,660 | |
| Long-term litigation liabilities | 8,067 | | | 0 | |
| Other non-current liabilities | 1,715 | | | 1,662 | |
| Commitments and contingent liabilities (Note 19) | 0 | | 0 |
| Redeemable noncontrolling interests | 1,271 | | | 1,402 | |
| McKesson Corporation stockholders’ equity (deficit) | | | |
| Preferred stock, $0.01 par value, 100 shares authorized, 0 shares issued or outstanding | 0 | | | 0 | |
| Common stock, $0.01 par value, 800 shares authorized, 273 and 272 shares issued at March 31, 2021 and 2020, respectively | 2 | | | 2 | |
| Additional paid-in capital | 6,925 | | | 6,663 | |
| Retained earnings | 8,202 | | | 13,022 | |
| Accumulated other comprehensive loss | (1,480) | | | (1,703) | |
| | | |
| Treasury shares, at cost, 115 and 110 shares at March 31, 2021 and 2020, respectively | (13,670) | | | (12,892) | |
| Total McKesson Corporation stockholders’ equity (deficit) | (21) | | | 5,092 | |
| Noncontrolling interests | 196 | | | 217 | |
| Total equity | 175 | | | 5,309 | |
| Total liabilities, redeemable noncontrolling interests, and equity | $ | 65,015 | | | $ | 61,247 | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| McKesson Corporation Stockholders’ Equity | | | | | | |
| Common
Stock | | Additional Paid-in Capital | | Other Capital | | Retained Earnings | | Accumulated Other
Comprehensive
Loss | | Treasury | | Noncontrolling
Interests | | Total
Equity | | |
| Shares | | Amount | | Common Shares | | Amount |
| Balances, March 31, 2018 | 275 | | | $ | 3 | | | $ | 6,188 | | | $ | (1) | | | $ | 12,986 | | | $ | (1,717) | | | (73) | | | $ | (7,655) | | | $ | 253 | | | $ | 10,057 | | | |
| Opening retained earnings adjustments: adoption of new accounting standards | — | | | — | | | — | | | — | | | 154 | | | — | | | — | | | — | | | — | | | 154 | | | |
| Balances, April 1, 2018 | 275 | | | 3 | | | 6,188 | | | (1) | | | 13,140 | | | (1,717) | | | (73) | | | (7,655) | | | 253 | | | 10,211 | | | |
| Issuance of shares under employee plans | 1 | | | — | | | 75 | | | — | | | — | | | — | | | — | | | (12) | | | — | | | 63 | | | |
| Share-based compensation | — | | | — | | | 92 | | | — | | | — | | | — | | | — | | | — | | | — | | | 92 | | | |
| Payments to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (184) | | | (184) | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (132) | | | — | | | — | | | — | | | (132) | | | |
| Net income | — | | | — | | | — | | | — | | | 34 | | | — | | | — | | | — | | | 176 | | | 210 | | | |
| Repurchase of common stock | — | | | — | | | 150 | | | — | | | — | | | — | | | (13) | | | (1,777) | | | — | | | (1,627) | | | |
| Retirement of common stock | (5) | | | — | | | (70) | | | — | | | (472) | | | — | | | 5 | | | 542 | | | — | | | 0 | | | |
| Cash dividends declared, $1.51 per common share | — | | | — | | | — | | | — | | | (298) | | | — | | | — | | | — | | | — | | | (298) | | | |
| Other | — | | | — | | | — | | | (1) | | | 5 | | | — | | | — | | | — | | | (52) | | | (48) | | | |
| 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 | 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 | | | 0 | | | 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 | | | 0 | | | 13,009 | | | (1,703) | | | (110) | | | (12,892) | | | 217 | | | 5,296 | | | |
| Issuance of shares under employee plans | 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 | — | | | — | | | 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 | | | $ | 0 | | | $ | 8,202 | | | $ | (1,480) | | | (115) | | | $ | (13,670) | | | $ | 196 | | | $ | 175 | | | |
|
| | | | | | | |
| | March 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 2,672 |
| | $ | 2,783 |
|
| Receivables, net | 17,711 |
| | 18,215 |
|
| Inventories, net | 16,310 |
| | 15,278 |
|
| Prepaid expenses and other | 443 |
| | 672 |
|
| Total Current Assets | 37,136 |
| | 36,948 |
|
| Property, Plant and Equipment, Net | 2,464 |
| | 2,292 |
|
| Goodwill | 10,924 |
| | 10,586 |
|
| Intangible Assets, Net | 4,102 |
| | 3,665 |
|
| Equity Method Investment in Change Healthcare | 3,728 |
| | 4,063 |
|
| Other Noncurrent Assets | 2,027 |
| | 3,415 |
|
| Total Assets | $ | 60,381 |
| | $ | 60,969 |
|
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | | | |
| Current Liabilities | | | |
| Drafts and accounts payable | $ | 32,177 |
| | $ | 31,022 |
|
| Short-term borrowings | — |
| | 183 |
|
| Deferred revenue | 63 |
| | 346 |
|
| Current portion of long-term debt | 1,129 |
| | 1,057 |
|
| Other accrued liabilities | 3,316 |
| | 3,004 |
|
| Total Current Liabilities | 36,685 |
| | 35,612 |
|
| Long-Term Debt | 6,751 |
| | 7,305 |
|
| Long-Term Deferred Tax Liabilities | 2,804 |
| | 3,678 |
|
| Other Noncurrent Liabilities | 2,625 |
| | 1,774 |
|
| Commitments and Contingent Liabilities (Note 24) |
| |
|
| Redeemable Noncontrolling Interests | 1,459 |
| | 1,327 |
|
| 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, 2018 and 2017, 275 and 273 shares issued at March 31, 2018 and 2017 | 3 |
| | 3 |
|
| Additional Paid-in Capital | 6,188 |
| | 6,028 |
|
| Retained Earnings | 12,986 |
| | 13,189 |
|
| Accumulated Other Comprehensive Loss | (1,717 | ) | | (2,141 | ) |
| Other | (1 | ) | | (2 | ) |
| Treasury Stock, at Cost, 73 and 62 shares at March 31, 2018 and 2017 | (7,655 | ) | | (5,982 | ) |
| Total McKesson Corporation Stockholders’ Equity | 9,804 |
| | 11,095 |
|
| Noncontrolling Interests | 253 |
| | 178 |
|
| Total Equity | 10,057 |
| | 11,273 |
|
| Total Liabilities, Redeemable Noncontrolling Interests and Equity | $ | 60,381 |
| | $ | 60,969 |
|
65
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended March 31, 2018, 2017 and 2016
(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, 2015 | 384 |
| | $ | 4 |
| | $ | 6,968 |
| | $ | (7 | ) | | $ | 12,705 |
| | $ | (1,713 | ) | | (152 | ) | | $ | (9,956 | ) | | $ | 84 |
| | $ | 8,085 |
|
| Issuance of shares under employee plans | 3 |
| | — |
| | 123 |
| | | | | | | | (1 | ) | | (109 | ) | | | | 14 |
|
| Share-based compensation | | | | | 130 |
| | | | | | | | | | | | | | 130 |
|
| Tax benefit related to issuance of shares under employee plans | | | | | 117 |
| | | | | | | | | | | | | | 117 |
|
| Other comprehensive income | | | | |
| | | | | | 152 |
| |
| |
| |
| | 152 |
|
| Net income |
| | | |
| | | | 2,258 |
| | | |
| |
| | 8 |
| | 2,266 |
|
| Repurchase of common stock | | | | |
| | | | | | | | (9 | ) | | (1,504 | ) | | | | (1,504 | ) |
| Retirement of common stock | (116 | ) | | (1 | ) | | (1,493 | ) | | | | (6,354 | ) | | | | 116 |
| | 7,848 |
| | | | — |
|
| Cash dividends declared, $1.08 per common share | | | | | | | | | (249 | ) | | | | | | | | | | (249 | ) |
| Other | | | | |
| | 5 |
| |
| | | | | | | | (8 | ) | | (3 | ) |
| Balances, March 31, 2016 | 271 |
| | $ | 3 |
| | $ | 5,845 |
| | $ | (2 | ) | | $ | 8,360 |
| | $ | (1,561 | ) | | (46 | ) | | $ | (3,721 | ) | | $ | 84 |
| | $ | 9,008 |
|
| Issuance of shares under employee plans | 3 |
| | — |
| | 125 |
| | | | | | | |
| | (61 | ) | | | | 64 |
|
| Share-based compensation | | | | | 110 |
| | | | | | | | | | | | | | 110 |
|
| Tax benefit related to issuance of shares under employee plans | | | | |
|
| | | | 7 |
| | | | | | | | | | 7 |
|
| Acquisition of Vantage | | | | | | | | | | | | | | | | | 89 |
| | 89 |
|
| Other comprehensive loss | | | | | | | | | | | (580 | ) | | | | | |
| | (580 | ) |
| Net income | | | | | | | | | 5,070 |
| | | | | | | | 39 |
| | 5,109 |
|
| Repurchase of common stock | | | | | (50 | ) | | | | | | | | (16 | ) | | (2,200 | ) | | | | (2,250 | ) |
| Cash dividends declared, $1.12 per common share | | | | | | | | | (249 | ) | | | | | | | | | | (249 | ) |
| Other | (1 | ) | | | | (2 | ) | | — |
| | 1 |
| | | | | | | | (34 | ) | | (35 | ) |
| Balances, March 31, 2017 | 273 |
| | $ | 3 |
| | $ | 6,028 |
| | $ | (2 | ) | | $ | 13,189 |
| | $ | (2,141 | ) | | (62 | ) |
| $ | (5,982 | ) | | $ | 178 |
|
| $ | 11,273 |
|
| Issuance of shares under employee plans | 2 |
| | — |
| | 126 |
| | | | | | | | | | (59 | ) | | | | 67 |
|
| Share-based compensation | | | | | 67 |
| | | | | | | | | | | | | | 67 |
|
| Payments to noncontrolling interests | | | | | | | | | | | | | | | | | (98 | ) | | (98 | ) |
| Other comprehensive income | | | | | | | | | | | 424 |
| | | | | | | | 424 |
|
| Net income | | | | | | | | | 67 |
| |
| | | | | | 187 |
| | 254 |
|
| Repurchase of common stock | | | | | (36 | ) | | | | | | | | (11 | ) | | (1,614 | ) | | | | (1,650 | ) |
| Exercise of put right by noncontrolling shareholders of McKesson Europe | | | | | 3 |
| | | | | | | | | | | | | | 3 |
|
| Cash dividends declared, $1.30 per common share | | | | | | | | | (270 | ) | | | | | | | | | | (270 | ) |
| Other |
| | | |
| | 1 |
| |
| | | | | | | | (14 | ) | | (13 | ) |
| Balances, March 31, 2018 | 275 |
| | $ | 3 |
| | $ | 6,188 |
| | $ | (1 | ) | | $ | 12,986 |
| | $ | (1,717 | ) | | (73 | ) | | $ | (7,655 | ) | | $ | 253 |
| | $ | 10,057 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) | | | | | | | | | | | | | | | | | |
| | Years Ended March 31, |
| | 2021 | | 2020 | | 2019 |
| OPERATING ACTIVITIES | | | | | |
| Net income (loss) | $ | (4,340) | | | $ | 1,120 | | | $ | 255 | |
| Adjustments to reconcile to net cash provided by operating activities: | | | | | |
| Depreciation | 321 | | | 321 | | | 317 | |
| Amortization | 566 | | | 601 | | | 632 | |
| Goodwill and other asset impairment charges | 242 | | | 139 | | | 2,079 | |
| Equity earnings and charges from investment in Change Healthcare Joint Venture | 0 | | | 1,084 | | | 194 | |
| Deferred taxes | (908) | | | (342) | | | 189 | |
| Credits associated with last-in, first-out inventory method | (38) | | | (252) | | | (210) | |
| Non-cash operating lease expense | 334 | | | 366 | | | — | |
| (Gain) loss from sales of businesses and investments | (9) | | | 33 | | | (86) | |
| Other non-cash items | 188 | | | 615 | | | 52 | |
| Changes in assets and liabilities, net of acquisitions: | | | | | |
| Receivables | 1,145 | | | (2,494) | | | (967) | |
| Inventories | (2,276) | | | (376) | | | (368) | |
| Drafts and accounts payable | 1,267 | | | 3,952 | | | 1,976 | |
| Operating lease liabilities | (362) | | | (377) | | | — | |
| Taxes | (166) | | | (8) | | | (95) | |
| Litigation liabilities | 8,067 | | | 0 | | | 0 | |
| Other | 511 | | | (8) | | | 68 | |
| Net cash provided by operating activities | 4,542 | | | 4,374 | | | 4,036 | |
| | | | | |
| INVESTING ACTIVITIES | | | | | |
| Payments for property, plant, and equipment | (451) | | | (362) | | | (426) | |
| Capitalized software expenditures | (190) | | | (144) | | | (131) | |
| Acquisitions, net of cash, cash equivalents, and restricted cash acquired | (35) | | | (133) | | | (905) | |
| Proceeds from sales of businesses and investments, net | 400 | | | 37 | | | 101 | |
| Other | (139) | | | 23 | | | (20) | |
| Net cash used in investing activities | (415) | | | (579) | | | (1,381) | |
| | | | | |
| FINANCING ACTIVITIES | | | | | |
| Proceeds from short-term borrowings | 6,323 | | | 21,437 | | | 37,265 | |
| Repayments of short-term borrowings | (6,323) | | | (21,437) | | | (37,268) | |
| Proceeds from issuances of long-term debt | 500 | | | 0 | | | 1,099 | |
| Repayments of long-term debt | (1,040) | | | (298) | | | (1,112) | |
| | | | | |
| Common stock transactions: | | | | | |
| Issuances | 92 | | | 113 | | | 75 | |
| Share repurchases, including shares surrendered for tax withholding | (770) | | | (1,954) | | | (1,639) | |
| Dividends paid | (276) | | | (294) | | | (292) | |
| Other | (199) | | | (301) | | | (355) | |
| Net cash used in financing activities | (1,693) | | | (2,734) | | | (2,227) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (61) | | | (19) | | | (119) | |
| Net increase in cash, cash equivalents, and restricted cash | 2,373 | | | 1,042 | | | 309 | |
| Cash, cash equivalents, and restricted cash at beginning of year | 4,023 | | | 2,981 | | | 2,672 | |
| Cash, cash equivalents, and restricted cash at end of year | 6,396 | | | 4,023 | | | 2,981 | |
| Less: Restricted cash at end of year included in Prepaid expenses and other | (118) | | | (8) | | | 0 | |
| | | | | |
| Cash and cash equivalents at end of year | $ | 6,278 | | | $ | 4,015 | | | $ | 2,981 | |
| | | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
| Cash paid for: | | | | | |
| Interest, net | $ | 220 | | | $ | 235 | | | $ | 383 | |
| Income taxes, net of refunds | 379 | | | 368 | | | 262 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2018 | | 2017 | | 2016 |
| Operating Activities | | | | | |
| Net income | $ | 297 |
| | $ | 5,153 |
| | $ | 2,310 |
|
| Adjustments to reconcile to net cash provided by operating activities: | | | | | |
| Depreciation | 303 |
| | 324 |
| | 281 |
|
| Amortization | 648 |
| | 586 |
| | 604 |
|
| Gain on Healthcare Technology Net Asset Exchange, net | (37 | ) | | (3,947 | ) | | — |
|
| Goodwill and other asset impairment charges | 2,217 |
| | 290 |
| | 8 |
|
| Loss from equity method investment in Change Healthcare | 248 |
| | — |
| | — |
|
| Deferred taxes | (868 | ) | | 882 |
| | 64 |
|
| Share-based compensation expense | 69 |
| | 115 |
| | 123 |
|
| Charges (credits) associated with last-in-first-out inventory method | (99 | ) | | (7 | ) | | 244 |
|
| Loss (gain) from sales of businesses and equity investments | (169 | ) | | 94 |
| | (103 | ) |
| Other non-cash items | (2 | ) | | 88 |
| | 108 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Receivables | 1,175 |
| | (762 | ) | | (1,957 | ) |
| Inventories | (458 | ) | | 320 |
| | (1,251 | ) |
| Drafts and accounts payable | 271 |
| | 2,070 |
| | 3,302 |
|
| Deferred revenue | (143 | ) | | (87 | ) | | (120 | ) |
| Taxes | 671 |
| | 146 |
| | (78 | ) |
| Settlement payment | — |
| | (150 | ) | | — |
|
| Other | 222 |
| | (371 | ) | | 137 |
|
| Net cash provided by operating activities | 4,345 |
| | 4,744 |
| | 3,672 |
|
| | | | | | |
| Investing Activities | | | | | |
| Payments for property, plant and equipment | (405 | ) | | (404 | ) | | (488 | ) |
| Capitalized software expenditures | (175 | ) | | (158 | ) | | (189 | ) |
| Acquisitions, net of cash and cash equivalents acquired | (2,893 | ) | | (4,237 | ) | | (40 | ) |
| Proceeds from sale of businesses and other assets, net | 374 |
| | 206 |
| | 210 |
|
| Payments received on Healthcare Technology Net Asset Exchange, net | 126 |
| | 1,228 |
| | — |
|
| Restricted cash for acquisitions | 1,469 |
| | (506 | ) | | (939 | ) |
| Other | (18 | ) | | 75 |
| | (111 | ) |
| Net cash used in investing activities | (1,522 | ) | | (3,796 | ) | | (1,557 | ) |
| | | | | | |
| Financing Activities | | | | | |
| Proceeds from short-term borrowings | 20,542 |
| | 8,294 |
| | 1,561 |
|
| Repayments of short-term borrowings | (20,725 | ) | | (8,124 | ) | | (1,688 | ) |
| Proceeds from issuances of long-term debt | 1,522 |
| | 1,824 |
| | — |
|
| Repayments of long-term debt | (2,287 | ) | | (1,601 | ) | | (1,598 | ) |
| Payments for debt extinguishments | (112 | ) | | — |
| | — |
|
| Common stock transactions: | | | | |
|
|
| Issuances | 132 |
| | 120 |
| | 123 |
|
| Share repurchases, including shares surrendered for tax withholding | (1,709 | ) | | (2,311 | ) | | (1,612 | ) |
| Dividends paid | (262 | ) | | (253 | ) | | (244 | ) |
| Other | (185 | ) | | (18 | ) | | 5 |
|
| Net cash used in financing activities | (3,084 | ) | | (2,069 | ) | | (3,453 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 150 |
| | (144 | ) | | 45 |
|
| Net decrease in cash and cash equivalents | (111 | ) | | (1,265 | ) | | (1,293 | ) |
| Cash and cash equivalents at beginning of year | 2,783 |
| | 4,048 |
| | 5,341 |
|
| Cash and cash equivalents at end of year | $ | 2,672 |
| | $ | 2,783 |
| | $ | 4,048 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid for: | | | | | |
| Interest | $ | 298 |
| | $ | 315 |
| | $ | 337 |
|
| Income taxes, net of refunds | $ | 144 |
| | $ | 587 |
| | $ | 923 |
|
67
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 global provider of healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. McKesson partners with pharmaceutical manufacturers, providers, pharmacies, governments, and other similar pronouns) delivers a comprehensive offering of pharmaceuticalsorganizations in healthcare to help provide the right medicines, medical products, and medical supplies and provideshealthcare services to help our customers improve the efficiencyright patients at the right time, safely, and effectivenesscost-effectively. Commencing with the second quarter of their healthcare operations. We managed our business through two2021, the Company reports its financial results in 4 reportable segments, McKesson Distributionsegments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and McKessonPrescription Technology Solutions as further described(“RxTS”). All prior segment information has been recast to reflect the Company’s new segment structure and current period presentation. The Company’s equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson in the fourth quarter of 2020, has been included in Other for retrospective periods presented. Refer to Financial Note 28,22, “Segments of Business.Business,” for more 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. IntercompanyOperations. All significant intercompany balances and transactions have been eliminated in 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 or havehas 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 consolidateThe Company consolidates VIEs when it is determined that we areit is the primary beneficiary of the VIE. 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.
Fiscal Period: The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires that wethe Company 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 severity, magnitude and duration, as well as the economic consequences of the coronavirus diseases 2019 (“COVID-19”) pandemic, are uncertain, rapidly changing, and difficult to predict. Therefore, the Company’s accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S., and includes several provisions related to employment and income taxes, including provisions for the deferral of the employer portion of social security taxes through December 31, 2020. On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021, which enhances and expands certain provisions of the CARES Act. These legislative acts are not expected to have a material impact on the Company’s consolidated financial results.
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 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 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. AtConsolidated Balance Sheets. As of March 31, 2018, our2021, restricted cash balance was nil. Atprimarily consists of funds temporarily held on behalf of unaffiliated medical practice groups related to their COVID-19 business continuity borrowings. The 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” on the Company’s Consolidated Balance Sheet as of March 31, 2017, our restricted cash balance was $1.5 billion, which primarily represents cash paid into the escrow accounts for our acquisitions that closed in the first quarter of 2018.2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Marketable Securities Available-for-Sale: OurThe Company’s marketable securities, which are available-for-sale, are carried at fair value and are included withinin “Prepaid expenses and other” in the consolidated balance sheets.Consolidated Balance Sheets. The unrealized gains and losses, net of the related tax effect, computed in marking these securities to market have been reported withinin stockholders’ equity. At March 31, 20182021 and 2017,2020, marketable securities were not material.
In determining whether an other-than-temporary decline in market value has occurred, we considerthe Company considers 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 ourits 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 intendthe Company intends 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 (expense), net, in the period in which the loss occurs.
Equity Method Investments: 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. We evaluate ourThe 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. Refer
Receivables, Net and Allowances for Doubtful Accounts: The Company’s receivables are presented net of an allowance for doubtful accounts and primarily consist of trade accounts receivables 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 are exposed to Financial Note 2, “Healthcare Technology Net Asset Exchange”credit losses on accounts receivable balances. The Company estimates credit losses by considering historical credit losses, the current economic environment, customer credit ratings 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 further information relating to our equity method investmentwhich an allowance for credit losses of $198 million and $224 million were included in Change Healthcare, LLC (“Change Healthcare”).“Receivables, net” on the Consolidated Balance Sheet as of March 31, 2021 and 2020, respectively. Changes in the allowance were not material for the year ended March 31, 2021.
The following table presents the components of the Company’s receivables as of March 31, 2021 and 2020:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2021 | | 2020 |
| Customer accounts | $ | 17,106 | | | $ | 17,201 | |
| Other | 2,325 | | | 3,014 | |
| Total receivables | 19,431 | | | 20,215 | |
| Allowances | (250) | | | (265) | |
| Receivables, net | $ | 19,181 | | | $ | 19,950 | |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Concentrations of Credit Risk and Receivables: OurThe Company’s trade accounts receivable are subject to concentrations of credit risk with customers primarily in our Distribution Solutionsits U.S. Pharmaceutical segment. During 2018,2021, sales to our tenthe Company’s 10 largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 51.7%51% of ourits total consolidated revenues.revenues and approximately 32% of total trade accounts receivable at March 31, 2021. Sales to ourthe Company’s largest customer, CVS Health Corporation (“CVS”), accounted for approximately 19.9%21% of ourits total consolidated revenues. At March 31, 2018, trade accounts receivable from our ten largest customers wererevenues in 2021 and comprised approximately 24.9%19% of total trade accounts receivable. Accounts receivable from CVS were approximately 16.4% of total trade accounts receivable.at March 31, 2021. 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 these 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 receivables are subject to concentrations 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 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 estimated amounts.
Financing Receivables: We assessThe Company assesses and monitormonitors credit risk associated with financing receivables, primarily lease and notes receivables,receivable, through regular review of our collectionits collections experience in determining ourits allowance for loan losses. On an ongoing basis, wethe Company also evaluateevaluates credit quality of ourits financing receivables utilizing aging of receivableshistorical collection rates and write-offs, as well as considering existing economic conditions, to determine if an allowance is required. 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, 20182021 and 2017,2020, financing receivables were not material to the Company’s consolidated financial statements. Financing receivables and the related allowance were not material to our consolidated financial statements.
Inventories: Prior to 2018, we reported inventories at the lower of cost or market (“LCM”). Effectiveallowances are included in “Receivables, net” and “Other non-current assets” in the first quarterConsolidated Balance Sheets.
Inventories: Inventories consist of 2018, we reportmerchandise held for resale. The Company reports inventories at the lower of cost or net realizable value, except for inventories determined using the last-in, first-out (“LIFO”) method. Inventories for our Distribution Solutions segment consistmethod 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 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”). method 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The LIFO method was used to value approximately 63%58% and 70%60% of ourthe Company’s inventories at March 31, 20182021 and 2017.2020, respectively. If wethe Company had used the FIFOmoving average method of inventory valuation, inventories would have been approximately $906$406 million and $1,005$444 million higher than the amounts reported at March 31, 20182021 and 2017.2020, respectively. These amounts are equivalent to ourthe Company’s LIFO reserves. OurThe Company’s LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. WeThe Company recognized LIFO credits of $99$38 million, $252 million, and $7$210 million in 20182021, 2020, and 20172019, respectively, in “Cost of sales” in its Consolidated Statements of Operations. The lower LIFO credits in 2021 compared to 2020 is primarily due to higher brand inflation and net LIFO chargesdelays of $244 million in 2016 in cost of sales within our consolidated statements of operations.branded off-patent to generic drug launches. 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. Excluding LIFO reserves, inventory reserves as of March 31, 2021 and 2020 were $263 million and $96 million, respectively. The increase was primarily due to charges in 2021 totaling $136 million on certain personal protective equipment and other related products due to inventory impairments and excess inventory within our Medical-Surgical Solutions segment. These charges are recorded in "Cost of sales" in the Consolidated Statements of Operations.
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. As of March 31, 20182021 and 2017,2020, inventories at LIFO did not exceed market.
Shipping and Handling Costs: We includeThe Company includes costs to pack and deliver inventory to ourits customers in selling,Selling, distribution, general, and administrative expenses. Shipping and handling costs of $914 million, $814 million,$1.0 billion, $1.0 billion, and $789$951 million were includedrecognized in our selling, distribution2021, 2020, and administrative expenses in 2018, 20172019, respectively.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Held for Sale: Assets and 2016.liabilities to be disposed of by sale (“disposal groups”) are reclassified into “held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The reclassification occurs when the disposal group is available for immediate sale and the sale is highly probable. These criteria are generally met when an agreement to sell exists, or 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 are not depreciated or amortized. 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. 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. Refer to Financial Note 3, “Held for Sale,” for more information.
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, (“PPE”) at costnet under finance leases are amortized over their respective useful lives 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, 2021 and 2020:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2021 | | 2020 |
| Land | $ | 156 | | | $ | 151 | |
| Building and improvements | 1,745 | | | 1,604 | |
| Machinery, equipment, and other | 2,512 | | | 2,308 | |
| Construction in progress | 382 | | | 131 | |
| Total property, plant, and equipment | 4,795 | | | 4,194 | |
| Accumulated depreciation and amortization | (2,214) | | | (1,829) | |
| Property, plant, and equipment, net | $ | 2,581 | | | $ | 2,365 | |
Total depreciation expense for property, plant, and equipment, net and amortization of finance leases was $344 million, $335 million, and $317 million for the years ended March 31, 2021, 2020, and 2019, respectively.
Goodwill: Goodwill is tested for impairment on an annual basis in the fourththird quarter orand more frequently if indicators of potential impairment exist. 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 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 reporting unit.results.
The Company applies the goodwill testing requires us to compareimpairment test by comparing the estimated fair value of a reporting unit to its carrying value. 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 required. Ifif any, but not to exceed the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded for that excess, limited to the total amount of goodwill allocated to thatthe reporting unit.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 future periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. The fair value estimates inthat is commensurate with the goodwill impairment analysis are highly sensitive to the discount rates used in the expected cash flows attributable torisk inherent within the reporting units. 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.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. Goodwill testing requires a complex series of assumptions and judgments 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 38 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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, 20182021 and 2017,2020, capitalized software held for internal use was $425$513 million and $455$400 million, respectively, net of accumulated amortization of $1,182$1.4 billion and $1.3 billion, respectively, and is included in “Other non-current assets” in the Consolidated Balance Sheets. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Amortization expense for capitalized software held for internal use was $117 million, $129 million, and $1,177$137 million for the years ended March 31, 2021, 2020, and was included in other assets in the consolidated balance sheets.2019, respectively.
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 catastrophic exposures, including certain exposures arising from the opioid-related claims of governmental entities against the Company, as discussed in more detail in Financial Note 19, “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 on ourthe 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 Operating Expenses in the Consolidated Statements of Operations.
Revenue Recognition:
Distribution Solutions Revenue is 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.
Revenues for our Distribution Solutions segment aregenerated from the distribution of pharmaceutical and medical products represent the majority of the Company’s revenues. The Company orders product from the manufacturer, receives and carries 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 persuasive evidencecontrol of an arrangement exists, productgoods is delivered and title passestransferred 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 at the point of sale. Service revenues, including technology service revenues, are recognized when services have been renderedare rendered. Revenues derived from distribution and there are no further obligations toretail business at the customer, the price is fixed or determinable,point of sale, and collectionrevenues derived from services represent approximately 98% and 2% of total revenues for each of the amounts are reasonably assured.years ended March 31, 2021 and 2020, respectively.
Revenues for our Distribution Solutions segment include large volume sales
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FINANCIAL NOTES (Continued)
Revenues are recorded gross when we are the primary party obligatedCompany is the principal in the transaction, take titlehas the ability to and possessiondirect the use of the inventory, are subjectgoods or services prior to inventory risk, havetransfer to a customer, is responsible for fulfilling the promise to its customer, has latitude in establishing prices, assumeand controls the risk of loss for collection from customers as well as delivery or return ofrelationship with the product, are responsible for fulfillment and other customer service requirements, or the transactions have several but not all of these indicators.
Revenues are recordedcustomer. The Company records its revenues 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 returnstaxes. Revenues are accruedmeasured based on the amount of consideration that the Company expects to receive, reduced by estimates at the time of sale to the customer.for return allowances, discounts, and rebates using historical data. Sales returns from customers were approximately $3.1 billion in 2018, 2017each of 2021 and 2016. We collect taxes2020 and $2.9 billion in 2019. Assets for the right to recover products from customers and remitthe associated refund liabilities for return allowances were not material as of March 31, 2021. Shipping and handling costs associated with outbound freight after control over a product has transferred to governmental authorities. We report all revenues net of taxes assessed by governmental authorities.
This segment also provides software as a service (“SaaS”) and claims processing. Revenues for SaaS-based subscription and transaction processing feescustomer are recognized ratably over the contract terms.
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 SaaS or SaaS-based solutions, 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 underas fulfillment costs. The Company records deferred revenues when payments are received or due in advance of its performance. Deferred revenues are primarily from the percentage-of-completion method are generally measured based on the ratio of labor hours incurred to date to total estimated labor hours to be incurred. Changes in estimates to completeCompany’s services arrangements and revisions in overall profit estimates on these contracts are charged to earnings in the period in which they are determined. We accrue for contract losses if and when the current estimate of total contract costs exceeds total contract revenue.
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FINANCIAL NOTES (Continued)
Revenue from time-based software license agreements is recognized ratably over the term of the agreement. Software implementation fees are recognized as the work is performed or under the percentage-of-completion method. Maintenance and support agreements are marketed under annual or multi-year agreements and are recognized ratablyrevenues over the period covered by the agreements. Hardware revenuesperiods when services are generally recognized upon delivery.
SaaS-based subscription, content and transaction processing fees are generally marketed under annual and multi-year agreements and are recognized ratably over the contracted terms beginning on the service start date for fixed fee arrangements and recognized as transactions are performed beginning on the service start date for per-transaction fee arrangements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing service revenues are recognized as the service is performed.
We also offer certain products on an application service provider basis, making our software functionality available onThe Company had no material contract assets, contract liabilities, or deferred contract costs recorded in its Consolidated Balance Sheets as of March 31, 2021 and 2020. The Company generally expenses costs to obtain a remote hosting basis from our data centers. The data centers provide system and administrative support,contract as well as hosting services. Revenue on products sold on an application service provider basisincurred when the amortization period is recognized on a monthly basis over the term of the contract beginning on the service start date of products hosted.less than one year.
This segment engages in multiple-element arrangements, which may contain any combination of software, hardware, implementation, SaaS-based offerings, consulting services or maintenance services. For multiple-element arrangements that do not include software, revenue is allocated to the separate elements based on their relative selling price and recognized in accordance with the revenue recognition criteria applicable to each element. Relative selling price is determined based on 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. For multiple-element arrangements accounted for in accordance with specific software accounting guidance when some elements are delivered prior to others in an arrangement and VSOE of fair value exists for the undelivered elements, revenue for the delivered elements is recognized upon delivery of such items. The segment establishes VSOE for hardware and implementation and consulting services based on the price charged when sold separately, and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is recognized under the residual method only when fair value has been established for all of the undelivered elements in an arrangement. If fair value cannot be established for any undelivered element, all of the arrangement’s revenue is deferred until the delivery of the last element or until the fair value of the undelivered element is determinable. For multiple-element arrangements with both software and nonsoftware elements, arrangement consideration is allocated between the software elements as a whole and nonsoftware elements. The segment then further allocates consideration to the individual elements within the software group, and revenue is recognized for all elements under the applicable accounting guidance and our policies described above.
Supplier Incentives: Fees for services 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 facts and circumstances. Adjustments to supplier reserves are generally included withinin 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, 2018 and 2017,The supplier reserves were $227 million and $201 million. All of the supplier reserves at March 31, 2018 and 2017primarily 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 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 period-end exchange rates, while revenues and expenses are translated at average exchange rates during the corresponding period and stockholders’ equity accounts are primarily translated at historical exchange rates. Foreign currency translation adjustments are included in other“Other comprehensive income or loss(loss), net of tax” in the consolidated statementsConsolidated Statements of comprehensive income,Comprehensive Income (Loss), and the cumulative effect is included in the stockholders’ equity 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 ourthe Company’s consolidated results of operations in 2018, 20172021, 2020, or 2016. We release2019. The Company releases cumulative translation adjustments 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 rata portion of the cumulative translation adjustments into net incomeearnings upon the sale of an equity method investment that is a foreign entity. entity or has a foreign component.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 as a charge or credit toin earnings. We useThe Company uses foreign currency-denominated notes and cross-currency swaps to hedge a portion of ourits net investment in ourits foreign subsidiaries. We useIt uses cash flow hedges primarily to reduce the effects of foreign currency exchange rate risk related to intercompany loans denominated in non-functional currencies. If the financial instrument is designated as a cash flow hedge or net investment hedge, the effective portions of changes in the fair value of the derivative are included in other“Other comprehensive income or loss(loss), net of tax” in the consolidated statementsConsolidated Statements of comprehensive income,Comprehensive Income (Loss), and the cumulative effect is included in the stockholders’ equity section of the consolidated balance sheets.Consolidated Balance Sheets. The cumulative changes in fair value are reclassified to the same line as the hedged item in the consolidated statementsConsolidated Statements of operationsOperations when the hedged item affects earnings. We evaluateThe Company evaluates hedge effectiveness at the 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 the fourth quarter of 2018, we adopted amended guidance for derivatives and hedging which eliminates the existing requirement to recognize periodic hedge ineffectiveness in earnings for cash flow hedges and net investment hedges that are highly effective. The adoption had no material impact on our financial statements as therefollowing the date when ineffectiveness was no ineffectiveness recognized on our cash flow hedges or net investment hedges prior to adoption.identified. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change included in earnings.
Comprehensive Income: Income (Loss): Comprehensive income (loss) consists of two components,components: net income (loss) and other comprehensive income. Other comprehensive income refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. Ourearnings. The Company’s other comprehensive income 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, 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 that is not allocable to McKesson Corporation. In 2018, 2017 and 2016, netNet income attributable to noncontrolling interests includedincludes 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. In 2018 and 2017, netNet income attributable to noncontrolling interests also includedincludes third-party equity interests in ourthe Company’s consolidated entities including Vantage Oncology Holdings, LLC (“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 sheets.in the Company’s Consolidated Balance Sheets. Refer to Financial Note 11,9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” for more 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.
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.
Disclosure is also provided when it is reasonably possible that a material loss will be incurred or when it is reasonably possible that the amount
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FINANCIAL NOTES (Continued)
The Company reviews all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or 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 19, “Commitments and Contingent Liabilities,” for additional information related to ongoing controlled substances claims to which the Company is possible to reasonably estimate a range of potential loss and boundaries of a high and low estimate.party.
Restructuring Charges: Employee severance costs are generally recognized when payments are probable and amounts are reasonably estimable. Costs related to contracts without future benefit or contract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred.
Business Combinations: We account The Company accounts 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 oncethe Company obtains control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributable 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 integration and 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 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.
Recently Adopted Accounting Pronouncements
Income Taxes: In the fourthfirst quarter of 2018, we2021, the Company prospectively adopted amended guidance as issued by SEC staffAccounting Standard Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in December 2017 which provides clarification for entities that may not have completed their accounting in the period of enactment for the income tax effects of the 2017 Tax Cut and Jobs Act ("2017 Tax Act")a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for us wascapitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the third quarter of 2018. The amended guidance providesrequirements for capitalizing implementation costs in a provisional one-year measurement periodcloud computing arrangement that has a software license. As a result, the Company began capitalizing eligible implementation costs for entities to finalize their accounting forsuch contracts and recognizing the income tax effects. Underexpense over the amended guidance, we are required to reflect the income tax effects in the enactment period of those aspects of the 2017 Tax Act for which the accounting is complete. We are required to record a provisional estimate in our consolidated financial statements if the accounting for certain aspects of the 2017 Tax Act are incomplete provided that the effects are reasonably determinable. Such provisional amounts are subject to further adjustments during the measurement period until the accounting for the income tax effects is finalized. If the effects of the 2017 Tax Act are not reasonably determinable, we would continue to apply the accounting guidance that was in effect immediately before the 2017 Tax Act’s enactment date until the provisional amounts become reasonably estimable. The SEC staff guidance also requires additional disclosures when the accounting related to the 2017 Tax Act is not complete. Refer to Financial Note 10, “Income Taxes,” for more information regarding the impact of this amended guidance on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Derivatives and Hedging: In the fourth quarter of 2018, we elected to early adopt amended guidance for derivatives and hedging on a modified retrospective basis. The amended guidance was issued to improve the accounting for hedging activities and to better align an entity’s risk management activities and financial reporting for hedging relationships. The amended guidance, among other provisions, eliminates the existing requirement to recognize periodic hedge ineffectiveness in earnings for cash flow hedges and net investment hedges that are highly effective and requires that all items that affect earnings be classified in the same income statement line as the hedged item.service period. The adoption of this amended guidance did not have a material effectimpact on ourthe Company’s consolidated financial statements.statements or disclosures.
Goodwill Impairment Testing: In the second quarter of 2018, we elected to adopt amended guidance which simplifies goodwill impairment testing by eliminating the second step of the impairment test. The amended guidance requires an impairment charge to be recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value under a one-step impairment test. Refer to Financial Note 3, “Goodwill Impairment Charges” for more information.
Investments:In the first quarter of 2018, we2021, the Company retrospectively adopted amended guidanceASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans, which requires the Company to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of reasons for significant gains and losses related to changes in the benefit obligation for the equity method of accounting.period. The amended guidance simplifiesalso requires the transitionCompany to remove disclosures on the equity method of accounting. This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, at the point an investment qualifies for the equity method, any unrealized gain or lossamounts in accumulated other comprehensive income (loss) willexpected to be recognized through earnings.as components of net periodic benefit costs over the next fiscal year. The adoption of this amended guidance resulted in changes in disclosures but did not have a material effectan impact on our consolidated financial statements.the Company’s Consolidated Statements of Operations, Comprehensive Income (Loss), Balance Sheets, or Cash Flows.
Derivatives and Hedging:In the first quarter of 2018, we2021, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, to remove, modify, and add disclosure requirements on fair value measurements. Certain requirements were applied prospectively while other changes were applied retrospectively on the effective date. The amended guidance removes disclosure requirements for derivative instrument novations. The amendments clarify that a novation, a changetransfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements, but adds new disclosure requirements including changes in unrealized gains or losses in other comprehensive income related to recurring Level 3 measurements and requirements to disclose the counterparty,range, and weighted-average used to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided all other hedge accounting criteria continue to be met.develop significant unobservable inputs for Level 3 fair value measurements. The adoption of this amended guidance resulted in changes in disclosures but did not have an effect on our consolidated financial statements.
Consolidation: In the first quarter of 2018, we adopted amended guidance for VIEs. The amended guidance requires a single decision maker of a VIE to consider indirect economic interests in the entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. This amendment does not change the existing characteristics of a primary beneficiary. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Inventories: In the first quarter of 2018, we adopted amended guidance for the subsequent measurement of inventory. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The requirement replaced the lower of cost or market evaluation previously applied. Accounting guidance is unchanged for inventory measured using the LIFO or the retail method. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Share-Based Payments: In the first quarter of 2017, we adopted amended guidance for employee share-based payment awards. Under the amended guidance, all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee share-based compensation arrangements are recognized within income tax expense. Under the previous guidance, windfalls were recognized in additional paid-in capital (“APIC”) and shortfalls were only recognized to the extent they exceeded the pool of windfall tax benefits. The amended guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows, rather than a financing activity. The primary impact of the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than APIC. As a result, discrete tax benefits of $54 million were recognized in income tax expense in 2017. We also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of 2017. None of the other provisions in this amended guidance had a material impact on our consolidated financial statements.
Business Combinations: In the first quarterCompany’s Consolidated Statements of 2017, we adopted amended guidance for an acquirer’s accounting for measurement-period adjustments. The amended guidance eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively and instead requires that measurement-period adjustments be recognized during the period in which it determines the adjustment. In addition, the amended guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization,Operations, Comprehensive Income (Loss), Balance Sheets, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Cash Flows.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fair Value Measurement: In the first quarter of 2017, we2021, the Company adopted amended fair value guidanceASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets from one based on current losses to a retrospective basis. This amended guidance limits disclosuresforward-looking model based on expected losses. The forward-looking model requires the Company to consider historical experience, current conditions, and removesreasonable and supportable forecasts that affect the requirement to categorize investments within the fair value hierarchy if the fair valuecollectability of the investment is measured using the net asset value (“NAV”) per share practical expedient.reported amount in estimating credit losses. The amended guidance primarily affected our fiscal 2017 annual disclosures relatedrequires financial assets that are measured at amortized cost be presented at the net amount expected to our pension benefits. Refer to Financial Note 18, “Pension Benefits,”be collected. An allowance for more information regardingcredit losses is established as a valuation account that is deducted from the impactamortized cost basis of this amendedfinancial assets. The guidance also requires enhanced disclosures. This guidance was adopted on our pension benefits. The adoption of this amended guidancea modified retrospective basis and did not have a material effectimpact on ourthe Company’s consolidated financial statements.
Fees Paidstatements or disclosures. Upon adoption of the amended guidance in a Cloud Computing Arrangement: In the first quarter of 2017, we adopted amended guidance for2021, the Company recorded a customer’s accounting for fees paid in a cloud computing arrangement. The amended guidance requires customerscumulative-effect adjustment of $13 million to determine whether or not an arrangement contains a software license element. If the arrangement contains a software license element, the related fees paid should be accounted for as an acquisitionopening balance of a software license. If the arrangement does not contain a software license, it is accounted forretained earnings, primarily as a service contract. The adoptionresult of this amended guidance did not have a material effect on our consolidated financial statements.
Debt Issuance Costs: In the first quarter of 2017, we adopted amended guidanceadjustments to allowances for the balance sheet presentation of debt issuance costs on a retrospective basis. The amended guidance requires debt issuance costs related to a recognized debt liability to be reported on the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amended guidance. In August 2015, a clarification was added to this amended guidance that debt issuance costs related to line-of-credit arrangements can continue to be deferred and presented as an asset on the balance sheet. Upon adoption, unamortized debt issuance costs of $40 million were reclassified primarily from other noncurrent assets to long-term debt at March 31, 2016.trade accounts receivable.
Consolidation: In the first quarter of 2017, we adopted amended guidance for consolidating legal entities in which a reporting entity holds a variable interest. The amended guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs and changes the consolidation analysis of reporting entities that are involved with VIEs that have fee arrangements and related party relationships. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Discontinued Operations: In the first quarter of 2016, we adopted amended guidance for reporting of discontinued operations and disclosures of disposals of components. The amended guidance revises the criteria for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Refer to Financial Note 7, “Discontinued Operations,” for more information regarding the impact of this amended guidance on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Recently Issued Accounting Pronouncements Not Yet Adopted
Accumulated Other Comprehensive Income:In February 2018, amended guidanceDecember 2019, ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, was issued with the intent to address a narrow-scope financial reporting issue that arose as a consequencesimplify various aspects related to accounting for income taxes. The guidance 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 the 2017 Tax Act. Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather in net income, such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate. This difference is referred to as stranded tax effects.outside basis differences. The amended guidance allows for a reclassification of only those amounts related to the 2017 Tax Act to retained earnings thereby eliminating the stranded tax effects. The amended guidance also requiressimplifies and clarifies certain disclosures about stranded tax effects.other aspects of accounting for income taxes. The amended guidance is effective for us beginningthe Company in the first quarter of 2020 on a prospective or retrospective basis. Early2022 and early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Share-Based Payments: In May 2017, amended guidance was issued for employee share-based payment awards. This amendment provides guidance on which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the amended guidance, we are required to account for the effects of a modification if the fair value, the vesting conditions or the classification (as an equity instrument or a liability instrument) of the modified award change from that of the original award immediately before the modification. The amended guidance is effective for us commencing in the first quarter of 2019 on a prospective basis. Early adoption is permitted. We do not expect the adoption of this amended guidance is not expected to have a material effect on our consolidated financial statements.
Premium Amortization of Purchased Callable Debt Securities: In March 2017, amended guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The amended guidance requires the premium of callable debt securities to be amortized to the earliest call date but does not require an accounting change for securities held at a discount as they would still be amortized to maturity. The amended guidance is effective for us on a modified retrospective basis commencing in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Compensation - Retirement Benefits: In March 2017, amended guidance was issued which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the statements of operations separately from the service cost component outside of operating income. This amended guidance is effective for us in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We expect the adoption of this amended guidance to have a material effect on our consolidated financial statements. This amended guidance is expected to only result in a change in presentation of other components of net benefit costs on our consolidated statement of operations (a reclassification from operating income to other income, net).
Derecognition of Nonfinancial Assets: In February 2017, amended guidance was issued that defines the term “in substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the asset that is promised is concentrated in nonfinancial assets. The scope of this amendment includes nonfinancial assets transferred within a legal entity including a parent entity’s transfer of nonfinancial assets by transferring ownership interests in consolidated subsidiaries. The amendment excludes all businesses and nonprofit activities from its scope and therefore all entities, with limited exceptions, are required to account for the derecognition of a business or nonprofit activity in accordance with the consolidation guidance once this amended guidance becomes effective. We are required to apply this amended guidance at the same time we apply the amended revenue guidance in the first quarter of 2019. It allows for either full retrospective or modified retrospective adoption. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Business Combinations: In January 2017, amended guidance was issued to clarify the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amended guidance provides a practical screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amended guidance requires that to be considered a business, a set must include an input and a substantive process that together significantly contribute to the ability to create output. The amended guidance is effective for us commencing in the first quarter of 2019 on a prospective basis. Early adoption is permitted in certain circumstances. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Restricted Cash: In November 2016, amended guidance was issued that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash or restricted cash equivalents are not reported as cash flow activities in the statement of cash flows. The amended guidance is effective for us commencing in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We expect the adoption of this amended guidance to have no effect on our consolidated statements of operations, comprehensive income or our consolidated balance sheets. This amended guidance is expected to only result in a change in presentation of restricted cash and restricted cash equivalents on our consolidated statement of cash flows.
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, amended guidance was issued to require entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amended guidance is effective for us commencing in the first quarter of 2019 on a modified retrospective basis. Upon adoption of this amended guidance in the first quarter of 2019, we anticipate recording approximately $130 million to $160 million of deferred tax assets with a corresponding cumulative-effect increase to the beginning balance of retained earnings in ourCompany’s consolidated financial statements for the tax consequences relating to an intra-entity transfer of certain software.or disclosures.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments: In August 2016, amended guidance was issued to provide clarification on cash flow classification related to eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees. The amended guidance is effective for us commencing
2.Investment in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We intend to make policy elections within the amended standard that are consistent with our current classification. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Financial Instruments - Credit Losses: In June 2016, amended guidance was issued, which will change the impairment model for most financial assets and require additional disclosures. The amended guidance requires financial assets that are measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets. The amended guidance also requires us to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount in estimating credit losses. The amended guidance becomes effective for us commencing in the first quarter of 2021 and will be applied through a cumulative-effect adjustment to the beginning retained earnings in the year of adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Leases: In February 2016, amended guidance was issued for lease arrangements. The amended guidance will require lessees to recognize assets and liabilities on the balance sheet for all leases with terms longer than 12 months and provide enhanced disclosures on key information of leasing arrangements. The amended guidance is effective for us commencing in the first quarter of 2020. Early adoption is permitted. We plan to adopt the amended guidance on the effective date and expect that the adoption of the amended lease guidance will materially affect our consolidated balance sheet and will require certain changes to our systems and processes.
Financial Instruments: In January 2016, amended guidance was issued that requires equity investments to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. This guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The investments that are accounted for under the equity method of accounting or result in consolidation of the investee are excluded from the scope of this amended guidance. The amended guidance will become effective for us commencing in the first quarter of 2019 and will be applied through a cumulative-effect adjustment. Early adoption is not permitted except for certain provisions. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenue Recognition: In May 2014, amended guidance was issued for recognizing revenue from contracts with customers. Under the amended guidance, 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. The amended guidance also requires additional quantitative and qualitative disclosures. Additional amendments were also issued subsequently, including clarifications on principal versus agent considerations, performance obligations, and certain scope improvements and practical expedients. The amended guidance is effective for us commencing in the first quarter of 2019. We will adopt this amended guidance on a modified retrospective basis in our first quarter of 2019. Our equity method investee, Change Healthcare will adopt the amended guidance in our first quarter of 2020. Change Healthcare is currently evaluating the adoption impact.Joint Venture
We continue to make progress on our evaluation of the adoption impact including a review of the amended guidance as compared to our current accounting policies and customer contract reviews. We substantially completed our assessment duringIn the fourth quarter of 2018. Our revenue is primarily generated from sales of pharmaceutical products, which will continue to be recognized when goods are transferred to2017, the customer. We have substantially similar performance obligations under the amended guidance as compared with deliverables and units of account currently being recognized. Accordingly, we generally anticipate that the timing of recognition of distribution revenue will be substantially unchanged under the amended guidance. Upon adoption of this amended guidance, we expect to recognize an immaterial adjustment to retained earnings reflecting the cumulative impact for estimated variable consideration, subject to the constraint.
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2. | Healthcare Technology Net Asset Exchange |
On March 1, 2017, weCompany contributed the majority of ourits McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formedform a joint venture, the Change Healthcare JV, under the terms of a contribution agreement previously entered into between McKesson and Change Healthcare Holdings, Inc. (“Change”) and others, including shareholders of Change. We retained our RelayHealth Pharmacy (“RHP”) and Enterprise Information Solutions (“EIS”) businesses. The EIS business was subsequently sold to a third party in the third quarter of 2018. In exchange for the contribution, we ownthe Company initially owned approximately 70% of the joint venture, with the remaining equity ownership of approximately 30% held by shareholders of Change. The joint venture isChange Healthcare JV was jointly governed by usMcKesson and shareholders of Change.
Gain from Healthcare TechnologyNet Asset Exchange
We accounted for this transaction asOn June 27, 2019, common stock and certain other securities of Change began trading on the NASDAQ (“IPO”). Change was a sale of the Core MTS Businessholding company and a subsequent purchase of a 70%did not own any material assets or have any operations other than its interest in the newly formed joint venture.Change Healthcare JV. On July 1, 2019, upon the completion of its IPO, Change received net cash proceeds of approximately $888 million. Change contributed the proceeds of $609 million from its offering of common stock to the Change Healthcare JV in exchange for additional membership interests of the Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds of $279 million from the concurrent offering of other securities were used by Change to acquire certain securities of the Change Healthcare JV that substantially mirrored the terms of other securities included in the offering by Change. As a result, McKesson’s equity interest in the Change Healthcare JV was diluted from approximately 70% to approximately 58.5% while Change owned approximately 41.5% of the outstanding LLC Units. Accordingly, in 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. The Company’s proportionate share of income or loss from this investment was subsequently reduced as immaterial settlements of stock option exercises occurred after the IPO. These amounts were included in “Equity earnings and charges from investment in Change Healthcare Joint Venture” in the Company’s Consolidated Statements of Operations for the year ended March 31, 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 Statements of Operations for the year ended March 31, 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Separation of the Change Healthcare JV
On March 10, 2020, the Company completed the previously announced 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 20, “Stockholders' Equity,” 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 2017, we deconsolidated2020, the Core MTS Business and recordedCompany recognized a pre-taxnet gain of $3,947$414 million (after-tax gainrelated 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 Statements of $3,018 million).Operations for the year ended March 31, 2020. The pre-taxnet gain was calculated based on the difference between the fair value of our 70% equity interest in the joint venture, less the carrying amount of the contributed Core MTS Business’ net assets of $1,132 million and $1,258 million of promissory notes, a $136 million noncurrent liability associated with a tax receivable agreement (as described below) and transaction and other related expenses. The $1,258 million of promissory notes were subsequently repaid in cash from proceeds of Change Healthcare’s long term debt issuance. Additionally, in the first quarter of 2018, we recorded a pre-tax gain of $37 million (after-tax gain of $22 million) in operating expenses upon the finalization of net working capital and other adjustments. During the second quarter of 2018, we received $126 million in cash from Change Healthcare representing the final settlement of the net working capital and other adjustments.as follows:
| | | | | |
| (In millions, except per share data) | |
| 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 | 521 | |
| Release of accumulated other comprehensive attributable to the joint venture | (24) | |
| Less: Transaction costs incurred | (23) | |
| Net gain on split-off of the Change Healthcare JV | $ | 414 | |
Equity Method Investment in the Change Healthcare Joint Venture
OurThe Company’s investment in the joint venture iswas accounted for using the equity method of accounting on a one-month reporting lag. In 2018, weThe Company’s accounting policy has been to disclose any intervening events of the joint venture in the lag period that could materially affect its consolidated financial statements. Effective April 1, 2019, the Change Healthcare JV adopted the amended revenue recognition guidance and, in the first quarter of 2020, the Company recorded ourits 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.
The Company recorded its proportionate share of loss from its investment in the Change Healthcare JV of $248$119 million which includedand $194 million in 2020 and 2019, respectively. The Company’s proportionate share of income or loss from this investment 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 includingprimarily representing incremental intangible assets amortization and removal of profit associated with basis differences, partially offset by a provisional tax benefitthe recognition of $76 million recognized by Change Healthcare primarily due to a reduction in the future applicable tax rate related to the December 2017 enactment of the 2017 Tax Act. This amount wasdeferred revenue. These amounts were recorded under the caption “Loss“Equity earnings and charges from Equity Method Investmentinvestment in Change Healthcare” Joint Venture” in our consolidated statementthe Company’s Consolidated Statements of operations.Operations.
At March 31, 2018 and 2017, our carrying value in our investment was $3,728 million and $4,063 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately $4,472 million and $4,762 million, primarily reflecting equity method intangible assets, goodwill and other fair value adjustments.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Related Party Transactions
In connection with the transaction,formation of the Change Healthcare JV, McKesson, the Change Healthcare JV and certain shareholders of Change entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other commercial agreements.
Pursuant to Fees incurred or earned from the TRA, McKesson may be required to make certain paymentsAdvisory Agreement were not material for 2020 and 2019. Fees incurred or may be entitled to receive certain payments related toearned from the cash tax savings attributable to the utilization of certain tax attributes, including certain amortizable tax basis in software contributed by McKesson to Change Healthcare. No such payments were required to be made or received for 2017 and 2018. At March 31, 2018 and 2017, we had $90 million and $136 million of noncurrent liability payable to shareholders of Change associated with the TRA. During 2018, we recorded a credit of $46 million in operating expense to reduce this liability to $90 million reflecting a reduction in future applicable tax rate related to the 2017 Tax Act. The TRA liability remained at $90 million at March 31, 2018. The amount of liability is determined based on certain estimates and could become payable in periods after a disposition of our investment in Change Healthcare.
The total fees charged by us to the joint venture for various transition services under the TSA were $91 million in 2018 and were not material in 2017. Transition services fees are included within operating expenses2021 and were $22 million in our consolidated statements of operations.
In 20182020 and 2017, we did not earn material transaction and advisory fees under the$60 million in 2019. The Advisory Agreement.
Revenues recognized and expenses incurred under commercial arrangements with Change Healthcare were not material during 2018 and 2017.
At March 31, 2018 and 2017, receivables due from the joint venture were not material.
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3. | Goodwill Impairment Charges |
We recorded non-cash pre-tax goodwill impairment charges of $1,738 million within the Distribution Solutions segmentAgreement was terminated in 2018 and $290 million within the Technology Solutions segment in 2017. The charges were recorded under the caption, “Goodwill Impairment Charges” in the accompanying consolidated statements of operations.
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. We evaluate goodwill for impairment on an annual basis as of January 1 each year and at an interim date, if indicators of potential impairment exist.
The fair value of the reporting unit was determined using a combination of an income approach based on a DCF model and a market approach based on guideline public companies’ revenues and earnings before interest, tax, depreciation and amortization multiples. 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 changes in key assumptions, including failure to improve operations of certain retail pharmacy stores, additional government reimbursement reductions, deterioration in the financial market, 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. 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.
Fiscal 2018
McKesson Europe
In 2018, we recorded total non-cash pre-tax and after-tax charges of $1,283 million to impair the carrying value of goodwill for our McKesson Europe reporting unit within our Distribution Solutions segment, as further described below. There were no tax benefits associated with these goodwill impairment charges. At March 31, 2018, this reporting unit had a remaining goodwill balance of $1,851 million.
2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2019, the Company renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million non-current liability payable to the shareholders of Change. In exchange for the shareholders of Change agreeing to extinguish the liability, the Company agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from the Change Healthcare JV that would otherwise have been required to be made to the shareholders of Change. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the non-current liability and recognized a credit of $90 million in “Selling, distribution, general, and administrative expenses” in its Consolidated Statement of Operations in 2019. At March 31, 2021 and 2020, the Company had 0 outstanding payable balance to the shareholders of Change under the TRA.
Under the agreement executed in 2019 between the Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, 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 years ended March 31, 2020 and 2019.
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, 2021 or 2020.
In conjunction with the separation transaction in the fourth quarter of 2020, the Company recorded a reversal of the deferred tax liability related to its investment. 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.
3. Held for Sale
Assets and liabilities that have met the classification as held for sale were $12 million and $9 million, respectively, as of March 31, 2021 and $906 million and $683 million, respectively, as of March 31, 2020. The amounts at March 31, 2020 primarily consisted of the majority of the Company’s German pharmaceutical wholesale business as described below. This disposal group had been recorded as assets and liabilities held for sale since the third quarter of 2020 through its contribution to a joint venture in the third quarter of 2021. Based on its analysis, the Company determined that the disposal groups classified as held for sale do not meet the criteria for classification as discontinued operations and are not considered to be significant disposals based on its quantitative and qualitative evaluation.
German Wholesale Joint Venture
On November 1, 2020, the Company completed its previously announced transaction with Walgreens Boots Alliance (“WBA”) whereby the majority of its German pharmaceutical wholesale business was contributed to a newly formed joint venture in which McKesson has a 30% noncontrolling interest.
Consideration received included a receivable amount of $41 million, primarily related to working capital and net debt adjustments from WBA, 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 carrying value of the investment in the joint venture was NaN as of March 31, 2021. The Company accounts for its interest in the joint venture as an equity method investment within the International segment. The joint venture also assumed a note payable to the Company in the amount of approximately $291 million as of the transaction date, which was paid to the Company in the third quarter of 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In conjunction with the contribution, the Company recorded losses of $58 million and $275 million (pre-tax and after-tax), respectively, in the years ended March 31, 2021 and 2020, which includes adjustments to remeasure the assets and liabilities held for sale to fair value less costs to sell. These charges were included within “Operating expenses” in the Consolidated Statements of Operations. The Company’s measurement of the fair value of the 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. As a result of finalization of working capital amounts contributed and other adjustments, the Company may record additional gains or losses in future periods; however, these adjustments are not expected to have a material impact on the Company’s consolidated financial statements.
Following the completion of the transaction on November 1, 2020, there were 0 assets or liabilities of the German pharmaceutical wholesale joint venture classified as held for sale on the Company’s Consolidated Balance Sheet. The total assets and liabilities of the German pharmaceutical wholesale joint venture that were classified as held for sale on the Company’s Consolidated Balance Sheet as of March 31, 2020, were as follows:
| | | | | |
| (In millions) | March 31, 2020 |
| Assets | |
| Current Assets | |
| Receivables, net | $ | 548 | |
| Inventories, net | 478 | |
| |
| Long-term assets | 88 | |
Remeasurement of assets of business held for sale to fair value less cost to sell (1) | (272) | |
| Total Assets held for sale | $ | 842 | |
| |
| Liabilities | |
| Current Liabilities | |
| Drafts and accounts payable | $ | 450 | |
| Other accrued liabilities | 40 | |
| Long-term liabilities | 166 | |
| Total Liabilities held for sale | $ | 656 | |
(1)Includes the effect of approximately $3 million of favorable cumulative foreign currency translation adjustment.
4. Restructuring, Impairment, and Related Charges
The Company recorded restructuring, impairment, and related charges of $334 million, $268 million and $597 million in 2021, 2020, and 2019, respectively. These charges are included in “Restructuring, impairment, and related charges, net” in the Consolidated Statements of Operations. In addition, charges related to restructuring initiatives are included in “Cost of sales” in the Consolidated Statements of Operations and were not material for the years ended 2021, 2020, and 2019.
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 includes the rationalization of its office space in North America. Where the Company determines to cease using office space, it plans to exit the portion of the facility no longer used. It also may retain and repurpose certain other office locations. The Company expects to incur total charges of approximately $180 million to $280 million for this initiative, consisting primarily of exit related costs, accelerated depreciation and amortization of long-lived assets, and asset impairments. This initiative is expected to be completed in 2022.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 transformational changes in technologies and business processes, operational efficiencies, and cost savings. The initiative includes reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. Under this initiative, the Company expects to incur total charges of approximately $85 million to $90 million. The Company recorded charges of $57 million in 2021, primarily related to asset impairments and accelerated depreciation expense as well as employee severance and other employee-related costs. The initiative is expected to be substantially complete in 2022 and estimated remaining charges primarily consist of accelerated amortization of long-lived assets, facility and other exit costs, and employee-related costs.
During the fourth quarter of 2019, 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, $72 million, and $163 million in 2021, 2020, and 2019, 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 expects to record under this initiative are 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, $44 million, and $33 million in 2021, 2020, and 2019, 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 expects to record under this initiative, primarily relating to lease costs, are not material.
In the second quarter of 2018, our McKessonthe Company committed to a restructuring plan, which primarily consisted of the closures of underperforming retail pharmacy stores in the U.K., included in its International segment, and a reduction in workforce. In 2019, the Company recorded charges of $18 million, consisting primarily of employee severance and lease exit costs, with $92 million of total charges recorded through the end of 2019. The plan was substantially completed in 2020 and additional charges 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 and $135 million in 2020 and 2019, respectively.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2021
Restructuring, impairment, and related charges, net for the year ended March 31, 2021 consisted of the following:
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| Year Ended March 31, 2021 |
| (In millions) | U.S. Pharmaceutical | | International (1) | | Medical-Surgical Solutions | | Prescription Technology Solutions | | Corporate (2) | | Total |
| Severance and employee-related costs, net | $ | 10 | | | $ | 22 | | | $ | (1) | | | $ | 4 | | | $ | 69 | | | $ | 104 | |
Exit and other-related costs (3) | 11 | | | 17 | | | 4 | | | 0 | | | 27 | | | 59 | |
| Asset impairments and accelerated depreciation | 0 | | | 46 | | | 1 | | | 0 | | | 9 | | | 56 | |
| Total | $ | 21 | | | $ | 85 | | | $ | 4 | | | $ | 4 | | | $ | 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.
Fiscal 2020
Restructuring, impairment, and related charges, net for the year ended March 31, 2020 consisted of the following:
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| Year Ended March 31, 2020 |
| (In millions) | U.S. Pharmaceutical (1) | | International (2) | | Medical-Surgical Solutions (3) | | Prescription Technology Solutions | | Corporate (4) | | Total |
| Severance and employee-related costs, net | $ | 12 | | | $ | 2 | | | $ | 4 | | | $ | (1) | | | $ | 30 | | | $ | 47 | |
Exit and other-related costs (5) | 1 | | | 13 | | | 19 | | | 0 | | | 46 | | | 79 | |
| Asset impairments and accelerated depreciation | 10 | | | 6 | | | 1 | | | 0 | | | 13 | | | 30 | |
| Total | $ | 23 | | | $ | 21 | | | $ | 24 | | | $ | (1) | | | $ | 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 operating model and cost optimization efforts described above.
(3)Primarily represents costs associated with the growth initiative 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2019
Restructuring, impairment, and related charges, net for the year ended March 31, 2019 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2019 |
| (In millions) | U.S. Pharmaceutical (1) | | International (2) | | Medical-Surgical Solutions (3) | | Prescription Technology Solutions | | Corporate (4) | | Total |
| Severance and employee-related costs, net | $ | 46 | | | $ | 51 | | | $ | 18 | | | $ | 3 | | | $ | 36 | | | $ | 154 | |
Exit and other-related costs (5) | 9 | | | 83 | | | 20 | | | 0 | | | 52 | | | 164 |
| Asset impairments and accelerated depreciation | 6 | | | 24 | | | 3 | | | 0 | | | 1 | | | 34 | |
| Total | $ | 61 | | | $ | 158 | | | $ | 41 | | | $ | 3 | | | $ | 89 | | | $ | 352 | |
(1)Represents costs associated with the operating model cost optimization efforts and growth initiative described above.
(2)Primarily represents costs associated with the operating model cost optimization efforts and U.K. restructuring initiative focusing on underperforming retail pharmacy stores described above.
(3)Primarily represents costs associated with the growth initiative described above.
(4)Represents costs associated with 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 lease and other contract exit costs associated with closures of facilities and retail pharmacy stores as well as project consulting fees.
The following table summarizes the activity related to the restructuring liabilities associated with the Company’s restructuring initiatives for the years ended March 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | U.S. Pharmaceutical | | International | | Medical-Surgical Solutions | | Prescription Technology Solutions | | Corporate | | Total |
| Balance, March 31, 2019 | $ | 35 | | | $ | 129 | | | $ | 26 | | | $ | 3 | | | $ | 44 | | | $ | 237 | |
| Restructuring, impairment, and related charges | 23 | | 21 | | | 24 | | | (1) | | | 89 | | | 156 |
| Non-cash charges | (10) | | | (6) | | | (1) | | | 0 | | | (13) | | | (30) | |
| Cash payments | (15) | | | (45) | | | (26) | | | (1) | | | (61) | | | (148) | |
| Other | (4) | | | (33) | | | (1) | | | 0 | | | (20) | | | (58) | |
Balance, March 31, 2020 (1) | 29 | | | 66 | | | 22 | | | 1 | | | 39 | | | 157 | |
| Restructuring, impairment, and related charges | 21 | | | 85 | | | 4 | | | 4 | | | 105 | | | 219 | |
| Non-cash charges | 0 | | | (46) | | | (1) | | | 0 | | | (9) | | | (56) | |
| Cash payments | (31) | | | (31) | | | (21) | | | (1) | | | (75) | | | (159) | |
| Other | 0 | | | (8) | | | (1) | | | 0 | | | (1) | | | (10) | |
Balance, March 31, 2021 (2) | $ | 19 | | | $ | 66 | | | $ | 3 | | | $ | 4 | | | $ | 59 | | | $ | 151 | |
(1) As of March 31, 2020, the total reserve balance was $157 million of which $118 million was recorded in Other accrued liabilities and $39 million was recorded in Other non-current liabilities.
(2) 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Long-Lived Asset Impairments
Fiscal 2021
In 2021, the Company recognized charges of $115 million to impair certain long-lived assets within the Company’s International segment. These charges primarily related to long-lived assets associated with the Company’s retail pharmacy businesses in Canada and Europe reporting unit had a declineand were due to declines in its estimated future cash flows primarily in our United Kingdom (“U.K.”) retail business,partially driven by significant government reimbursement reductions affecting retail pharmacy economics acrossa revised outlook regarding the U.K. market. Accordingly, we performedimpacts of COVID-19. The Company used both an interim one-step goodwill impairment test underincome approach (a DCF method) and a market approach to estimate the amended goodwill guidance for this reporting unit prior to our annual impairment test. As a result of the interim impairment test, the estimated fair value of this reporting unit was determinedthe long-lived assets.
Fiscal 2020
In 2020, the Company recognized charges of $82 million to be lower thanimpair certain long-lived and intangible assets for its retail pharmacy business in Europe within the carrying value and we recorded a non-cash goodwill impairment charge (pre-tax and after-tax) of $350 million. The discount rate and terminal growth rate used in our 2018 second quarter impairment testing were 7.5% and 1.25% comparedCompany’s International segment. These charges related primarily to 7.0% and 1.5% in our 2017 annual impairment test.
Additionally, as a result ofintangible assets associated with pharmacy licenses within the 2018 annual impairment test, we determined that the carrying value of the McKesson Europe reporting unit further exceeded its estimated fair value and recognized a non-cash goodwill impairment charge (pre-tax and after-tax) of $933 million in the fourth quarter of 2018. This reporting unit had a further decline in its estimated future cash flows driven by weakening script growth outlook in our U.K.U.K retail business and by a more competitive environment in France during the fourth quarter of 2018. The discount rate and terminal growth rate used in our 2018 annual impairment testing were 8.0% and 1.25%.
Rexall Health
As a result of the 2018 annual impairment test, we determined that the carrying value of our Rexall Health reporting unit within our Distribution Solutions segment exceeded its estimated fair value and recognized a non-cash goodwill impairment charge (pre-tax and after-tax) of $455 million in the fourth quarter of 2018. The impairment was the result ofdue to a decline in estimated future cash flows primarily driven by significant genericsadditional U.K. government reimbursement reductions across Canadacommunicated in the third quarter of 2020. The Company used a combination of an income approach (a DCF method) and minimum wage increases in multiple provinces which can only be partially mitigated through the business’ cost saving efforts. The discount rate and terminal growth rate used in our impairment testing for this reporting unit were 10.0% and 2.0%. At March 31, 2018, the Rexall Health reporting unit had no remaining goodwill relateda market approach to our acquisition of Rexall Health.
Other risks, expenses and future developments that we were unable to anticipate as of the testing dates in 2018 may require us to further revise the future projected cash flows, which could adversely affectestimate the fair value of our reporting unitsthe 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 periods.cash flows primarily driven by lower than expected growth in both prescription volume and sales of non-prescription goods. As a result, we may be required to record additional impairment charges. Also, refer to Financial Note 4, “Restructuring and Asset Impairment Charges,” for more information.
Fiscal 2017
Enterprise Information Solutions
In conjunction with the 2017 Healthcare Technology Net Asset Exchange, we evaluated strategic options for our EIS business, which wasCompany recognized a reporting unit within our Technology Solutions segment. In the second quarter of 2017, we recorded a non-cash pre-tax charge of $290$30 million ($282 million after-tax) to impair certain long-lived and intangible assets, primarily customer relationships. The Company utilized an income approach (a DCF method) for estimating the carrying value of this reporting unit’s goodwill. The impairment primarily resulted from a decline in estimated cash flows. The amount of goodwill impairment for the EIS business was determined under the former accounting guidance on goodwill impairment testing, and computed as the excess of the carryingfair value of the reporting unit’s goodwill over its implied fair value of its goodwill. The charge was recorded underlong-lived and intangible assets.
Fiscal 2019
In 2019, the caption, “Goodwill Impairment Charges,” in the accompanying consolidated statements of operations. Most of the goodwill impairment for this reporting unit was not deductible for income tax purposes. Refer to Financial Note 5, “Divestitures” for more information on the sale of the EIS business.
Refer to Financial Note 21, “Fair Value Measurements,” for more information on this nonrecurring fair value measurement.
| |
4. | Restructuring and Asset Impairment Charges |
We recorded pre-tax restructuring and asset impairmentCompany recognized charges of $567$210 million in 2018 primarily within the Distribution Solutions segment, $18 million in 2017 and $203 million in 2016 within the Distribution Solutions segment, Technology Solutions segment and Corporate. These charges were recorded under the caption, “Restructuring and asset impairment charges” in the accompanying consolidated statements of operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2018
McKesson Europe
In 2018, we recorded total non-cash pre-tax asset impairment charges of $446 million ($410 million after-tax) and pre-tax restructuring charges of $74 million ($67 million after-tax) primarily representing employee severance and lease exit costs for our McKesson Europe business, as further discussed below.
In the second quarter of 2018, we recorded non-cash pre-tax charges of $189 million ($157 million after-tax) to impair the carrying value of certain intangiblelong-lived assets (primarily pharmacy licenses) and store assets (primarily fixtures). The impairment wasfor its U.K. retail business, within the Company’s International segment, primarily driven by our U.K. retail business due to the previously discussed decline in estimated future cash flows which resulted from significant government reimbursement reductions and competitive pressures in the U.K.
In the fourth quarter of 2018, we recorded non-cash pre-tax charges of $257 million ($253 million after-tax) to impair the carrying value of certain intangible assets (primarily customer relationships) and capitalized software assets due to further declines in estimated future cash flows in our European business.
We utilized The Company used an income approach (DCF(a DCF method) or a combination of an income approach and a market approach to estimate the fair value of the long-lived assets.
In 2019, the Company recorded charges of $35 million to impair certain intangible assets (primarily customer relationships) for its Rexall Health retail business within the Company’s International segment. The impairments were primarily the result of the decline in estimated future cash flows for this business. The estimated cash flow projections were negatively affected by a lower projected overall growth rate from the ongoing impact of government regulations in 2019. The Company utilized an income approach (a DCF method) for estimating the fair value of long-lived assets.
The fair value of the long-lived and intangible assets described above is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specificcompany-specific information. Refer to Financial Note 17, “Fair Value Measurements,” for more information on nonrecurring fair value measurements.
On September 29, 2017, we committed5. Business Acquisitions and Divestitures
During 2021 and 2020, the Company did not complete any material acquisitions. During 2021, 2020, and 2019, the Company did not complete any material divestitures other than the contribution of the majority of its German wholesale business to a restructuring plan, which primarily consistsnewly formed joint venture, as described in Financial Note 3, “Held for Sale,” in 2021 and the separation of the closures of underperforming retail storesChange Healthcare JV, as described in the U.K. and a reductionFinancial Note 2, “Investment in workforce. The planChange Healthcare Joint Venture,” in 2020.
Acquisitions
Goodwill recognized for business acquisitions is generally not expected to be substantially implemented prior todeductible for tax purposes. However, if the first halfassets of 2019. As part of this plan, we recorded pre-tax restructuring charges of $74 million ($67 million after-tax) in operating expenses during 2018 primarily representing employee severance and lease exit costs. We made $10 million of cash payments, primarily related to employee severance. The reserve balance as of March 31, 2018 includes $42 million recorded in other accrued liabilities in our consolidated balance sheets.
We expect to record total pre-tax restructuring charges of approximately $90 million to $130 millionanother company are acquired, the goodwill may be deductible for our McKesson Europe business, of which $74 million of pre-tax charges were recorded to date. Estimated remaining restructuring charges primarily consist of lease termination and other exit costs.
Rexall Health
In the fourth quarter of 2018, we recorded non-cash pre-tax and after-tax charges of $33 million to impair the carrying value of certain intangible assets (primarily customer relationships). The impairment was the result of a decline in estimated future cash flows primarily driven by significant generics reimbursement reductions across Canada and minimum wage increases in multiple provinces which can only be partially mitigated through the business’ cost saving efforts. We utilized an income approach (DCF method) for estimating the fair value of long-lived assets. The fair value of the intangible assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information.
Fiscal 2016
Cost Alignment Plan
On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives that will be substantially implemented prior to the end of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms, as well as the disposal and abandonment of certain non-core businesses. As a result of the Cost Alignment Plan, we expect to record total pre-tax charges of approximately $250 million to $270 million, of which $256 million of pre-tax charges were recorded to date. The remaining charges under this program primarily consist of exit-related costs and accelerated depreciation and amortization related to our Distribution Solutions segment.
tax purposes.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
2019 Acquisition
We recorded restructuring charges of $13 million in 2018 and $14 million in 2017 including asset impairment and accelerated depreciation and amortization, which were primarily recorded within operating expenses within our Distribution Solutions segment. We recorded restructuring charges of $229 million primarily related to severance and employee-related costs, in which restructuring charges of $26 million were recorded in cost of sales and $203 million were recorded in operating expenses in 2016.
Restructuring charges for our Cost Alignment Plan for the year ended March 31, 2016 consisted of the following:
|
| | | | | | | | | | | | | | | |
| (In millions) | Distribution Solutions | | Technology Solutions | | Corporate | | Total |
Severance and employee-related costs, net (1) | $ | 147 |
| | $ | 44 |
| | $ | 16 |
| | $ | 207 |
|
| Exit-related costs | 3 |
| | 1 |
| | 1 |
| | 5 |
|
Asset impairments and accelerated depreciation and amortization (2) | 11 |
| | 6 |
| | — |
| | 17 |
|
| Total | $ | 161 |
| | $ | 51 |
| | $ | 17 |
| | $ | 229 |
|
| | | | | | | | |
| Cost of Sales | $ | 5 |
| | $ | 21 |
| | $ | — |
| | $ | 26 |
|
| Operating Expenses | 156 |
| | 30 |
| | 17 |
| | 203 |
|
| Total | $ | 161 |
| | $ | 51 |
| | $ | 17 |
| | $ | 229 |
|
| |
(1) | Severance and employee-related costs, net, include charges of $117 million and $90 million, for a total of $207 million, for a reduction in workforce and business process initiatives. |
| |
(2) | Asset impairments and accelerated depreciation and amortization charges primarily include impairments for capitalized software projects and software licenses due to abandonments. |
The following table summarizes the activity related to the restructuring liabilities associated with the Cost Alignment Plan for the years ended March 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| (In millions) | Distribution Solutions | | Technology Solutions | | Corporate | | Total |
| Balance, March 31, 2016 | $ | 156 |
| | $ | 45 |
| | $ | 21 |
| | $ | 222 |
|
| Net restructuring charges recognized | 19 |
| | (10 | ) | | 5 |
| | 14 |
|
| Non-cash charges | (10 | ) | | — |
| | 1 |
| | (9 | ) |
| Cash payments | (67 | ) | | (20 | ) | | (19 | ) | | (106 | ) |
| Other | (8 | ) | | (5 | ) | | (2 | ) | | (15 | ) |
Balance, March 31, 2017 (1) | $ | 90 |
| | $ | 10 |
| | $ | 6 |
| | $ | 106 |
|
| Net restructuring charges recognized | 13 |
| | — |
| | — |
| | 13 |
|
| Non-cash charges | — |
| | — |
| | — |
| | — |
|
| Cash payments | (36 | ) | | (4 | ) | | (5 | ) | | (45 | ) |
| Other | (3 | ) | | (6 | ) | | 4 |
| | (5 | ) |
Balance, March 31, 2018 (2) | $ | 64 |
| | $ | — |
| | $ | 5 |
| | $ | 69 |
|
| |
(1) | The reserve balance as of March 31, 2017 includes $71 million recorded in other accrued liabilities and $35 million recorded in other noncurrent liabilities on our consolidated balance sheet. |
| |
(2) | The reserve balance as of March 31, 2018 includes $39 million recorded in other accrued liabilities and $30 million recorded in other noncurrent liabilities on our consolidated balance sheet. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2018
Enterprise Information Solutions
Medical Specialties Distributors LLC (“MSD”)
On AugustJune 1, 2017, we entered into an agreement with a third party to sell our EIS business for $185 million, subject to adjustments for net debt and working capital. On October 2, 2017,2018, the transaction closed upon satisfaction of all closing conditions including the termination of the waiting period under U.S. antitrust laws. We received net cash proceeds of $169 million after $16 million of assumed net debt by the third party. We recognized a pre-tax gain of $109 million (after-tax gain of $30 million) upon the disposition of this business in the third quarter of 2018 within operating expenses in our Technology Solutions segment.
Equity Investment
On July 18, 2017, weCompany completed the sale of an equity method investment in our Distribution Solutions segment to a third party for total cash proceeds of $42 million and recognized a pre-tax gain of $43 million ($26 million after-tax) within other income, net, in the second quarter of 2018.
Fiscal 2017
There were no material divestitures in 2017.
Fiscal 2016
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 sold our nurse triage business within our Technology Solutions segment for net sale proceeds of $84 million and recorded a pre-tax gain of $51 million ($38 million after-tax) from the sale.
These divestitures did not meet the criteria to be reported as discontinued operations since they did not constitute a significant strategic business shift. Accordingly, pre-tax gains from 2018 and 2016 divestitures were recorded within continuing operations of our consolidated statements of operations. Pre- and after-tax income of divested businesses were not material for 2018 and 2016.
2018 Acquisitions
RxCrossroads
On January 2, 2018, we completed ourits acquisition of RxCrossroadsMSD for the net purchase consideration of $724$784 million, which was funded from cash on hand. RxCrossroadsMSD is headquartered in Louisville, Kentuckya leading national distributor of infusion and provides tailoredmedical-surgical supplies as well as a provider of biomedical services to pharmaceuticalalternate site and biotechnology manufacturers. This acquisition will enhance our existing commercialization solutions for manufacturers of branded, specialty, generic and biosimilar drugs.home health providers. The financial results of the acquired business areMSD have been included in our North America pharmaceutical distribution and services businessthe Company’s Consolidated Statements of Operations within our Distributionits Medical-Surgical Solutions segment since the acquisition date.
The provisional fair value of assets acquired and liabilities assumed as of the acquisition date excluding goodwill and intangibles, were $133 million and $43 million. Approximately $368 million of the preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. The preliminary purchase price allocation included acquired identifiable intangibles of $262 million primarily representing customer relationships and trade names with a weighted average life of 18 years. Amounts of assets and liabilities recognized as of the acquisition date are provisional and subject to change within the measurement period as our fair value assessments are finalized.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
CoverMyMeds LLC (“CMM”)
On April 3, 2017, we completed our acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. The cash consideration was initially paid into an escrow account prior to our 2017 fiscal year end, and was included in “Other Noncurrent Assets” within our consolidated balance sheet at March 31, 2017. CMM is headquartered in Columbus, Ohio and provides electronic prior authorization solutions to pharmacies, providers, payers, and pharmaceutical manufacturers. The financial results of CMM are included in our North America pharmaceutical distribution and services business within our Distribution Solutions segment since the acquisition date.
Pursuant to the agreement, McKesson may pay up to an additional $160 million of contingent consideration based on CMM’s financial performance for 2018 and 2019. As a result, we recorded a liability for this remaining contingent consideration at its estimated fair value of $113 million as of the acquisition date on our consolidated balance sheet. The contingent consideration was estimated using a Monte Carlo simulation, which utilized Level 3 inputs under the fair value measurement and disclosure guidance, including estimated financial forecasts. The contingent liability is re-measured at fair value at each reporting date until the liability is extinguished with changes in fair value being recorded in our consolidated statements of operations. As of March 31, 2018, the contingent consideration liability was $124 million. The initial fair value of this contingent consideration was a non-cash investing activity. In May 2018, we made a cash payment of $68 million representing the contingent consideration for 2018.
The fair value of assets acquired and liabilities assumed of CMM as of the acquisition date were finalized upon completion of the measurement period. Asperiod in the first quarter of March 31, 2018, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $53 million and $8 million. Approximately $870 million of the final purchase price allocation has been assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition.2020. The final purchase price allocation included acquired identifiable intangibles of $487$326 million primarily representing customer relationships with a weighted averageweighted-average life of 1718 years.
Other
During 2018, we also completed our acquisitions of intraFUSION, Inc. (“intraFUSION”), BDI Pharma, LLC (“BDI”) and Uniprix Group (“Uniprix”) for net cash consideration of $485 million, which was funded from cash on hand. intraFUSION is a healthcare management company based in Houston, Texas and provides services to physician office infusion centers. BDI is a plasma distributor headquartered in Columbia, South Carolina. We acquired the Uniprix banner which serves more than 300 independent pharmacies in Quebec, Canada. The adjusted provisional fair value of assets acquired and liabilities assumed for these acquisitions as of the acquisition date, excluding goodwill and intangibles, were $292 million and $154 million. Approximately $240 million of the adjusted preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. Included in the adjusted preliminary purchase price allocation for these acquisitions are acquired identifiable intangibles of $118 million primarily representing customer relationships. Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period until our fair value assessments are finalized. The financial results of intraFUSION, BDI and Uniprix are included within our Distribution Solutions segment since the acquisition dates.
The fair value of acquired intangibles from these acquisitions was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
2017 Acquisitions
In 2017, we completed our acquisitions of Rexall Health, a division of the Katz Group Canada Inc., Vantage, Biologics, Inc. (“Biologics”) and UDG Healthcare Plc (“UDG”), as further discussed below.
Rexall Health
On December 28, 2016, we completed our acquisition of Rexall Health which operates approximately 450 retail pharmacies in Canada, primarily in Ontario and Western Canada. The net cash purchase consideration of $2.9 billion Canadian dollars (or, approximately $2.1 billion) was funded from cash on hand. As part of the transaction, McKesson agreed to divest 27 local stores that the Competition Bureau of Canada (the “Bureau”) identified during its review of the transaction. During 2018, we completed the sales of all 27 stores and received net cash proceeds of $116 million Canadian dollars (or, approximately $94 million) from a third-party buyer. We also received $147 million Canadian dollars (or, approximately $119 million) in cash from the third-party seller of Rexall Health as the settlement of the post-closing purchase price adjustment related to these store divestitures. No gain or loss was recognized from the sales of these stores. On May 23, 2018, as the result of resolving certain indemnity and other claims, $126 million Canadian dollars (or, approximately $98 million) including accrued interest, was released to us from an escrow account. The receipt of this cash will be recorded as a settlement gain within operating expenses in our consolidated financial statements during the first quarter of 2019. The financial results of Rexall Health are included in our North America pharmaceutical distribution and services business within our Distribution Solutions segment since the acquisition date.
The fair value measurements of assets acquired and liabilities assumed of Rexall Health as of the acquisition date were finalized upon completion of the measurement period. At December 31, 2017, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $560 million and $210 million. Approximately $948 million of the final purchase price allocation was assigned to goodwill, which primarily reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. The final purchase price allocation included acquired identifiable intangibles of $872 million, net of intangibles classified as held for sale, primarily representing trade names with a weighted average life of 19 years and customer relationships with a weighted average life of 19 years.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Vantage & Biologics
On April 1, 2016, we acquired Vantage, which is headquartered in Manhattan Beach, California. Vantage provides comprehensive oncology management services, including radiation oncology, medical oncology, and other integrated cancer care services, through over 51 cancer treatment facilities in 13 states. The net purchase consideration of $515 million was funded from cash on hand. On April 1, 2016, we also acquired Biologics for a net purchase consideration of $692 million, which was funded from cash on hand. Biologics is one of the largest independent oncology-focused specialty pharmacies in the U.S., and is headquartered in Cary, North Carolina. Financial results for these acquisitions since the acquisition date are included in our consolidated statements of operations within our North America pharmaceutical distribution and services business, which is part of our Distribution Solutions segment. These acquisitions collectively enhance our specialty pharmaceutical distribution scale and oncology-focused pharmacy offerings, provide solutions for manufacturers and payers, and expand the scope of our community-based oncology and practice management services.
The following table summarizes the final amountsrecording of the fair values recognized forvalue of the assets acquired and liabilities assumed for these two acquisitionsthis acquisition as of the acquisition date, as well asincluding immaterial adjustments made during the measurement period:
|
| | | | | | | | | | | |
| (In millions) | Amounts Previously Recognized as of Acquisition Date (Provisional) (1) | | Measurement Period Adjustments | | Amounts Recognized as of Acquisition Date |
| Receivables | $ | 106 |
| | $ | (5 | ) | | $ | 101 |
|
| Other current assets, net of cash and cash equivalents acquired | 19 | | | — | | | 19 | |
| Goodwill | 1,219 | | | (87 | ) | | 1,132 | |
| Intangible assets | 136 | | | 79 | | | 215 | |
| Other long-term assets | 76 | | | 54 | | | 130 | |
| Current liabilities | (117 | ) | | (15 | ) | | (132 | ) |
| Other long-term liabilities | (80 | ) | | (89 | ) | | (169 | ) |
| Fair value of net assets, less cash and cash equivalents | 1,359 | | | (63 | ) | | 1,296 | |
| Less: Noncontrolling Interests | (152 | ) | | 63 | | | (89 | ) |
| Net assets acquired, net of cash and cash equivalents | $ | 1,207 |
| | $ | — |
| | $ | 1,207 |
|
| | | | | | | | | | | | | | | |
(1)(In millions) | As reported on Form 10-Q for | | | | Amounts Recognized as of the quarter ended June 30, 2016.Acquisition Date (1) |
| Receivables | | | | | $ | 112 | |
| Other current assets, net of cash and cash equivalents acquired | | | | | 71 | |
| Goodwill | | | | | 388 | |
| Intangible assets | | | | | 326 | |
| Other long-term assets | | | | | 56 | |
| Current liabilities | | | | | (72) | |
| Other long-term liabilities | | | | | (97) | |
| Net assets acquired, net of cash and cash equivalents | | | | | $ | 784 | |
At March 31, 2017, approximately $558 million and $574 million of the final purchase price allocations for Vantage and Biologics have been assigned to goodwill, which primarily reflects the expected future benefits of synergies upon integrating the businesses. Goodwill represents the excess of the purchase price and the fair value of noncontrolling interests over the fair value of the acquired net assets.
The final purchase price allocation included acquired identifiable intangibles of $22 million and $193 million for Vantage and Biologics. Acquired intangibles for Vantage primarily consist of $13 million of non-competition agreements with a weighted average life of 4 years, and for Biologics primarily consist of $170 million of trade names with a weighted average life of 9 years. The final fair value of Vantage’s noncontrolling interests(1)Final amounts as of the acquisition date was approximately $89 million, which represents the portion of net assets of Vantage’s consolidated entities that is not allocable to McKesson.
UDG
In the first quarter of 2017, we completed our acquisition of the pharmaceutical distribution businesses of UDG based in Ireland and the U.K. with a net purchase consideration of €380 million (or, approximately $431 million), which was funded with cash on hand. The acquired UDG businesses primarily provide pharmaceutical and other healthcare products to retail and hospital pharmacies. The acquisition of UDG expands our offerings and strengthens our market position in Ireland and the U.K. Financial results for UDG since the acquisition date are included in our results of operations within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The fair value measurements of assets acquired and liabilities assumed of UDG as of the acquisition date were finalized upon completion of the measurement period. At MarchMay 31, 2017, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $469 million and $340 million. Included in the final purchase price allocation are acquired identifiable intangibles of $120 million primarily comprised of customer relationships with a weighted average life of 10 years. At March 31, 2017, $181 million of the final purchase price allocation has been assigned to goodwill. Goodwill reflects the expected future benefits of synergies upon integrating the businesses. The net effect of the cumulative adjustments was an increase in goodwill of approximately $16 million from the provisional amounts as previously reported at June 30, 2016.2019.
The fair value of acquired intangibles was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.
Other Acquisitions
CoverMyMeds LLC (“CMM”)
On April 3, 2017, the Company completed its acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. Pursuant to the agreement, McKesson’s purchase consideration was subject to an additional $160 million of contingent consideration based on CMM’s financial performance for 2018 and 2019. Pursuant to the agreement, the Company paid additional contingent consideration of $69 million and $68 million in May 2019 and May 2018, respectively. As of March 31, 2020, the related liability was NaN.
During the three years presented, wethe Company also completed a number of other de minimis acquisitions within both of ourits operating segments. Financial results for ourthe Company’s business acquisitions have been included in ourthe Company’s 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.respective acquisition dates.
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.
| |
7. | Discontinued Operations |
On May 31, 2016, we completed the sale of our Brazilian pharmaceutical distribution business and recognized an after-tax loss of $113 million within discontinued operations in the first quarter of 2017 primarily for the settlement of certain indemnification matters as well as the release of the cumulative translation losses. We made a payment of approximately $100 million related to the sale of this business.
6. Share-Based Compensation
The results of discontinued operations for the years ended March 31, 2018, 2017 and 2016 were not material except for the loss recognized upon the disposition of our Brazilian business in 2017. As of March 31, 2018 and 2017, the carrying amounts of total assets and liabilities of discontinued operations were not material.
| |
8. | Share-Based Compensation |
We provideCompany provides share-based compensation to ourits employees, officers, and non-employee directors, including stock options, an employee stock purchase plan (“ESPP”), restricted stock units (“RSUs”), performance-based stock units (“PSUs”, formerly referred to as total shareholder return units or “TSRUs”), performance-based restricted stock units (“PeRSUs”), 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 were no material share-based compensation expenses capitalized as part of the cost of an asset in 2018, 2017 and 2016.
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) | 2021 | | 2020 | | 2019 |
Restricted stock unit awards (1) | $ | 137 | | | $ | 104 | | | $ | 75 | |
| Stock options | 4 | | | 7 | | | 12 | |
| Employee stock purchase plan | 10 | | | 8 | | | 8 | |
| Share-based compensation expense | 151 | | | 119 | | | 95 | |
Tax benefit for share-based compensation expense (2) | (23) | | | (18) | | | (12) | |
| Share-based compensation expense, net of tax | $ | 128 | | | $ | 101 | | | $ | 83 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
Restricted stock unit awards (1) | $ | 46 |
| | $ | 79 |
| | $ | 88 |
|
| Stock options | 14 |
| | 24 |
| | 22 |
|
| Employee stock purchase plan | 9 |
| | 12 |
| | 13 |
|
Share-based compensation expense (2) | 69 |
| | 115 |
| | 123 |
|
Tax benefit for share-based compensation expense (3) | (28 | ) | | (92 | ) | | (41 | ) |
| Share-based compensation expense, net of tax | $ | 41 |
| | $ | 23 |
| | $ | 82 |
|
| |
(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 expense, which was recorded due to employee terminations associated with the March 2016 Cost Alignment 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 2021, 2020, and 2019 included discrete income tax expense of $2 million, $2 million, and $4 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. Income tax expense for 2018 and 2017 included discrete income tax benefits of $8 million and $54 million related to the adoption of the amended accounting guidance on share-based compensation. |
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, PeRSUs, 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, 2018, 282021, 20 million shares remain available for future grant under the 2013 Stock Plan.
Stock Options
Stock options are granted with an exercise price at no less than the fair market value and those options granted under the stock plans generally have a contractual term of seven years and follow a four year vesting schedule.
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We use the Black-Scholes options-pricing model to estimate the fair value of our stock options. Once the fair value of an employee stock option is determined, current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The options-pricing model requires the use of various estimates and assumptions as follows:
Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market volatility. We believe that this market-based input provides a reasonable estimate of our future stock price movements and is consistent with employee stock option valuation considerations.
Expected dividend yield is based on historical experience and investors’ current expectations.
The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury rate in effect at the time of grant.
Expected life of the options is based primarily on historical employee stock option exercises and other behavior data and reflects the impact of changes in contractual life of current option grants compared to our historical grants.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Weighted-average assumptions used to estimate the fair value of employee stock options were as follows:
|
| | | | | |
| | Years Ended March 31, |
| | 2018 | | 2017 | | 2016 |
| Expected stock price volatility | 25% | | 21% | | 21% |
| Expected dividend yield | 0.8% | | 0.7% | | 0.4% |
| Risk-free interest rate | 1.7% | | 1.1% | | 1.4% |
| Expected life (in years) | 4.5 | | 4 | | 4 |
The following is a summary of stock options outstanding at March 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| $ | 76.55 |
| – | $ | 158.24 |
| | 1 | | 2 | | $ | 108.17 |
| | 1 | | $ | 106.05 |
|
| 158.25 |
| – | 239.93 |
| | 2 | | 4 | | 190.18 |
| | 1 | | 199.13 |
|
| | | | | 3 | | | | | | 2 | | |
The following table summarizes stock option activity during 2018:
|
| | | | | | | | | | | |
| (In millions, except per share data) | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (2) |
| Outstanding, March 31, 2017 | 4 | | $ | 145.76 |
| | 4 | | $ | 97 |
|
| Granted | 1 | | 157.45 |
| | | | |
| Cancelled | (1) | | 180.79 |
| | | | |
| Exercised | (1) | | 86.95 |
| | | | |
| Outstanding, March 31, 2018 | 3 | | $ | 161.27 |
| | 4 | | $ | 36 |
|
| | | | | | | | |
Vested and expected to vest (1) | 3 | | $ | 160.28 |
| | 4 | | $ | 35 |
|
| Vested and exercisable, March 31, 2018 | 2 | | 147.76 |
| | 2 | | 35 |
|
| |
(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) | 2018 | | 2017 | | 2016 |
| Weighted-average grant date fair value per stock option | $ | 34.24 |
| | $ | 32.19 |
| | $ | 44.04 |
|
| Aggregate intrinsic value on exercise | $ | 60 |
| | $ | 97 |
| | $ | 107 |
|
| Cash received upon exercise | $ | 77 |
| | $ | 54 |
| | $ | 47 |
|
| Tax benefits realized related to exercise | $ | 22 |
| | $ | 38 |
| | $ | 42 |
|
| Total fair value of stock options vested | $ | 20 |
| | $ | 18 |
| | $ | 18 |
|
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 15 |
| | $ | 21 |
| | $ | 20 |
|
| Weighted-average period in years over which stock option compensation cost is expected to be recognized | 2 |
| | 2 |
| | 2 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Restricted Stock Unit Awards
RSUs which entitle the holder to receive at the end of a vesting term a specified number of shares of the Company’s common stock are accounted for at fair value at the 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 compensation 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, 2018,2021, approximately 117,00082,000 RSUs for ourthe Company’s directors are vested.
PSUs are conditional upon the attainment of market and performance objectives over a specified period. The number of vested PSUs is assessed at the end of a three-year performance period upon attainment of meeting certain earnings per share targets, average return on invested capital, and for certain participants, total shareholder return relative to a peer group of companies 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 the 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 generally three years. Expense is attributed to the requisite service period on a straight-line basis based on the fair value of the PSUs, adjusted for the performance modifier at the end of each reporting period. For PSUs that are designated as equity awards, the fair value is measured at the grant date. For PSUs that are eligible for cash settlement and designated as liability awards, the Company re-measures the fair value at the end of each reporting period and adjusts a corresponding liability in its Consolidated Balance Sheets for changes in fair value.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
PeRSUs are RSUsawards for which the number of RSUs awarded is conditional upon the attainment of one or more performance objectives over a specified period. Each year,All outstanding PeRSU awards have completed the Compensation Committee approves the target number of PeRSUs representing the base number of awards that could be granted if performance goalsperiod and are attained. PeRSUs arenow classified and accounted for as variable awards untilRSUs. The Company did 0t grant any PeRSUs during 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 awardedyears ended March 31, 2021 and expected to vest, and the market price of the Company’s common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PeRSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted and classified as RSUs and accounted for on that basis. We recognize compensation expense for these awards on a straight-line basis over the requisite aggregate service period of generally four years.
TSRUs replaced PeRSUs for our executive officers beginning in 2015. The number of vested TSRUs is assessed at the end of a three-year performance period and is conditioned upon attainment of a total shareholder return metric relative to a peer group of companies. We use the Monte Carlo simulation model to measure the fair value of TSRUs. TSRUs have a requisite service period of approximately three years. Expense is attributed to the requisite service period on a straight-line basis based on the fair value of the TSRUs. For TSRUs that are designated as equity awards, the fair value is measured at the grant date. For TSRUs that are eligible for cash settlement and designated as liability awards, we remeasure 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.2020.
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, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Expected stock price volatility | 29% | | 23% | | 18% | Expected stock price volatility | 36 | % | | 30 | % | | 31 | % |
| Expected dividend yield | 0.8% | | 0.7% | | 0.4% | Expected dividend yield | 1.1 | % | | 1.3 | % | | 0.9 | % |
| Risk-free interest rate | 1.5% | | 1.1% | | 0.9% | Risk-free interest rate | 0.2 | % | | 2.2 | % | | 2.6 | % |
| Expected life (in years) | 3 | | 3 | | 3 | Expected life (in years) | 3 | | 3 | | 3 |
The following table summarizes activity for restricted stock unit awards (RSUs, PeRSUs,PSUs, and TSRUs)PeRSUs) during 2018:2021:
|
| | | | | |
| (In millions, except per share data) | Shares | | Weighted- Average Grant Date Fair Value Per Share |
| Nonvested, March 31, 2017 | 2 | | $ | 188.54 |
|
| Granted | 1 | | 159.49 |
|
| Vested | (1) | | 172.02 |
|
| Nonvested, March 31, 2018 | 2 | | $ | 176.74 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | | |
| (In millions, except per share data) | Shares | | Weighted-
Average
Grant Date Fair
Value Per Share |
| Nonvested, March 31, 2020 | 3 | | $ | 135.57 | |
| Granted | 1 | | 155.47 | |
| Cancelled | 0 | | 133.70 | |
| Vested | (1) | | 147.63 | |
| Nonvested, March 31, 2021 | 3 | | $ | 142.13 | |
The following table provides data related to restricted stock unit award activity:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Total fair value of shares vested | $ | 79 | | | $ | 67 | | | $ | 59 | |
| Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax | $ | 147 | | | $ | 155 | | | $ | 119 | |
| Weighted-average period in years over which restricted stock unit award cost is expected to be recognized | 2 | | 3 | | 2 |
Stock Options
Stock options are granted with an exercise price at no less than the fair market value and those options granted under the stock plans generally have a contractual term of seven years and follow a four-year vesting schedule.
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Total fair value of shares vested | $ | 156 |
| | $ | 109 |
| | $ | 104 |
|
| Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax | $ | 97 |
| | $ | 99 |
| | $ | 144 |
|
| Weighted-average period in years over which restricted stock unit award cost is expected to be recognized | 2 |
| | 2 |
| | 2 |
|
ESPP | | | | | | | | | | |
| | | | Year Ended
March 31, 2019 |
| | | |
Expected stock price volatility (2) | | | | 26 | % |
Expected dividend yield (3) | | | | 0.9 | % |
Risk-free interest rate (4) | | | | 2.8 | % |
Expected life (in years) (5) | | | | 4.6 |
(1)The Company did 0t grant any stock options during the years ended March 31, 2021 and 2020.
(2)The computation of expected volatility was based on a combination of the historical volatility of the Company’s common stock and implied market volatility. The Company believes this market-based input provides a reasonable estimate of its future stock price movements and is consistent with employee stock option valuation considerations.
(3)Expected dividend yield is based on historical experience and investors’ current expectations.
(4)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 grant date.
(5)The expected life of the options is based primarily on historical employee stock option exercises and other behavioral data and reflects the impact of changes in the contractual life of current option grants compared to the Company’s historical grants.
The following is a summary of stock options outstanding at March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| $ | 118.41 | | – | $183.20 | | 1 | | | 3 | | $ | 166.18 | | | 1 | | | $ | 171.38 | |
| 183.20 | | – | 237.86 | | 1 | | | 1 | | 216.23 | | | 1 | | | 216.23 | |
| | | | 2 | | | | | | | 2 | | | |
The following table summarizes stock option activity during 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share data) | Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term (Years) | | Aggregate Intrinsic Value (2) |
| Outstanding, March 31, 2020 | 2 | | $ | 180.48 | | | 3 | | $ | 1 | |
| Granted | 0 | | 0 | | | | | |
| Cancelled | 0 | | 187.12 | | | | | |
| Exercised | 0 | | 153.51 | | | | | |
| Outstanding, March 31, 2021 | 2 | | $ | 183.29 | | | 2 | | $ | 36 | |
Vested and expected to vest (1) | 2 | | $ | 183.38 | | | 2 | | $ | 35 | |
| Vested and exercisable, March 31, 2021 | 2 | | 189.20 | | | 2 | | 24 | |
(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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table provides data related to stock option activity:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions, except per share data) | 2021 | | 2020 | | 2019 |
| Weighted-average grant date fair value per stock option | $ | 0 | | | $ | 0 | | | $ | 34.98 | |
| Aggregate intrinsic value on exercise | $ | 5 | | | $ | 17 | | | $ | 16 | |
| Cash received upon exercise | $ | 38 | | | $ | 66 | | | $ | 29 | |
| Tax benefits realized related to exercise | $ | 4 | | | $ | 4 | | | $ | 4 | |
| Total fair value of stock options vested | $ | 10 | | | $ | 16 | | | $ | 16 | |
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 2 | | | $ | 6 | | | $ | 15 | |
| Weighted-average period in years over which stock option compensation cost is expected to be recognized | 2 | | 2 | | 2 |
Employee Stock Purchase Plan
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 for all the years presented. We recognizeThe Company recognizes costs for employer matching contributions as ESPP expense over the relevant purchase period. Shares issued under the ESPP were not material in 2018, 2017,2021, 2020, and 2016.2019. At March 31, 2018, 32021, 2 million shares remain available for issuance.
7. Other Income, Net
Other income, net consists of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Interest income | $ | 12 | | | $ | 49 | | | $ | 39 | |
Equity in earnings, net (1) | 48 | | | 36 | | | 43 | |
Net gains on investments in equity securities (2) | 133 | | | 17 | | | 23 | |
Actuarial losses from pension plans (3) | 0 | | | (127) | | | 0 | |
Gain from sale of equity method investment (4) | 0 | | | 0 | | | 56 | |
| Other, net | 30 | | | 37 | | | 21 | |
| Total | $ | 223 | | | $ | 12 | | | $ | 182 | |
(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 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 and were included within Corporate expenses, net. Refer to Financial Note 17, “Fair Value Measurements,” and to Financial Note 22, “Segments of Business.”
(3)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 15, “Pension Benefits.”
(4)Represents a gain from the sale of an equity investment to a third party included in RxTS during 2019.
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | 2017 | 2016 |
| Interest income | $ | 48 |
| | $ | 29 |
| | $ | 18 |
|
Equity in earnings, net (1) | 32 |
| | 30 |
| | 15 |
|
Gain from sale of equity method investment (2) | 43 |
| | — |
| | — |
|
Other, net (1) | 7 |
| | 31 |
| | 25 |
|
| Total | $ | 130 |
| | $ | 90 |
| | $ | 58 |
|
| |
(1) | Primarily recorded within our Distribution Solutions segment. |
| |
(2) | Amount represented a pre-tax gain from the sale of an equity method investment from our Distribution Solutions segment to a third party during the second quarter of 2018. |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Income from continuing operations before income taxes | | | | | |
| U.S. | $ | 1,175 |
| | $ | 5,772 |
| | $ | 2,319 |
|
| Foreign | (936 | ) | | 1,119 |
| | 931 |
|
| Total income from continuing operations before income taxes | $ | 239 |
| | $ | 6,891 |
| | $ | 3,250 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
8. Income Taxes
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Income (loss) from continuing operations before income taxes | | | | | |
| U.S. | $ | (6,019) | | | $ | 216 | | | $ | 1,512 | |
| Foreign | 985 | | | 928 | | | (902) | |
| Income (loss) from continuing operations before income taxes | $ | (5,034) | | | $ | 1,144 | | | $ | 610 | |
Income tax expense (benefit) related to continuing operations consists of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Current | | | | | |
| Federal | $ | (15) | | | $ | 170 | | | $ | (20) | |
| State | 47 | | | 48 | | | 35 | |
| Foreign | 181 | | | 142 | | | 152 | |
| Total current | 213 | | | 360 | | | 167 | |
| | | | | |
| Deferred | | | | | |
| Federal | (562) | | | (204) | | | 223 | |
| State | (204) | | | (105) | | | 44 | |
| Foreign | (142) | | | (33) | | | (78) | |
| Total deferred | (908) | | | (342) | | | 189 | |
| Income tax expense (benefit) | $ | (695) | | | $ | 18 | | | $ | 356 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Current | | | | | |
| Federal | $ | 577 |
| | $ | 524 |
| | $ | 658 |
|
| State | 33 |
| | 86 |
| | 96 |
|
| Foreign | 205 |
| | 122 |
| | 90 |
|
| Total current | 815 |
| | 732 |
| | 844 |
|
| | | | | | |
| Deferred | | | | | |
| Federal | (767 | ) | | 767 |
| | 95 |
|
| State | 17 |
| | 164 |
| | 42 |
|
| Foreign | (118 | ) | | (49 | ) | | (73 | ) |
| Total deferred | (868 | ) | | 882 |
| | 64 |
|
| Income tax (benefit) expense | $ | (53 | ) | | $ | 1,614 |
| | $ | 908 |
|
During 2018, income tax benefit was $53 million and during 2017 and 2016 income tax expenses were $1,614 million and $908 million related to continuing operations.
OurThe Company reported an income tax benefit rate was 22.2%of 13.8% in 2018 and income2021. Income tax expense rates were 23.4%,1.6% and 27.9%58.4% in 20172020 and 2016.2019, respectively. Fluctuations in ourthe Company’s reported income tax rates are primarily due to changethe impact of opioid-related claims of $8.1 billion ($6.8 billion after-tax) in tax laws, including2021, the recently enacted 2017 Tax Act,impact of the Change Healthcare joint venture divestiture in 2020, the impact of nondeductible impairment charges in 2019, and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 31.6% for 2018 and 35% for 2017 and 201621% to the income before income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Income tax expense (benefit) at federal statutory rate | $ | (1,057) | | | $ | 240 | | | $ | 128 | |
| State income taxes, net of federal tax benefit | (206) | | | (41) | | | 70 | |
| Tax effect of foreign operations | (77) | | | (81) | | | (86) | |
| Unrecognized tax benefits and settlements | 41 | | | (7) | | | 20 | |
| Non-deductible goodwill | 14 | | | 7 | | | 357 | |
| Opioid-related litigation and claims | 715 | | | 0 | | | 0 | |
| Net tax benefit on intellectual property transfer | (105) | | | 0 | | | (42) | |
Tax-free gain on investment exit (1) | 0 | | | (87) | | | 0 | |
| Impact of change in U.S. tax rate on temporary differences | 0 | | | 0 | | | (81) | |
| | | | | |
| Capital loss carryback | 0 | | | (19) | | | 0 | |
Other, net (2) | (20) | | | 6 | | | (10) | |
| Income tax expense (benefit) | $ | (695) | | | $ | 18 | | | $ | 356 | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Income tax expense at federal statutory rate | $ | 75 |
| | $ | 2,411 |
| | $ | 1,137 |
|
| State income taxes net of federal tax benefit | 50 |
| | 153 |
| | 92 |
|
| Tax effect of foreign operations | (146 | ) | | (326 | ) | | (295 | ) |
| Unrecognized tax benefits and settlements | 454 |
| | 57 |
| | (14 | ) |
| Non-deductible goodwill | 585 |
| | 106 |
| | — |
|
| Share-based compensation | (8 | ) | | (54 | ) | | — |
|
| Net tax benefit on intellectual property transfer | (178 | ) | | (137 | ) | | — |
|
| Rate differential on gain from Change Healthcare Net Asset Exchange | — |
| | (587 | ) | | — |
|
| Remeasurement of U.S. deferred taxes | (1,324 | ) | | — |
| | — |
|
| Transition tax on foreign earnings | 457 |
| | — |
| | — |
|
Other, net (1) | (18 | ) | | (9 | ) | | (12 | ) |
| Income tax (benefit) expense | $ | (53 | ) | | $ | 1,614 |
| | $ | 908 |
|
| |
(1) | Our 2018 effective tax rate was impacted by other favorable U.S. federal permanent differences including research and development credits of $11 million. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2018, as a result of the 2017 Tax Act, we recognized a provisional tax benefit of $1,324 million due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate and a provisional tax expense of $457 million for the one-time tax imposed on certain accumulated earnings and profits (“E&P”) of our foreign subsidiaries.
Our reported income tax benefit rate for 2018 was unfavorably impacted by non-cash pre-tax charges of $1,738 million to impair the carrying value of goodwill related to our McKesson Europe and Rexall Health reporting units within our Distribution Solutions segment, given that no tax benefit was recognized for these charges. Our reported income tax expense rate for 2017 was unfavorably impacted by the non-cash pre-tax charge of $290 million to impair the carrying value of goodwill related to our EIS business within our Technology Solutions segment, given that the majority of this charge was not deductible for income tax purposes. (1)Refer to Financial Note 3, “Goodwill Impairment Charges,2, “Investment in Change Healthcare Joint Venture,” for more information.additional information regarding the separation of the Change Healthcare JV.
On December(2)The Company’s effective tax rates were impacted by other favorable U.S. federal permanent differences including research and development credits of $5 million in 2021 and $7 million in each of 2020 and 2019.
The Company’s reported income tax rate for 2021 was impacted by the charge for pending and future opioid-related claims of $8.1 billion ($6.8 billion after-tax), as described further in Financial Note 19, 2016, we“Commitments and Contingent Liabilities.” The Company recorded a deferred tax benefit of $1.3 billion, which is net of certain non-deductible expenses and an unrecognized tax benefit of $455 million.
During 2021 and 2019, the Company sold various software relating to our Technology Solutions businessintellectual property between wholly ownedwholly-owned legal entities within the McKesson group that are based in different tax jurisdictions. TheIn both instances, the transferor entity recognized a gain on the sale of assets thatwhich was not subject to income tax in its local jurisdiction; such gain wasgains were eliminated upon consolidation. A McKesson entity based in the U.S. was the recipientThe acquiring entities of the software and isintellectual property were entitled to amortize the fair valuepurchase price of the assets for book and tax purposes. TheIn accordance with ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” discrete tax benefit associated with the amortizationbenefits of these assets is being recognized over the tax lives of the assets. As a result, we recognized a net tax benefit of $178$105 million and $137$42 million in 2018were recognized for 2021 and 2017.2019, respectively, with a corresponding increase to a deferred tax assets for the temporary difference arising from the buyer’s excess tax basis.
On March 1, 2017, we contributed assets to10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare JV as described in Financial Note 2, “Healthcare Technology Net Asset Exchange”. While“Investment in Change Healthcare Joint Venture.” The Company’s reported income tax expense rate for 2020 was favorably impacted by this transaction given that it was predominantly structured asintended to generally be a tax free asset contributiontax-free split-off for U.S. federal income tax purposes under Section 721(a) ofpurposes. In the Internal Revenue Code, we recorded tax expense of $929 million on the gain. The tax expense was primarily driven by the recognition of a deferred tax liability on the excess book over tax basis in our equity investment in Change Healthcare.
In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all windfalls and shortfalls related to employee share-based compensation arrangements are recognized within income tax expense. We elected to early adopt this amended guidance in the firstfourth quarter of 2017. The primary impact of2020, the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than APIC. As a result, weCompany recognized a net tax benefitgain for financial reporting purposes of $8$414 million and $54 million in 2018 and 2017.
In 2016, we recognized a $19 million tax benefit due to a reduction in our deferred tax liabilities as a result of enacted tax law changes in certain foreign jurisdictions and a $25 million tax benefit associated with the U.S. Tax Court’s decision in Altera Corp. v. Commissioner related to the treatmentseparation transaction.
The Company’s reported income tax expense rate for 2020 was unfavorably impacted by non-cash charges of share-based compensation$275 million to remeasure the carrying value of assets and liabilities held for sale related to the formation of a new German wholesale joint venture within the Company’s International segment. Refer to Financial Note 3, “Held for Sale,” for more information on this transaction which closed in the third quarter of 2021.
The Company’s reported income tax expense in an intercompany cost-sharing agreement.rate for 2019 was unfavorably impacted by non-cash charges of $1.8 billion to impair the carrying value of goodwill for its International segment, given that these charges are generally not deductible for tax purposes. Refer to Financial Note 12, “Goodwill and Intangible Assets, Net,” for more information.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred tax balances consisted of the following:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2021 | | 2020 |
| Assets | | | |
| Receivable allowances | $ | 69 | | | $ | 72 | |
| Opioid-related litigation and claims | 724 | | | 0 | |
| Compensation and benefit related accruals | 305 | | | 331 | |
| Net operating loss and credit carryforwards | 974 | | | 828 | |
| Lease obligations | 539 | | | 482 | |
| Other | 115 | | | 109 | |
| Subtotal | 2,726 | | | 1,822 | |
| Less: valuation allowance | (864) | | | (833) | |
| Total assets | 1,862 | | | 989 | |
| Liabilities | | | |
| Inventory valuation and other assets | (1,939) | | | (1,947) | |
| Fixed assets and systems development costs | (196) | | | (202) | |
| Intangibles | (411) | | | (531) | |
| | | |
| Lease right-of-use assets | (505) | | | (449) | |
| Other | (37) | | | (56) | |
| Total liabilities | (3,088) | | | (3,185) | |
| Net deferred tax liability | $ | (1,226) | | | $ | (2,196) | |
| | | |
| Long-term deferred tax asset | $ | 185 | | | $ | 59 | |
| Long-term deferred tax liability | (1,411) | | | (2,255) | |
| Net deferred tax liability | $ | (1,226) | | | $ | (2,196) | |
|
| | | | | | | |
| | March 31, |
| (In millions) | 2018 | | 2017 |
| Assets | | | |
| Receivable allowances | $ | 58 |
| | $ | 124 |
|
| Compensation and benefit related accruals | 345 |
| | 593 |
|
| Net operating loss and credit carryforwards | 811 |
| | 594 |
|
| Long-term contractual obligations | 59 |
| | 107 |
|
| Other | 279 |
| | 241 |
|
| Subtotal | 1,552 |
| | 1,659 |
|
| Less: valuation allowance | (751 | ) | | (503 | ) |
| Total assets | 801 |
| | 1,156 |
|
| Liabilities | | | |
| Inventory valuation and other assets | (1,869 | ) | | (2,818 | ) |
| Fixed assets and systems development costs | (158 | ) | | (224 | ) |
| Intangibles | (644 | ) | | (921 | ) |
| Change Healthcare Equity Investment | (814 | ) | | (773 | ) |
| Other | (71 | ) | | (70 | ) |
| Total liabilities | (3,556 | ) | | (4,806 | ) |
| Net deferred tax liability | $ | (2,755 | ) | | $ | (3,650 | ) |
| | | | |
| Long-term deferred tax asset | 49 |
| | 28 |
|
| Long-term deferred tax liability | (2,804 | ) | | (3,678 | ) |
| Net deferred tax liability | $ | (2,755 | ) | | $ | (3,650 | ) |
We assessThe 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 $751$864 million and $503$833 million in 20182021 and 2017. The increase of $248 million in valuation allowances in the current year2020, respectively, and primarily relate primarily to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. The increase in the valuation allowance of $31 million in the current year relates primarily to 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 $111 million, $2,787 million$2.4 billion, $3.9 billion, and $1,806 million.$2.2 billion at March 31, 2021. Federal and state net operating losses will expire at various dates from 20192022 through 2039.2041. Substantially all ourits foreign net operating losses have indefinite lives. In addition, we havethe Company has foreign capital loss carryforwards of $756$783 million with indefinite lives.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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) | 2018 | | 2017 | | 2016 |
| Unrecognized tax benefits at beginning of period | $ | 486 |
| | $ | 555 |
| | $ | 616 |
|
| Additions based on tax positions related to prior years | 47 |
| | 7 |
| | 116 |
|
| Reductions based on tax positions related to prior years | (124 | ) | | (67 | ) | | (62 | ) |
| Additions based on tax positions related to current year | 778 |
| | 105 |
| | 28 |
|
| Reductions based on settlements | (7 | ) | | (113 | ) | | (141 | ) |
| Reductions based on the lapse of the applicable statutes of limitations | — |
| | — |
| | (6 | ) |
| Exchange rate fluctuations | 3 |
| | (1 | ) | | 4 |
|
| Unrecognized tax benefits at end of period | $ | 1,183 |
| | $ | 486 |
| | $ | 555 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Unrecognized tax benefits at beginning of period | $ | 958 | | | $ | 1,052 | | | $ | 1,183 | |
| Additions based on tax positions related to prior years | 53 | | | 20 | | | 78 | |
| Reductions based on tax positions related to prior years | (5) | | | (168) | | | (234) | |
| Additions based on tax positions related to current year | 755 | | | 82 | | | 68 | |
| Reductions based on settlements | (8) | | | (8) | | | (13) | |
| Reductions based on the lapse of the applicable statutes of limitations | (12) | | | (13) | | | (25) | |
| Exchange rate fluctuations | 13 | | | (7) | | | (5) | |
| Unrecognized tax benefits at end of period | $ | 1,754 | | | $ | 958 | | | $ | 1,052 | |
As of March 31, 2018, we2021, the Company had $1,183 million$1.8 billion of unrecognized tax benefits, of which $1,042 million$1.3 billion would reduce income tax expense and the effective tax rate, if recognized. The increase in unrecognized tax benefits in 20182021 compared to 20172020 is primarily attributable to provisional amounts relatinguncertainty 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 application of certain provisionsactual amount of the 2017 Tax Act, partially offset by atax benefit related to uncertain tax positions may differ from these estimates. Refer to Financial Note 19, “Commitments and Contingent Liabilities,” for more information. The decrease in unrecognized tax benefit duebenefits in 2020 compared to 2019 is primarily attributable to the favorable resolution of the Internal Revenue Services (“IRS”) relating to the fiscal years 2010 through 2012. an outstanding California tax refund claim which decreased unrecognized tax benefits by $91 million.
During the next twelve months, we do not expect any material reduction in ourit is reasonably possible that the Company’s unrecognized tax benefits.benefit may decrease by as much as $93 million due to settlements of tax examinations and statute of limitations 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 benefits of $1 million and $6 million in 2018 and 2017 and income tax expense of $12$9 million, $23 million, and $33 million in 2016, related to2021, 2020, and 2019, respectively, representing interest and penalties, in our consolidated statementsits Consolidated Statements of operations. The income tax benefit for interest and penalties recognized in 2018 and 2017 was primarily due to concluding certain tax authority examinations and lapses of statutes of limitations.Operations. As of March 31, 20182021 and 2017, we had2020, it accrued $37$101 million and $45$91 million cumulatively in interest and penalties on unrecognized tax benefits.
We fileThe Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. DuringThe Internal Revenue Service (“IRS”) is currently examining the third quarter ofCompany’s U.S. corporation income tax returns for 2018 we signed the Revenue Agent’s Report from the U.S. IRS relating to their audit of the fiscal years 2010 through 2012 and recorded a $39 million tax benefit due to the favorable resolution of various uncertain tax positions for those years. During the first quarter of 2017, we reached an agreement with the IRS to settle all outstanding issues relating to the fiscal years 2007 through 2009 without a material impact to our provision for income taxes. We are subject to audit by the IRS for fiscal years 2013 through the current fiscal year. We are2019. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 20102013 through the current fiscal year.
On December 22, 2017, the U.S. government enacted comprehensive new tax legislation under the Tax Cuts and Jobs Act. The 2017 Tax Act makes broad and complex changes to the U.S. tax code that affect our fiscal year 2018 in multiple ways, including but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; and (2) requiring companies to pay a one-time tax on certain unrepatriatedUndistributed earnings of the Company’s foreign subsidiaries.
The 2017 Tax Act also establishes new tax provisions that will affect our fiscal year 2019, including, but not limited to, (1) eliminating the corporate alternative minimum tax; (2) creating the base erosion anti-abuse tax (“BEAT”); (3) establishing new limitations on deductible interest expense and certain executive compensation; (4) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (6) changing rules related to uses and limitationsoperations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
On December 22, 2017, the SEC staff issued guidance on income tax accounting for the 2017 Tax Act, which was further incorporated into the U.S. GAAP guidance on income taxes in the fourth quarter of 2018. Refer to Financial Note 1, “Significant Accounting Policies - Recently Adopted Accounting Pronouncements.”
Regarding the new GILTI tax rules, which apply to fiscal years beginning after December 31, 2017, we are allowed to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred or (2) reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in the company’s current measurement of deferred taxes. Our analysis of the new GILTI rules and how they may impact us is incomplete. Accordingly, we have not made a policy election regarding the treatment of the GILTI tax. We will finalize our evaluation of the GILTI tax rules during the measurement period.
Although our accounting for the impactapproximately $6.0 billion were considered indefinitely reinvested. Following enactment of the 2017 Tax Act, the repatriation of cash to the U.S. is incomplete, we have made reasonable estimates and recorded provisional amounts as follows:
Reductiongenerally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the U.S. federal corporate tax rate: The 2017 Tax Act reduces the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. U.S. tax law stipulates that our fiscal year 2018 iscould be subject to a blended tax rate of 31.6 percent, which is based on the pro rata number of days in the fiscal year before and after the effective date. For the fiscal year 2019, the tax rate will be 21 percent. As a result, we have remeasured certain deferred tax assets and deferred tax liabilities and recorded a provisional net tax benefit of $1,324 million, mainly driven by a decrease in our deferred tax liabilities for inventories and investments. During the fourth quarter of 2018, this provisional tax benefit increased by $68 million mainly due to changes to the state effect of adjustments made to federal temporary differences. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, it may be affected by, among other items, changes to estimates the Company has made to calculate our existing temporary differences.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deemed Repatriation Transition Tax (“Transition Tax”): The 2017 Tax Act imposes a tax on certain accumulated E&P of our foreign subsidiaries. We were able to make a reasonable estimate of the impact of the new tax and recorded a provisional tax expense of $457 million. During the fourth quarter of 2018, this provisional tax expense increased by $23 million mainly due to changes in estimated amounts of post-1986 E&P of the relevant subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. This estimate may change as we gather additional information to more precisely compute the amount of tax.
Prior to the 2017 Tax Act, undistributed earnings of our foreign operations totaling $5,854 million were considered indefinitely reinvested. While the Company has accrued the 2017 Tax Act’s new tax on these earnings, we were unable to determine a reasonable estimate of the remaining tax liability, if any, for its remaining outside basis differences or assess how the 2017 Tax Act will impact the Company's existing assertion of indefinite reinvestment. As such, no change has been made with respect to this assertion for the year ended March 31, 2018. The Company will complete its analysis of the impact of the 2017 Tax Act on our indefinite reinvestment assertion and record amounts, such asapplicable foreign withholding taxes and state income taxes, if necessary, duringtaxes. The Company may remit foreign earnings to the measurement period.U.S. to the extent it is tax efficient to do so. It does not expect the tax impact from remitting these earnings to be material.
Our accounting for the income tax effects of the 2017 Tax Act will be completed during the measurement period9. Redeemable Noncontrolling Interests and we will record any necessary adjustments in the period such adjustments are identified.Noncontrolling Interests
| |
11. | Redeemable Noncontrolling Interests and Noncontrolling Interests |
Redeemable Noncontrolling Interests
OurThe Company’s redeemable noncontrolling interests primarily relate to ourits 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 and a one-time guaranteed dividend for calendar year 2014 of €0.83 per share reduced accordingly for any dividend paid by McKesson Europe in relation to that year.share. As a result, during 2018, 20172021, 2020, and 2016, we2019, the Company recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $43 million, $44$42 million, and $44 million.$45 million, respectively. All amounts were recorded in our consolidated statements“Net income attributable to noncontrolling interests” in the Company’s Consolidated Statements of operations within the caption, “Net Income Attributable to Noncontrolling Interests,”Operations and the corresponding liability balance was recorded within otherin “Other accrued liabilities on our consolidated balance sheets.liabilities” in the Company’s Consolidated Balance Sheets.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have 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”). The exercise of the Put Right will reduce the balance of redeemable noncontrolling interests. During 2018, we2021, the Company paid $50$49 million to purchase 1.91.8 million shares of McKesson Europe through the exercises of the Put Right by the noncontrolling shareholders, whichshareholders. This decreased the carrying value of redeemablethe noncontrolling interests by $53 million.$49 million, and the associated effect of the increase in the Company’s ownership interest on its equity of $3 million was recorded as a net increase to McKesson’s stockholders paid-in capital. During 2020 and 2019, there were no material exercises of the Put Right. The balance of redeemablethe associated liability for Redeemable noncontrolling interests is reported as 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. The Redeemable noncontrolling interest is also adjusted each period for the proportion of other comprehensive income, primarily due to changes in foreign currency exchange rates, attributable to the noncontrolling shareholders. At March 31, 20182021 and 2017,2020, the carrying value of redeemable noncontrolling interests of $1.46$1.3 billion and $1.33$1.4 billion, respectively, exceeded the maximum redemption value of $1.35$1.2 billion and $1.21 billion.$1.2 billion, respectively. At March 31, 20182021 and 2017, we2020, the Company owned approximately 77%78% and 76%77%, respectively, of McKesson Europe’s outstanding common shares.
Appraisal Proceedings
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of McKesson Europe initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court (the “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,Proceedings, such amount will bewas paid as specified currently in the Domination Agreement. If any such Appraisal Proceedings result in an adjustment, we would be required to make certain additional payments for any shortfall to all McKesson Europe noncontrolling shareholders who previously receivedOn September 19, 2018, the 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 shall remain €22.99, thereby rejecting the lower court’s increase, and the recurring compensation shall remain €0.83 per share.
Noncontrolling Interests
Noncontrolling interests represent third-party equity interests in ourthe Company’s consolidated entities primarily related to ClarusONE and Vantage, which were $253$196 million and $178$217 million at March 31, 20182021 and 2017 on our consolidated balance sheets.2020, respectively, in the Company’s Consolidated Balance Sheets. During 2018, 20172021, 2020, and 2016, we2019, respectively, the Company allocated a total of $187$156 million, $39$178 million, and $8$176 million of net income to noncontrolling interests.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Changes in redeemable noncontrolling interests and noncontrolling interests for the years ended March 31, 20182021, 2020, and 20172019 were as follows:
| | | | | | | | | | | | |
| (In millions) | |
Noncontrolling
Interests | | Redeemable
Noncontrolling
Interests |
| Balance, March 31, 2018 | | $ | 253 | | | $ | 1,459 | |
| Net income attributable to noncontrolling interests | | 176 | | | 45 | |
| Other comprehensive loss | | 0 | | | (66) | |
| Reclassification of recurring compensation to other accrued liabilities | | — | | | (45) | |
| Payments to noncontrolling interests | | (184) | | | 0 | |
| Other | | (52) | | | 0 | |
| Balance, March 31, 2019 | | 193 | | | 1,393 | |
| Net income attributable to noncontrolling interests | | 178 | | | 42 | |
| Other comprehensive income | | 0 | | | 3 | |
| Reclassification of recurring compensation to other accrued liabilities | | — | | | (42) | |
| Payments to noncontrolling interests | | (154) | | | 0 | |
| Other | | 0 | | | 6 | |
| Balance, March 31, 2020 | | 217 | | | 1,402 | |
| Net income attributable to noncontrolling interests | | 156 | | | 43 | |
| Other comprehensive loss | | 0 | | | (79) | |
| Reclassification of recurring compensation to other accrued liabilities | | — | | | (43) | |
| Payments to noncontrolling interests | | (177) | | | 0 | |
| Exercises of put right | | — | | | (49) | |
| Other | | 0 | | | (3) | |
| Balance, March 31, 2021 | | $ | 196 | | | $ | 1,271 | |
10. Earnings per Common Share
|
| | | | | | |
| (In millions) |
Noncontrolling Interests | Redeemable Noncontrolling Interests |
| Balance, March 31, 2016 | $ | 84 |
| $ | 1,406 |
|
| Net income attributable to noncontrolling interests | 39 |
| 44 |
|
| Other comprehensive loss | — |
| (78 | ) |
| Reclassification of recurring compensation to other accrued liabilities | — |
| (44 | ) |
Purchases of noncontrolling interests (1) | 89 |
| — |
|
| Other | (34 | ) | (1 | ) |
| Balance, March 31, 2017 | $ | 178 |
| $ | 1,327 |
|
| Net income attributable to noncontrolling interests | 187 |
| 43 |
|
| Other comprehensive income | — |
| 185 |
|
| Reclassification of recurring compensation to other accrued liabilities | — |
| (43 | ) |
| Payments to noncontrolling interests | (98 | ) | — |
|
| Exercises of Put Right | — |
| (53 | ) |
| Other | (14 | ) | — |
|
| Balance, March 31, 2018 | $ | 253 |
| $ | 1,459 |
|
| |
(1) | Represents the fair value of noncontrolling interests we purchased related to our 2016 acquisition of Vantage. Refer to Financial Note 6, “Business Combinations,” for more information. |
The effect of changes in our ownership interests related to redeemable noncontrolling interests on our equity of $3 million resulting from exercises of Put Right was recorded as a net increase to McKesson’s stockholders’ paid-in capital during 2018. Changes from net income attributable to McKesson and transfers from redeemable noncontrolling interests were $70 million during 2018.
| |
12. | Earnings Per Common Share |
Basic earnings (loss) per common share areis 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The computations for basic and diluted earningsDiluted loss per common share are as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions, except per share amounts) | 2018 | | 2017 | | 2016 |
| Income from continuing operations | $ | 292 |
| | $ | 5,277 |
| | $ | 2,342 |
|
| Net income attributable to noncontrolling interests | (230 | ) | | (83 | ) | | (52 | ) |
| Income from continuing operations attributable to McKesson | 62 |
| | 5,194 |
| | 2,290 |
|
| Income (Loss) from discontinued operations, net of tax | 5 |
| | (124 | ) | | (32 | ) |
| Net income attributable to McKesson | $ | 67 |
| | $ | 5,070 |
| | $ | 2,258 |
|
| | | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 208 |
| | 221 |
| | 230 |
|
| Effect of dilutive securities: | | | | | |
| Options to purchase common stock | — |
| | 1 |
| | 1 |
|
| Restricted stock units | 1 |
| | 1 |
| | 2 |
|
| Diluted | 209 |
| | 223 |
| | 233 |
|
| | | | | | |
Earnings (loss) per common share attributable to McKesson: (1) | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | 0.30 |
| | $ | 23.28 |
| | $ | 9.84 |
|
| Discontinued operations | 0.02 |
| | (0.55 | ) | | (0.14 | ) |
| Total | $ | 0.32 |
| | $ | 22.73 |
| | $ | 9.70 |
|
| Basic | | | | | |
| Continuing operations | $ | 0.30 |
| | $ | 23.50 |
| | $ | 9.96 |
|
| Discontinued operations | 0.02 |
| | (0.55 | ) | | (0.14 | ) |
| Total | $ | 0.32 |
| | $ | 22.95 |
| | $ | 9.82 |
|
| |
(1) | Certain computations may reflect rounding adjustments. |
for the year ended March 31, 2021 was calculated by excluding potentially dilutive securities from the denominator of the share computation due to their anti-dilutive effects. Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately 2 million and 3 million of potentially dilutive securities for 2020 and 2019, respectively, were excluded from the computations of diluted net earnings per common share, in 2018, 2017 and 2016, as they were anti-dilutive.
|
| | | | | | | |
| | March 31, |
| (In millions) | 2018 | | 2017 |
| Customer accounts | $ | 14,349 |
| | $ | 14,602 |
|
| Other | 3,578 |
| | 3,893 |
|
| Total | 17,927 |
| | 18,495 |
|
| Allowances | (216 | ) | | (280 | ) |
| Net | $ | 17,711 |
| | $ | 18,215 |
|
Other receivables primarily include amounts due from suppliers. The allowances are primarily for estimated uncollectible accounts.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The computations for basic and diluted earnings or loss per common share are as follows:
14. Property, Plant | | | | | | | | | | | | | | | | | |
| Years Ended March 31, |
| (In millions, except per share amounts) | 2021 | | 2020 | | 2019 |
| Income (loss) from continuing operations | $ | (4,339) | | | $ | 1,126 | | | $ | 254 | |
| Net income attributable to noncontrolling interests | (199) | | | (220) | | | (221) | |
| Income (loss) from continuing operations attributable to McKesson | (4,538) | | | 906 | | | 33 | |
| Income (loss) from discontinued operations, net of tax | (1) | | | (6) | | | 1 | |
| Net income (loss) attributable to McKesson | $ | (4,539) | | | $ | 900 | | | $ | 34 | |
| | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 160.6 | | | 180.6 | | | 196.3 | |
| Effect of dilutive securities: | | | | | |
| | | | | |
| Restricted stock units | 0 | | | 1.0 | | | 1.0 | |
| Diluted | 160.6 | | | 181.6 | | | 197.3 | |
| | | | | |
Earnings (loss) per common share attributable to McKesson: (1) | | | | | |
| Diluted | | | | | |
| Continuing operations | $ | (28.26) | | | $ | 4.99 | | | $ | 0.17 | |
| Discontinued operations | 0 | | | (0.04) | | | 0 | |
| Total | $ | (28.26) | | | $ | 4.95 | | | $ | 0.17 | |
| Basic | | | | | |
| Continuing operations | $ | (28.26) | | | $ | 5.01 | | | $ | 0.17 | |
| Discontinued operations | 0 | | | (0.03) | | | 0 | |
| Total | $ | (28.26) | | | $ | 4.98 | | | $ | 0.17 | |
(1)Certain computations may reflect rounding adjustments.
11. Leases
In 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 Equipment,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 related to previously impaired long-lived assets at the retail pharmacies in the Company’s U.K. and Canadian businesses, partially offset by derecognition of existing deferred gain on the Company’s sale-leaseback transaction related to its former corporate headquarters building. The Company 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 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
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 right-of-use (“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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | |
| | |
| March 31, | |
| (In millions, except lease term and discount rate) | 2021 | | 2020 | |
| Operating leases | | | | |
| Operating lease right-of-use assets | $ | 2,100 | | | $ | 1,886 | | |
| | | | |
| Current portion of operating lease liabilities | $ | 390 | | | $ | 354 | | |
| Long-term operating lease liabilities | 1,867 | | | 1,660 | | |
| Total operating lease liabilities | $ | 2,257 | | | $ | 2,014 | | |
| | | | |
| Finance leases | | | | |
| Property, plant and equipment, net | $ | 237 | | | $ | 180 | | |
| | | | |
| Current portion of long-term debt | $ | 22 | | | $ | 15 | | |
| Long-term debt | 206 | | | 151 | | |
| Total finance lease liabilities | $ | 228 | | | $ | 166 | | |
| | | | |
| Weighted-average remaining lease term (Years) | | | | |
| Operating leases | 7.8 | | 7.7 | |
| Finance leases | 10.1 | | 12.1 | |
| | | | |
| Weighted-average discount rate | | | | |
| Operating leases | 2.53 | % | | 3.03 | % | |
| Finance leases | 2.71 | % | | 2.86 | % | |
The components of lease cost were as follows:
| | | | | | | | | | | |
| Years Ended March 31, |
| (In millions) | 2021 | | 2020 |
| Short-term lease cost | $ | 32 | | | $ | 29 | |
| Operating lease cost | 465 | | | 459 | |
| | | |
| Finance lease cost: | | | |
| Amortization of right-of-use assets | 23 | | | 14 | |
| Interest on lease liabilities | 6 | | | 5 | |
| Total finance lease cost | 29 | | | 19 | |
| | | |
Variable lease cost (1) | 125 | | | 125 | |
| Sublease income | (36) | | | (33) | |
Total lease cost (2) | $ | 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.
Rent expense under operating leases was $576 million in 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplemental cash flow information related to leases was as follows: | | | | | | | | | | | | |
| Years Ended March 31, | |
| (In millions) | 2021 | | 2020 | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | $ | (362) | | | $ | (377) | | |
| Operating cash flows from finance leases | (4) | | | (3) | | |
| Financing cash flows from finance leases | (31) | | | (18) | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases (1) | $ | 321 | | | $ | 2,378 | | |
| Finance leases | 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.
Maturities of lease liabilities as of March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| (In millions) | Operating Leases | | Finance Leases | | Total |
| 2022 | $ | 433 | | | $ | 28 | | | $ | 461 | |
| 2023 | 401 | | | 28 | | | 429 | |
| 2024 | 332 | | | 27 | | | 359 | |
| 2025 | 283 | | | 25 | | | 308 | |
| 2026 | 233 | | | 24 | | | 257 | |
| Thereafter | 823 | | | 130 | | | 953 | |
Total lease payments (1) | 2,505 | | | 262 | | | 2,767 | |
| Less imputed interest | (248) | | | (34) | | | (282) | |
| Present value of lease liabilities | $ | 2,257 | | | $ | 228 | | | $ | 2,485 | |
(1)Total lease payments are not reduced by minimum sublease income of $202 million which are due under future noncancellable subleases.
As of March 31, 2021, the Company entered into additional leases primarily for facilities that have not yet commenced with future lease payments of $217 million that are not reflected in the table above. These operating leases will commence between 2022 and 2024 with noncancellable lease terms of five to 15 years.
Lessor
The Company primarily leases certain owned equipment, that are classified as direct financing or sales-type leases, to physician practices. As of March 31, 2021 and 2020, the total lease receivable was $298 million and $272 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, 2021 and 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
12. Goodwill and Intangible Assets, Net
|
| | | | | | | |
| | March 31, |
| (In millions) | 2018 | | 2017 |
| Land | $ | 187 |
| | $ | 166 |
|
| Building, machinery, equipment and other | 3,746 |
| | 3,637 |
|
| Total property, plant and equipment | 3,933 |
| | 3,803 |
|
| Accumulated depreciation | (1,469 | ) | | (1,511 | ) |
| Property, plant and equipment, net | $ | 2,464 |
| | $ | 2,292 |
|
| |
15. | Goodwill and Intangible Assets, Net |
Changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | U.S. Pharmaceutical | | International | | Medical-Surgical Solutions | | Prescription Technology Solutions | | Total |
| Balance, March 31, 2019 | $ | 3,935 | | | $ | 1,446 | | | $ | 2,451 | | | $ | 1,526 | | | $ | 9,358 | |
| Goodwill acquired | 0 | | | 62 | | | 0 | | | 14 | | | 76 | |
| Acquisition accounting, transfers and other adjustments | 1 | | | 4 | | | 7 | | | 0 | | | 12 | |
| Other changes/disposals | (1) | | | 0 | | | (5) | | | 0 | | | (6) | |
| Impairment charges | 0 | | | (2) | | | 0 | | | 0 | | | (2) | |
| Foreign currency translation adjustments, net | (11) | | | (67) | | | 0 | | | 0 | | | (78) | |
| Balance, March 31, 2020 | 3,924 | | | 1,443 | | | 2,453 | | | 1,540 | | | 9,360 | |
| Goodwill acquired | 0 | | | 5 | | | 0 | | | 0 | | | 5 | |
| Acquisition accounting, transfers and other adjustments | 0 | | | 0 | | | 0 | | | 2 | | | 2 | |
| Other changes/disposals | (1) | | | 0 | | | 0 | | | 0 | | | (1) | |
| Impairment charges | 0 | | | (69) | | | 0 | | | 0 | | | (69) | |
| Foreign currency translation adjustments, net | 40 | | | 156 | | | 0 | | | 0 | | | 196 | |
| Balance, March 31, 2021 | $ | 3,963 | | | $ | 1,535 | | | $ | 2,453 | | | $ | 1,542 | | | $ | 9,493 | |
|
| | | | | | | | | | | |
| (In millions) | Distribution Solutions | | Technology Solutions | | Total |
| Balance, March 31, 2016 | $ | 7,987 |
| | $ | 1,799 |
| | $ | 9,786 |
|
| Goodwill acquired | 2,836 |
| | 22 |
| | 2,858 |
|
| Acquisition accounting, transfers and other adjustments | (146 | ) | | 1 |
| | (145 | ) |
| Goodwill impairment | — |
| | (290 | ) | | (290 | ) |
| Amount reclassified to assets held for sale | (165 | ) | | — |
| | (165 | ) |
Goodwill disposed (1) | (30 | ) | | (1,078 | ) | | (1,108 | ) |
| Foreign currency translation adjustments, net | (350 | ) | | — |
| | (350 | ) |
| Balance, March 31, 2017 | $ | 10,132 |
| | $ | 454 |
| | $ | 10,586 |
|
| Goodwill acquired | 1,707 |
| | — |
| | 1,707 |
|
Acquisition accounting, transfers and other adjustments (2) | 369 |
| | (330 | ) | | 39 |
|
Goodwill impairment (3) | (1,738 | ) | | — |
| | (1,738 | ) |
Goodwill disposed (1) | (48 | ) | | (124 | ) | | (172 | ) |
| Amount reclassified to assets held for sale | (2 | ) | | — |
| | (2 | ) |
| Foreign currency translation adjustments, net | 504 |
| | — |
| | 504 |
|
| Balance, March 31, 2018 | $ | 10,924 |
| | $ | — |
| | $ | 10,924 |
|
| |
(1) | 2017 Technology Solutions segment amount represents goodwill disposal associated with Healthcare Technology Net Asset Exchange transaction. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for more information. 2018 Technology Solutions segment amount represents goodwill disposal associated with the sale of our EIS business. Refer to Financial Note 5, “Divestitures” for more information. |
| |
(2) | Effective April 1, 2017, our RHP business was transferred from the Technology Solutions segment to the Distribution Solutions segment. |
| |
(3) | In 2018, goodwill impairment charges from our international businesses were translated at average exchange rates during the corresponding period and accumulated goodwill impairment losses described below were translated at year-end exchange rates. |
Goodwill Impairment Charges
AsThe Company evaluates goodwill for impairment on an annual basis each year and at an interim date, if indicators of March 31, 2018, accumulatedpotential impairment exist. On October 1, 2019, the Company voluntarily changed its annual goodwill impairment losstesting date from January 1 to October 1 to better align with the timing of the Company’s annual long-term planning process. Accordingly, management determined that the change in accounting principle is preferable under the circumstance. This change has been applied prospectively from October 1, 2019 as retrospective application is deemed impracticable due to the inability to objectively determine the assumptions and significant estimates used in earlier periods without the benefit of hindsight. This change was $1,755 million primarily in our Distribution Solutions segment. As of March 31, 2017,not material to the accumulatedCompany’s consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment losscharge.
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 $290 million primarilydetermined 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 our Technology Solutions segment. Referkey assumptions, including failure to Financial Noteimprove 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 “Goodwill Impairment Charges,” for more information onmeasurement due to the impairment charges recorded in 2018 and 2017.
significance of unobservable inputs developed using company-specific information.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Goodwill charges listed below were recorded in “Goodwill impairment charges” in the Consolidated Statements of Operations. Most of the goodwill impairment for these reporting units were generally not deductible for income tax purposes.
Fiscal 2021
In the second quarter of 2021, the Company implemented a new segment reporting structure which resulted in 4 reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and RxTS. 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. At March 31, 2021, the balance of goodwill for the reporting units in Europe was approximately NaN and the remaining balance of goodwill in the International segment primarily relates to one of its reporting units in Canada.
The annual impairment testing performed for 2021 did not indicate any impairment of goodwill.
Fiscal 2020
The impairment testing performed in 2020 did not indicate any material impairment of goodwill.
Fiscal 2019
The impairment testing performed in 2019 resulted in the following impairment charges:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except rates) | | | | | | | | | |
| Quarter Ended | | Reporting Unit | | Segment (1) | | Discount Rate | | Terminal Growth Rate | | Goodwill Impairment (2) | |
| June 2018 | | Pharmaceutical Distribution | | International | | 8.0 | % | | 1.25 | % | | $ | 238 | | (3) |
| June 2018 | | Retail Pharmacy | | International | | 8.5 | % | | 1.25 | % | | 251 | | (4) |
| June 2018 | | Pharmaceutical Distribution | | International | | 8.0 | % | | 1.25 | % | | 81 | | (4) |
| March 2019 | | Retail Pharmacy | | International | | 10.0 | % | | 1.25 | % | | 465 | | (5) |
| March 2019 | | Pharmaceutical Distribution | | International | | 9.0 | % | | 1.25 | % | | 741 | | (5) |
| | | | Total | | | | | | $ | 1,776 | | |
(1)As described above, the Company implemented its new segment reporting structure in the second quarter of 2021 and its European Pharmaceutical Solutions segment and its Rexall Health business in Canada became part of the International segment. Amounts included herein were previously included within the former European Pharmaceutical Solutions segment.
(2)Represents pre-tax and after-tax amounts, except for an aggregate $20 million of tax charges related to the March 2019 Retail Pharmacy impairment. Total goodwill impairment for 2019 also included $21 million related to the Company’s Rexall Health business, within the International segment, recorded in the third quarter of 2019.
(3)Prior to implementing its new segment reporting structure in the first quarter of 2019, the Company’s European operations were considered a single reporting unit. Following the change in reportable segments, its European Pharmaceutical Solutions segment was divided into 2 distinct reporting units, Retail Pharmacy (“RP”), formerly Consumer Solutions, and Pharmaceutical Distribution (“PD”), formerly Pharmacy Solutions, for the purposes of goodwill impairment testing. This change required performance of a goodwill impairment test for these 2 new reporting units which resulted in a goodwill impairment charge as PD’s estimated fair value was lower than its reassigned carrying value.
(4)Both RP and PD projected a decline in the estimated future cash flows primarily triggered by U.K. government actions which were announced on June 29, 2018. An interim goodwill impairment test for these reporting units identified that their carrying values exceeded their estimated fair value and resulted in an impairment charge.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(5)As a result of the annual goodwill impairment test, the carrying values of the PD and RP reporting units exceeded their estimated fair value which required the Company to record impairment charges for the reporting units. These additional impairments were primarily due to declines in the reporting units’ estimated future cash flows and the selection of higher discount rates. The declines in estimated future cash flows were primarily attributed to additional government reimbursement reductions and competitive pressures within the U.K. The risk of successfully achieving certain business initiatives was the primary factor in the use of a higher discount rate. As of March 31, 2019 the entire remaining goodwill balances of both reporting units were impaired.
Refer to Financial Note 17, “Fair Value Measurements,” for more information on these nonrecurring fair value measurements. As of March 31, 2021 and 2020, accumulated goodwill impairment losses in the Company’s International segment were $3.6 billion and $3.5 billion, respectively.
Intangible Assets
Information regarding intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 |
| (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 | | $ | 3,739 | | | $ | (2,269) | | | $ | 1,470 | | | $ | 3,650 | | | $ | (1,950) | | | $ | 1,700 | |
| Service agreements | 10 | | 1,081 | | | (513) | | | 568 | | | 994 | | | (480) | | | 514 | |
| Pharmacy licenses | 23 | | 497 | | | (244) | | | 253 | | | 492 | | | (232) | | | 260 | |
| Trademarks and trade names | 12 | | 925 | | | (394) | | | 531 | | | 808 | | | (242) | | | 566 | |
| Technology | 4 | | 150 | | | (122) | | | 28 | | | 175 | | | (111) | | | 64 | |
| Other | 6 | | 254 | | | (226) | | | 28 | | | 273 | | | (221) | | | 52 | |
| Total | | | $ | 6,646 | | | $ | (3,768) | | | $ | 2,878 | | | $ | 6,392 | | | $ | (3,236) | | | $ | 3,156 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | March 31, 2017 |
| (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 | | $ | 3,619 |
| | $ | (1,550 | ) | | $ | 2,069 |
| | $ | 2,893 |
| | $ | (1,295 | ) | | $ | 1,598 |
|
| Service agreements | 12 | | 1,037 |
| | (386 | ) | | 651 |
| | 1,009 |
| | (316 | ) | | 693 |
|
| Pharmacy licenses | 26 | | 684 |
| | (196 | ) | | 488 |
| | 741 |
| | (150 | ) | | 591 |
|
| Trademarks and trade names | 14 | | 932 |
| | (187 | ) | | 745 |
| | 845 |
| | (124 | ) | | 721 |
|
| Technology | 4 | | 147 |
| | (84 | ) | | 63 |
| | 69 |
| | (64 | ) | | 5 |
|
| Other | 4 | | 262 |
| | (176 | ) | | 86 |
| | 201 |
| | (144 | ) | | 57 |
|
| Total | | | $ | 6,681 |
| | $ | (2,579 | ) | | $ | 4,102 |
| | $ | 5,758 |
| | $ | (2,093 | ) | | $ | 3,665 |
|
Amortization expense of intangible assets was $503$422 million, $444$462 million, and $431$485 million for 2018, 20172021, 2020, and 2016.2019, respectively. Estimated annual amortization expense of intangible assets is as follows: $440$370 million,, $422 $270 million,, $405 $259 million,, $373 $253 million, and $262$220 million for 20192022 through 2023,2026, and $2,200 million$1.5 billion thereafter. All intangible assets were subject to amortization as of March 31, 20182021 and 2017.
2020.
Refer to Financial Note 4, “Restructuring, Impairment, and Asset ImpairmentRelated Charges,” for more information on intangible asset impairment charges recorded in 2018.
2021, 2020, and 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
13. Debt and Financing Activities
| |
16. | Debt andFinancing Activities
|
Long-term debt consisted of the following:
| | | | | | | | | | | |
| March 31, |
| (In millions) | 2021 | | 2020 |
U.S. Dollar notes (1) (2) | | | |
| 3.65% Notes due November 30, 2020 | $ | 0 | | | $ | 700 | |
| 4.75% Notes due March 1, 2021 | 0 | | | 323 | |
| 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 | |
| 0.90% Notes due December 3, 2025 | 500 | | | 0 | |
| 7.65% Debentures due March 1, 2027 | 167 | | | 167 | |
| 3.95% Notes due February 16, 2028 | 600 | | | 600 | |
| 4.75% Notes due May 30, 2029 | 400 | | | 400 | |
| 6.00% Notes due March 1, 2041 | 282 | | | 282 | |
| 4.88% Notes due March 15, 2044 | 411 | | | 411 | |
Foreign currency notes (1) (3) | | | |
| 0.63% Euro Notes due August 17, 2021 | 704 | | | 662 | |
| 1.50% Euro Notes due November 17, 2025 | 700 | | | 659 | |
| 1.63% Euro Notes due October 30, 2026 | 587 | | | 552 | |
| 3.13% Sterling Notes due February 17, 2029 | 627 | | | 557 | |
| | | |
| Lease and other obligations | 270 | | | 174 | |
| Total debt | 7,148 | | | 7,387 | |
| Less: Current portion | 742 | | | 1,052 | |
| Total long-term debt | $ | 6,406 | | | $ | 6,335 | |
|
| | | | | | | |
| | March 31, |
| (In millions) | 2018 | | 2017 |
U.S. Dollar notes (1) (2) | | | |
| 1.40% Notes due March 15, 2018 | $ | — |
| | $ | 500 |
|
| 7.50% Notes due February 15, 2019 | — |
| | 350 |
|
| 2.28% Notes due March 15, 2019 | 1,100 |
| | 1,100 |
|
| 4.75% Notes due March 1, 2021 | 323 |
| | 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 | 167 |
| | 175 |
|
| 3.95% Notes due February 16, 2028 | 600 |
| | — |
|
| 6.00% Notes due March 1, 2041 | 282 |
| | 493 |
|
| 4.88% Notes due March 15, 2044 | 411 |
| | 800 |
|
Foreign currency notes (1) (3) | | | |
| 4.50% Euro Bonds due April 26, 2017 | — |
| | 533 |
|
Floating Rate Euro Notes due February 12, 2020 (4) | 337 |
| | — |
|
| 0.63% Euro Notes due August 17, 2021 | 695 |
| | 638 |
|
| 1.50% Euro Notes due November 17, 2025 | 691 |
| | 635 |
|
| 1.63% Euro Notes due October 30, 2026 | 669 |
| | — |
|
| 3.13% Sterling Notes due February 17, 2029 | 630 |
| | 564 |
|
| | | | |
| Lease and other obligations | 75 |
| | 75 |
|
| Total debt | 7,880 |
| | 8,362 |
|
| Less: Current portion | 1,129 |
| | 1,057 |
|
| Total long-term debt | $ | 6,751 |
| | $ | 7,305 |
|
| |
(1) | These notes are unsecured and unsubordinated obligations of the Company. |
| |
(2) | Interest on these notes is payable semiannually. |
| |
(3) | Interest on these foreign bonds and notes is payable annually, except the 2020 Floating Rate Euro Notes. |
| |
(4) | Interest on these notes is payable quarterly. |
(1)These notes are unsecured and unsubordinated obligations of the Company.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(3)Interest on these foreign currency notes is payable annually.
Long-Term Debt
OurThe Company’s long-term debt includes both U.S. dollar and foreign currency-denominated borrowings. At March 31, 20182021 and March 31, 2017, $7,880 million2020, $7.1 billion and $8,362 million$7.4 billion, respectively, of total debt werewas outstanding, of which $1,129$742 million and $1,057 million were$1.1 billion, respectively, was included under the captionin “Current portion of long-term debt” within our consolidated balance sheets.
Fiscal 2018in the Company’s Consolidated Balance Sheets.
On February 12, 2018, weDecember 3, 2020, the Company completed a public offering of Euro-denominated floating rate notes0.90% Notes due February 12, 2020December 3, 2025 (the “2020 Floating Rate Euro“2025 Notes”) in an aggregatea principal amount of €250 million and 1.63% Euro-denominated notes due October 30, 2026 (the “2026 Euro Notes”) in an aggregate principal amount of €500$500 million. On February 16, 2018, we completed a public offering of 3.95% notes due February 16, 2028 (the “2028 USD Notes”) in an aggregate principal amount of $600 million. The 2020 Floating Rate Euro Notes bear an interest at a rate equal to the three-month Euro Interbank Offered Rate plus 0.15%. Interest on the 2020 Floating Rate Euro2025 Notes is payable semi-annually on February 12, May 12, August 12June 3rd and November 12December 3rd of each year, commencing on May 12, 2018. Interest on the 2026 Euro Notes is payable on October 30 of each year, commencing on October 30, 2018. Interest on the 2028 USD Notes is payable on February 16 and August 16 of each year, commencing on August 16, 2018. We utilized the net proceedsJune 3, 2021. Proceeds received from these notes of $1.5 billion,this note issuance, net of discounts and offering expenses, to financewere $496��million.
During the purchaseyear ended March 31, 2021, the Company retired its 3.65% $700 million total principal of certain outstanding notes and for working capital and general corporate purposes.
Fiscal 2017
On February 17, 2017, we completed a public offering of 0.63% Euro-denominated notes due August 17, 2021 (the “2021 Euro Notes”) in an aggregateon November 30, 2020 upon maturity. On December 1, 2020, the Company redeemed its 4.75% $323 million total principal amount of €600 million, 1.50% Euro-denominated notes due November 17, 2025 (the “2025on March 1, 2021 prior to maturity. These notes were redeemed using cash on hand and the proceeds of the notes offering discussed above. In 2020, the Company repaid at maturity its €250 million Floating Rate Euro Notes”) in an aggregate principal amount of €600 million and 3.13% British pound sterling-denominatedNotes due February 12, 2020. In 2019, the Company repaid at maturity its $1.1 billion 2.28% notes due February 17, 2029 (the “2029 Sterling Notes”) in an aggregate principal amountMarch 15, 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Each note, which constitutes a “Series”, is an unsecured and unsubordinated obligation of the Company and ranks equally with all of the Company’s existing and, from time-to-time, future unsecured and unsubordinated indebtedness outstanding. Each Series is governed by materially similar indentures and officers’ certificates. Upon required notice to holders of notes with fixed interest rates, wethe Company may redeem those notes at any time prior to maturity, in whole or in part, for cash at redemption prices that may include a make-whole premium plus accrued and unpaid interest, as specified in the indenture and officers’ certificate relating to that Series. The 2020 Floating Rate Euro Notes are not redeemable at our option.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 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 consolidate, merge or sell all or substantially all of ourits 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.
Tender Offers and Early Repayments
On February 7, 2018, we commenced cash tender offers for a portion of our existing outstanding (i) 7.50% Notes due 2019, (ii) 4.75% Notes due 2021, (iii) 7.65% Debentures due 2027, (iv) 6.00% Notes due 2041 and (v) 4.88% Notes due 2044 (collectively referred to herein as the “Tender Offer Notes”). In connection with the tender offers and an additional repurchase, we paid an aggregate consideration of $1.05 billion to redeem $936 million principal amount of the notes at a redemption price equal to 100% of the principal amount and premiums of $99 million, plus accrued and unpaid interest of $20 million. The redemption of the Tender Offer Notes was accounted for as a debt extinguishment. As a result of the redemption, we incurred a pre-tax loss on debt extinguishment of $109 million ($70 million after-tax), which included premiums of $99 million and the write-off of unamortized debt issuance costs of $10 million.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On March 26, 2018, we paid an aggregate consideration of $317 million to redeem $302 million principal amount of the 7.500% Notes due 2019 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest of $2 million, and the applicable redemption premium of $13 million pursuant to the terms of the indentures. As a result of the redemption, we incurred a pre-tax loss on debt extinguishment of $13 million ($8 million after-tax), which primarily represented the premiums.
Repayments at maturity
In 2018, we repaid at maturity our €500 million Euro-denominated bond due April 26, 2017 and our $500 million 1.40% notes due March 15, 2018. In 2017, we repaid at maturity our €350 million Euro-denominated bond (or, approximately $385 million) due October 18, 2016, our $500 million 5.70% notes due March 1, 2017 and our $700 million 1.29% notes due March 10, 2017. In 2016, we repaid at maturity our $400 million floating rate notes due September 10, 2015, our $500 million 0.95% notes due December 4, 2015, our $600 million 3.25% notes due March 1, 2016 and a term loan balance of $93 million.
Other Information
Scheduled principal payments of long-term debt are $1,129 million in 2019, $353 million in 2020, $337 million in 2021, $634$742 million in 2022, $403$838 million in 2023, $1.1 billion in 2024, $34 million in 2025, $1.2 billion in 2026, and $5,024 million$3.2 billion thereafter.
Revolving Credit Facilities
We haveIn the second quarter of 2020, the Company entered into a Credit Agreement, dated as of September 25, 2019 (the “2020 Credit Facility”), that provides a syndicated $4.0 billion five-year senior unsecured credit facility with a $3.6 billion aggregate sublimit of availability in Canadian dollars, British pound sterling, and Euro. Borrowings under the 2020 Credit Facility bear interest based upon the London Interbank Offered Rate (“LIBOR”), Canadian Dealer Offered Rate for credit extensions denominated in Canadian dollars, a prime rate, or alternative overnight rates as applicable, plus agreed margins. The 2020 Credit Facility matures in September 2024 and had 0 borrowings during 2021 and 2020 and 0 amounts outstanding as of March 31, 2021 and 2020.
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 2020 Credit Facility, as amended, contains various customary investment grade covenants, including a financial covenant which obligates the Company to maintain a maximum Total Debt to Consolidated EBITDA ratio, as defined in the amended credit agreement. If the Company does not comply with these covenants, its ability to use the 2020 Credit Facility may be suspended and repayment of any outstanding balances under the 2020 Credit Facility may be required. At March 31, 2021, the Company was in compliance with all covenants. 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 (the “Global Facility”), which has a $3.15 billion aggregate sublimit of availabilitywas scheduled to mature in Canadian dollars, British pound sterling and Euros.October 2020. The Global Facility matures on October 22, 2020. Borrowings underwas terminated in connection with the Globalexecution of the 2020 Credit Facility bear interest based uponin September 2019 and had 0 borrowings during the London Interbank Offered Rate, Canadian Dealer Offered Rate for credit extensions denominated in Canadian Dollars, a prime rate, or alternative overnight rates as applicable, plus agreed margins. six months ended September 30, 2019.
The Global Facility contains a financial covenant which obligates the Company to maintain a debt to capital ratio of no greater than 65% and other customary investment grade covenants. If we do not comply with these covenants, our ability to use the Global Facility may be suspended and repayment of any outstanding balances under the Global Facility may be required. At March 31, 2018, we were in compliance with all covenants. There were no borrowings under this facility during 2018, 2017 and 2016, and no borrowings outstanding as of March 31, 2018 and 2017.
We also maintainmaintains bilateral credit linesfacilities primarily denominated in Euros with a total committed amount of $8 million and an uncommitted balanceamount of $242$152 million as of March 31, 2018.2021. Borrowings and repayments were not material in 20182021 and 2017. During 2016, we borrowed $641 million2020 and repaid $635 million under these credit lines primarily related to short‑term borrowings. These credit lines have interest rates ranging from 0.2% to 6%. As of March 31, 2018, borrowingsamounts outstanding under these credit lines were not material.material as of March 31, 2021 and 2020.
Commercial Paper
We maintainThe Company maintains a commercial paper program to support ourits working capital requirements and for other general corporate purposes. Under the program, the Company can issue up to $3.5$4.0 billion in outstanding commercial paper notes. During 20182021 and 2017, we2020, it borrowed $20,542 million$6.3 billion and $8,283 million$21.4 billion, respectively, and repaid $20,725 million$6.3 billion and $8,100 million$21.4 billion, respectively, under the program. During 2016, there were no material commercial paper issuances. At March 31, 2018,2021 and 2020, there were no0 commercial paper notes outstanding. At March 31, 2017, we had $183 million commercial paper notes outstanding with a weighted average interest rate
| |
17. | Variable Interest Entities |
We evaluate ourFINANCIAL NOTES (Continued)
14. Variable Interest Entities
The Company evaluates its ownership, contractual, and other interests in entities to determine if they are 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, 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 a 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 sheetsits Consolidated Balance Sheets for these VIEs were $819$662 million and $92$74 million, respectively, at March 31, 20182021 and $821$695 million and $149$82 million, respectively, at March 31, 2017.2020.
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 relationships are with oncology and other specialty practices. Under these practice arrangements, weit generally ownowns or leaseleases all of the real estate and equipment used by the affiliated practices and managemanages the practices’ administrative functions. WeIt also havehas relationships with certain pharmacies in Europe with whom weit may provide financing, have equity ownership, and/or a supply agreement whereby we supplyit supplies the vast majority of the pharmacies’ purchases. OurThe Company’s maximum exposure to loss (regardless of probability) as a result of all unconsolidated VIEs was $1.1$1.5 billion at March 31, 20182021 and 2017,$1.4 billion at March 31, 2020, which primarily represents the value of intangible assets related to service agreements, equity investments, and lease and loan receivables. This amount excludes the customer loan guarantees discussed in Financial Note 23,18, “Financial Guarantees and Warranties.” We believeThe Company believes there is no material loss exposure on these assets or from these relationships.
We maintain15. 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.
OurOn 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 Statements 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 NaN.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
During the third quarter of 2020, a cash payment of $114 million was made to settle a participant’s liability from the executive benefit retirement plan. As a result, a majority of the remaining recorded unrecognized losses in accumulated other comprehensive loss for this Plan were recognized as expense and a settlement charge of approximately $11 million was recorded in “Other income, net”, in the Consolidated Statements of Operations. As of March 31, 2020 and 2019, this plan had an accumulated comprehensive loss of approximately $1 million and $12 million, respectively.
The Company’s non-U.S. defined benefit pension plans cover eligible employees located predominantly in Norway, the United Kingdom, Germany, and Canada. Benefits for these plans are based primarily on each employee’s final salary, with annual adjustments for inflation. The obligations in Norway are largely related to the state-regulated pension plan which is managed by the Norwegian Public Service Pension Fund (“SPK”). According to the terms of the SPK, the plan assets of state regulated plans in Norway must correspond very closely to the pension obligation calculated using the principles codified in Norwegian law. The shortfall may not exceed 1% of the obligation. If the shortfall exceeds this threshold, it must be remedied within two years. In the United Kingdom, we 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 McKesson Europe’s Management Board.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 3, “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 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service cost - benefits earned during the year | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 15 | | | $ | 16 | | | $ | 15 | |
| Interest cost on projected benefit obligation | 0 | | | 6 | | | 14 | | | 19 | | | 19 | | | 21 | |
| Expected return on assets | 0 | | | (4) | | | (16) | | | (20) | | | (22) | | | (23) | |
| Amortization of unrecognized actuarial loss and prior service costs | 0 | | | 2 | | | 5 | | | 5 | | | 6 | | | 4 | |
| Curtailment/settlement loss | 0 | | | 127 | | | 4 | | | 0 | | | 0 | | | 1 | |
| | | | | | | | | | | |
| Net periodic pension expense | $ | 0 | | | $ | 131 | | | $ | 7 | | | $ | 19 | | | $ | 19 | | | $ | 18 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Service cost - benefits earned during the year | $ | 3 |
| | $ | 5 |
| | $ | 4 |
| | $ | 15 |
| | $ | 15 |
| | $ | 20 |
|
| Interest cost on projected benefit obligation | 14 |
| | 13 |
| | 18 |
| | 22 |
| | 23 |
| | 24 |
|
| Expected return on assets | (19 | ) | | (15 | ) | | (19 | ) | | (26 | ) | | (26 | ) | | (30 | ) |
| Amortization of unrecognized actuarial loss and prior service costs | 6 |
| | 11 |
| | 42 |
| | 5 |
| | 4 |
| | 3 |
|
| Curtailment/settlement loss (gain) | 2 |
| | — |
| | 2 |
| | 1 |
| | (2 | ) | | — |
|
| Net periodic pension expense | $ | 6 |
| | $ | 14 |
| | $ | 47 |
| | $ | 17 |
| | $ | 14 |
| | $ | 17 |
|
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 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) | 2021 | | 2020 | | 2021 | | 2020 |
| Change in benefit obligations | | | | | | | |
Benefit obligation at beginning of period (1) | $ | 10 | | | $ | 439 | | | $ | 896 | | | $ | 990 | |
| Service cost | 0 | | | 0 | | | 15 | | | 16 | |
| Interest cost | 0 | | | 6 | | | 19 | | | 19 | |
| Actuarial loss (gain) | 0 | | | 20 | | | 89 | | | (36) | |
| Benefits paid | (1) | | | (179) | | | (34) | | | (43) | |
| Annuity Premium Transfer | 0 | | | (276) | | | 0 | | | 0 | |
| | | | | | | |
Divestiture (2) | 0 | | | 0 | | | (187) | | | 0 | |
| Acquisitions | 0 | | | 0 | | | 0 | | | 2 | |
| Foreign exchange impact and other | 0 | | | 0 | | | 77 | | | (52) | |
Benefit obligation at end of period (1) | $ | 9 | | | $ | 10 | | | $ | 875 | | | $ | 896 | |
| | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of period | $ | 0 | | | $ | 322 | | | $ | 594 | | | $ | 642 | |
| Actual return on plan assets | 0 | | | 27 | | | 87 | | | 3 | |
| Employer and participant contributions | 1 | | | 116 | | | 27 | | | 28 | |
| Benefits paid | (1) | | | (179) | | | (34) | | | (43) | |
| Annuity Premium Transfer | 0 | | | (276) | | | 0 | | | 0 | |
| | | | | | | |
| | | | | | | |
| Foreign exchange impact and other | 0 | | | (10) | | | 61 | | | (36) | |
| Fair value of plan assets at end of period | $ | 0 | | | $ | 0 | | | $ | 735 | | | $ | 594 | |
| | | | | | | |
| Funded status at end of period | $ | (9) | | | $ | (10) | | | $ | (140) | | | $ | (302) | |
| | | | | | | |
| Amounts recognized on the balance sheet | | | | | | | |
| Assets | $ | 0 | | | $ | 0 | | | $ | 54 | | | $ | 49 | |
Current liabilities (2) | (1) | | | (1) | | | (9) | | | (162) | |
| Long-term liabilities | (8) | | | (9) | | | (185) | | | (189) | |
| Total | $ | (9) | | | $ | (10) | | | $ | (140) | | | $ | (302) | |
(1)The benefit obligation is the projected benefit obligation.
(2)The divestiture relates 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 3, “Held for Sale.” These amounts were included within current liabilities and totaled $151 million at March 31, 2020.
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 from 2.03% as of March 31, 2020 to 1.89% as of March 31, 2021.
•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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Change in benefit obligations | | | | | | | |
Benefit obligation at beginning of period (1) | $ | 513 |
| | $ | 535 |
| | $ | 943 |
| | $ | 899 |
|
| Service cost | 3 |
| | 5 |
| | 15 |
| | 15 |
|
| Interest cost | 14 |
| | 13 |
| | 22 |
| | 23 |
|
| Actuarial loss (gain) | 1 |
| | (11 | ) | | (15 | ) | | 98 |
|
| Benefits paid | (44 | ) | | (26 | ) | | (42 | ) | | (34 | ) |
| Expenses paid | (2 | ) | | (3 | ) | | (1 | ) | | (1 | ) |
| Amendments | — |
| | — |
| | (2 | ) | | — |
|
| Acquisitions | — |
| | — |
| | — |
| | 37 |
|
| Foreign exchange impact and other | — |
| | — |
| | 115 |
| | (94 | ) |
Benefit obligation at end of period (1) | $ | 485 |
| | $ | 513 |
| | $ | 1,035 |
| | $ | 943 |
|
| | | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of period | $ | 293 |
| | $ | 262 |
| | $ | 623 |
| | $ | 607 |
|
| Actual return on plan assets | 35 |
| | 22 |
| | 21 |
| | 76 |
|
| Employer and participant contributions | 53 |
| | 38 |
| | 17 |
| | 16 |
|
| Benefits paid | (44 | ) | | (26 | ) | | (42 | ) | | (34 | ) |
| Expenses paid | (2 | ) | | (3 | ) | | (1 | ) | | (1 | ) |
| Acquisitions | — |
| | — |
| | — |
| | 35 |
|
| Foreign exchange impact and other | — |
| | — |
| | 69 |
| | (76 | ) |
| Fair value of plan assets at end of period | $ | 335 |
| | $ | 293 |
| | $ | 687 |
| | $ | 623 |
|
| | | | | | | | |
| Funded status at end of period | $ | (150 | ) | | $ | (220 | ) | | $ | (348 | ) | | $ | (320 | ) |
| | | | | | | | |
| Amounts recognized on the balance sheet | | | | | | | |
| Assets | $ | 10 |
| | $ | — |
| | $ | 19 |
| | $ | 4 |
|
| Current liabilities | (39 | ) | | (17 | ) | | (7 | ) | | (7 | ) |
| Long-term liabilities | (121 | ) | | (203 | ) | | (360 | ) | | (317 | ) |
| Total | $ | (150 | ) | | $ | (220 | ) | | $ | (348 | ) | | $ | (320 | ) |
| |
(1) | The benefit obligation is the projected benefit obligation. |
•Discount rates ($6 million loss): The weighted average discount rate for Non-U.S. plans decreased from 2.13% as of March 31, 2019 to 2.03% as of March 31, 2020.
•Demographic and assumption changes ($42 million gain): 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. The difference between actual inflation and assumed inflation in our U.K. pension plans resulted in a gain of $23 million.
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) | 2018 | | 2017 | | 2018 | | 2017 |
| Projected benefit obligation | $ | 485 |
| | $ | 513 |
| | $ | 1,035 |
| | $ | 943 |
|
| Accumulated benefit obligation | 485 |
| | 513 |
| | 990 |
| | 902 |
|
| Fair value of plan assets | 335 |
| | 293 |
| | 687 |
| | 623 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| March 31, | | March 31, |
| (In millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Projected benefit obligation | $ | 9 | | | $ | 10 | | | $ | 875 | | | $ | 896 | |
| Accumulated benefit obligation | 9 | | | 10 | | | 847 | | | 856 | |
| Fair value of plan assets | 0 | | | 0 | | | 735 | | | 594 | |
Amounts recognized in accumulated other comprehensive income (pre-tax) 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) | 2018 | | 2017 | | 2018 | | 2017 | (In millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Net actuarial loss | $ | 134 |
| | $ | 157 |
| | $ | 162 |
| | $ | 160 |
| Net actuarial loss | $ | 1 | | | $ | 1 | | | $ | 120 | | | $ | 149 | |
| Prior service credit | — |
| | — |
| | (5 | ) | | (3 | ) | Prior service credit | 0 | | | 0 | | | (2) | | | (3) | |
| Total | $ | 134 |
| | $ | 157 |
| | $ | 157 |
| | $ | 157 |
| Total | $ | 1 | | | $ | 1 | | | $ | 118 | | | $ | 146 | |
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) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Net actuarial loss (gain) | $ | 0 | | | $ | (3) | | | $ | 8 | | | $ | (9) | | | $ | (24) | | | $ | 42 | |
| | | | | | | | | | | |
| Amortization of: | | | | | | | | | | | |
| Net actuarial loss | 0 | | | (129) | | | (9) | | | (35) | | | (6) | | | (5) | |
| Prior service credit (cost) | 0 | | | 0 | | | 0 | | | 1 | | | 0 | | | 0 | |
| Foreign exchange impact and other | 0 | | | 0 | | | 0 | | | 15 | | | (6) | | | (12) | |
| Total recognized in other comprehensive loss (income) | $ | 0 | | | $ | (132) | | | $ | (1) | | | $ | (28) | | | $ | (36) | | | $ | 25 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net actuarial loss (gain) | $ | (15 | ) | | $ | (17 | ) | | $ | 9 |
| | $ | (11 | ) | | $ | 47 |
| | $ | (38 | ) |
| Prior service credit | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (5 | ) |
| Amortization of: | | | | | | | | | | | |
| Net actuarial loss | (8 | ) | | (11 | ) | | (44 | ) | | (6 | ) | | (4 | ) | | (5 | ) |
| Prior service credit (cost) | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Foreign exchange impact and other | — |
| | — |
| | — |
| | 19 |
| | (10 | ) | | (1 | ) |
| Total recognized in other comprehensive loss (income) | $ | (23 | ) | | $ | (28 | ) | | $ | (35 | ) | | $ | — |
| | $ | 35 |
| | $ | (47 | ) |
We expectThe Company recognized $33 million in actuarial losses for pension plans to amortize $9stockholders’ equity in 2021 as a result of the contribution of the Company’s German pharmaceutical wholesale business to a joint venture as discussed in more detail in Financial Note 3, “Held for Sale.” The Company recognized $127 million ofin actuarial losslosses for the pension plans fromto stockholders’ equity toin 2020 as a result of $116 million from the termination of the U.S. defined benefit pension expense in 2019. The comparable 2018 amount was $14plan and $11 million of actuarial loss.from 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 $160$9 million and $176$10 million at March 31, 20182021 and 2017.2020, 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 $297$162 million and $276$298 million at March 31, 20182021 and 2017.2020, respectively. Funding obligations for ourits non-U.S. plans vary based on the laws of each non-U.S. jurisdiction.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Expected benefit payments including assumed executive lump sum payments, for ourthe Company’s pension plans are as follows: $97$43 million, $184$36 million, $65$37 million, $70$36 million and $67$38 million for 20192022 to 20232026 and $339$202 million for 20242027 through 2028.2031. 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 $55$24 million for 2019.2022.
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, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Net periodic pension expense | | | | | | | | | | | |
| Discount rates | 3.08% | | 3.66% | | 3.83% | | 1.89% | | 2.03% | | 2.35% |
| Rate of increase in compensation | N/A (1) | | N/A (1) | | N/A (1) | | 3.20 | | 2.93 | | 3.13 |
| Expected long-term rate of return on plan assets | N/A | | 4.00 | | 5.25 | | 2.56 | | 3.01 | | 3.71 |
| Benefit obligation | | | | | | | | | | | |
| Discount rates | 2.35% | | 3.08% | | 3.65% | | 1.89% | | 2.03% | | 2.13% |
| Rate of increase in compensation | N/A (1) | | N/A (1) | | N/A (1) | | 3.20 | | 2.93 | | 3.18 |
|
| | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Years Ended March 31, | | Years Ended March 31, |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net periodic pension expense | | | | | | | | | | | |
| Discount rates | 3.55 | % | | 3.40 | % | | 3.36 | % | | 2.34 | % | | 2.72 | % | | 2.36 | % |
| Rate of increase in compensation | 4.00 |
| | 4.00 |
| | 4.00 |
| | 2.72 |
| | 2.76 |
| | 2.80 |
|
| Expected long-term rate of return on plan assets | 6.25 |
| | 6.25 |
| | 6.75 |
| | 4.03 |
| | 4.51 |
| | 4.87 |
|
| Benefit obligation | | | | | | | | | | | |
| Discount rates | 3.69 | % | | 3.39 | % | | 3.27 | % | | 2.35 | % | | 2.35 | % | | 2.84 | % |
| Rate of increase in compensation | N/A (1) |
| | 4.00 |
| | 4.00 |
| | 2.59 |
| | 3.18 |
| | 2.98 |
|
| |
(1) | (1) This assumption is no longer needed in actuarial valuations as U.S. plans are frozen or have fixed benefits for the remaining active participants. |
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, 2018, our2021, the Company’s U.S. defined benefit liabilities are valued using a weighted average discount rate of 3.69%, which represents an increase of 30 basis points from our 2017weighted-average discount rate of 3.39%2.35%, which represents a decrease of 73 basis points from its 2020 weighted-average discount rate of 3.08%. OurThe Company’s non-U.S. defined benefit pension plan liabilities are valued using a weighted-average discount rate of 2.35%1.89%, which represents no changea decrease of 14 basis points from 2017.its 2020 weighted-average discount rate of 2.03%.
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, 2018 and 2017 are 26% and 50% equity investments, 70% and 45% fixed income investments including cash and cash equivalents and 4% 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 investments are 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, 2018 and 2017, 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, 2021 and 2020, using the fair value hierarchy by asset class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-U.S. Plans |
| March 31, 2021 | | March 31, 2020 |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 5 | | | $ | 0 | | | $ | 0 | | | $ | 5 | | | $ | 13 | | | $ | 0 | | | $ | 0 | | | $ | 13 | |
| Equity securities: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Equity commingled funds | 64 | | | 117 | | | 0 | | | 181 | | | 53 | | | 75 | | | 0 | | | 128 | |
| Fixed income securities: | | | | | | | | | | | | | | | |
| Government securities | 5 | | | 144 | | | 0 | | | 149 | | | 6 | | | 139 | | | 0 | | | 145 | |
| Corporate bonds | 6 | | | 30 | | | 0 | | | 36 | | | 14 | | | 17 | | | 0 | | | 31 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Fixed income commingled funds | 51 | | | 222 | | | 1 | | | 274 | | | 107 | | | 101 | | | 0 | | | 208 | |
| Other: | | | | | | | | | | | | | | | |
| Real estate funds and Other | 31 | | | 4 | | | 3 | | | 38 | | | 22 | | | 2 | | | 3 | | | 27 | |
| Total | $ | 162 | | | $ | 517 | | | $ | 4 | | | $ | 683 | | | $ | 215 | | | $ | 334 | | | $ | 3 | | | $ | 552 | |
| | | | | | | | | | | | | | | |
Assets held at NAV practical expedient (1) | | | | | | | | | | | | | | | |
| Equity commingled funds | | | | | | | 10 | | | | | | | | | 8 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other | | | | | | | 42 | | | | | | | | | 34 | |
| Total plan assets | | | | | | | $ | 735 | | | | | | | | | $ | 594 | |
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, 2018 | | March 31, 2018 |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 39 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Equity securities: | | | | | | | | | | | | | | | |
| Common and preferred stock | 7 |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
|
| Equity commingled funds | — |
| | — |
| | — |
| | — |
| | 41 |
| | 94 |
| | — |
| | 135 |
|
| Fixed income securities: | | | | | | | | | | | | | | | |
| Government securities | — |
| | 85 |
| | — |
| | 85 |
| | 5 |
| | 113 |
| | — |
| | 118 |
|
| Corporate bonds | — |
| | 58 |
| | — |
| | 58 |
| | 114 |
| | 136 |
| | — |
| | 250 |
|
| Mortgage-backed securities | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
|
| Asset-backed securities and other | — |
| | 21 |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
|
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | — |
| | 64 |
| | — |
| | 64 |
|
| Other: | | | | | | | | | | | | | | | |
| Real estate funds | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Other | — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | 4 |
| | 26 |
|
| Total | $ | 46 |
| | $ | 171 |
| | $ | — |
| | $ | 217 |
| | $ | 187 |
| | $ | 407 |
| | $ | 4 |
| | $ | 598 |
|
Assets held at NAV practical expedient (1) | | | | | | | | | | | | | | | |
| Equity commingled funds | | | | | | | 54 |
| | | | | | | | 27 |
|
| Fixed income commingled funds | | | | | | | 53 |
| | | | | | | | — |
|
| Real estate funds | | | | | | | 11 |
| | | | | | | | — |
|
| Other | | | | | | | — |
| | | | | | | | 62 |
|
| Total plan assets |
|
| |
|
| |
|
| | $ | 335 |
| |
|
| |
|
| |
|
| | $ | 687 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | March 31, 2017 | | March 31, 2017 |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Equity securities: | | | | | | | | | | | | | | | |
| Common and preferred stock | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | — |
| | — |
|
| Equity commingled funds | — |
| | — |
| | — |
| | — |
| | 13 |
| | 40 |
| | — |
| | 53 |
|
| Fixed income securities: | | | | | | | | | | | | | | | |
| Government securities | — |
| | 27 |
| | — |
| | 27 |
| | 24 |
| | 68 |
| | — |
| | 92 |
|
| Corporate bonds | — |
| | 12 |
| | — |
| | 12 |
| | 69 |
| | 120 |
| | 10 |
| | 199 |
|
| Mortgage-backed securities | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | — |
|
| Asset-backed securities and other | — |
| | 19 |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
|
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | 20 |
| | 29 |
| | — |
| | 49 |
|
| Other: | | | | | | | | | | | | | | | |
| Real estate funds | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 6 |
| | 8 |
|
| Total | $ | 25 |
| | $ | 68 |
| | $ | — |
| | $ | 93 |
| | $ | 130 |
| | $ | 257 |
| | $ | 16 |
| | $ | 403 |
|
Assets held at NAV practical expedient (1) | | | | | | | | | | | | | | | |
| Equity commingled funds | | | | | | | 131 |
| | | | | | | | 94 |
|
| Fixed income commingled funds | | | | | | | 59 |
| | | | | | | | 53 |
|
| Real estate funds | | | | | | | 10 |
| | | | | | | | 13 |
|
| Other | | | | | | | — |
| | | | | | | | 60 |
|
| Total plan assets |
|
| |
|
| |
|
| | $ | 293 |
| |
|
| |
|
| |
|
| | $ | 623 |
|
| |
(1) | Equity commingled funds, fixed income commingled funds, real estate funds and other investments for which fair value is measured using the NAV per share as a practical expedient are not leveled within the fair value hierarchy and are included as a reconciling item to total investments. |
Cash and cash equivalents - Cash and cash equivalents include short-term investment funds that maintain daily liquidity and aim to have constant unit values of $1.00.$1.00. The funds invest in short-term fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and high credit quality. Directly held cash and cash equivalents are classified as Level 1 investments. Cash and cash equivalents include money market funds and other commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 1 investments.
Common and preferred stock - This investment class consists of common and preferred shares issued by U.S. and non-U.S. corporations. Common shares are traded actively on exchanges and price quotes are readily available. Preferred shares may not be actively traded. Holdings of common shares are generally classified as Level 1 investments.
Equity commingled funds - Some equity investments are held in commingled funds, which have daily net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 1 or Level 2 investments.
Fixed income securities - Government securities consist of bonds and debentures issued by central governments or federal agencies; corporate bonds consist of bonds and debentures issued by corporations; mortgage-backed securities consist of debt obligations secured by a mortgage or pool of mortgages; and asset-backed securities primarily consist of debt obligations secured by an asset or pool of assets other than mortgages.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)
Real estate funds - The value of the real estate funds is reported by the fund manager and is based on a valuation of the underlying properties. Inputs used in the valuation include items such as cost, discounted future cash flows, independent appraisals, and market based comparable data. The real estate funds are classified as Level 1, 2, or 3 investments.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Other - At March 31, 20182021 and 2017,2020, this includes $38$36 million and $37$29 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.
The activity attributable to Level 3 plan assets was insignificant innot material for the years ended March 31, 20182021 and 2017.2020.
Multiemployer Plans
The Company contributes to a number of multiemployer pension plans under the terms of collective-bargaining agreements that cover union-represented employees in the U.S. In 2017, weit 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. Plans were not material for the years ended March 31, 2018, 2017,2021, 2020, and 2016.2019. Contributions to the POA for non-U.S. Plans exceeding 5% of total plan contributions were $16$22 million,, $18 $17 million, and $23$27 million in 2018, 20172021, 2020, and 2016.2019, respectively. Based on actuarial calculations, we estimatethe Company estimates the funded status for ourits non-U.S. Plans to be approximately 75%78% as of March 31, 2018. No2021. NaN amounts were accrued for liability associated with the POA as we havethe Company has no intention to withdraw from the plan.
Defined Contribution Plans
We haveThe Company has a contributory retirement savings plan (“RSP”) for U.S. eligible employees. Eligible employees may contribute to the RSP 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 RSP and non-U.S. plans were $82$102 million, $98$102 million, and $99$92 million for the years ended March 31, 2018, 2017,2021, 2020, and 2016.2019, respectively.
Postretirement Benefits
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| |
19. | Postretirement Benefits |
We maintainThe Company maintains a number of postretirement benefits, primarily consisting of healthcare and life insurance (“welfare”) benefits, for certain eligible U.S. employees. Eligible employees consist of those who retired before March 31, 1999 and those who retired after March 31, 1999, but were an active employee as of that date, after meeting other age-related criteria. 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) | 2018 | | 2017 | | 2016 |
| Service cost - benefits earned during the year | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost on accumulated benefit obligation | 2 |
| | 2 |
| | 4 |
|
| Amortization of unrecognized actuarial gain and prior service credit | (6 | ) | | (1 | ) | | — |
|
| Net periodic postretirement (credit) expense | $ | (3 | ) | | $ | 2 |
| | $ | 5 |
|
Information regarding the changes in benefit obligations for our postretirement welfare plans is as follows:
|
| | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 |
| Benefit obligation at beginning of period | $ | 82 |
| | $ | 98 |
|
| Service cost | 1 |
| | 1 |
|
| Interest cost | 2 |
| | 2 |
|
| Actuarial gain | (1 | ) | | (13 | ) |
| Benefit payments | (6 | ) | | (6 | ) |
| Benefit obligation at end of period | $ | 78 |
| | $ | 82 |
|
The components of the amount recognized in accumulated other comprehensive income for the Company’s other postretirement benefits at March 31, 2018 and 2017 were net actuarial gains of $8 million and $11 million and net prior service credits of $11 million and $14 million. Other changes in benefit obligations recognized in other comprehensive income were net actuarial gains of $3 million and $14 million in 2018 and 2017 and net prior service credits of $3 million and $3 million in 2018 and 2017.
We estimate that the amortization of the actuarial income from stockholders’ equity to other postretirement gain in 2019 will be $5 million. Comparable 2018 amount was an expense of $6 million.
Other postretirement benefits are funded as claims are paid. Expected benefit payments for our postretirement welfare benefit plans are as follows: $8 million, $7 million, $7 million, $7 million and $7 million for 2019 to 2023 and $28 million cumulatively for 2024 through 2028. Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. Expected contributions to be made for our postretirement welfare benefit plans are $8 million for 2019.
Weighted-average discount rates used to estimate postretirement welfare benefit expenses were 3.83%, 3.68% and 3.59% for 2018, 2017 and 2016. Weighted-average discount rates for the actuarial present value of benefit obligations were 3.92%, 3.82% and 3.68% for 2018, 2017 and 2016.
Actuarial gain or loss for the postretirement welfare benefit plan is amortized to income or expense over a three-year period. The assumed healthcare cost trends used in measuring the accumulated postretirement benefit obligation were 3.00% for 2018 and 2017. For 2018, 2017 and 2016, a one-percentage-point increase or decrease in the assumed healthcare cost trend rate would not have a material impact on the postretirement benefit obligations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Pursuant to various collective bargaining agreements, we contribute to multiemployer health and welfare plans that cover union-represented employees. Our liability is limited to the contractual dollar obligations set forth by the collective bargaining agreements. Contributions to the plans and amounts accrued were not material for the years ended March 31, 2018, 2017,2021, 2020, and 2016.2019. The benefit obligation at March 31, 2021 and 2020 was $64 million and $65 million, respectively.
16. 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 rate 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 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-currency swaps. These forward contracts and cross-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, 2018, we2021 and 2020, the Company had €1.95€1.7 billion of Euro-denominated notes and £450 million British pound sterling-denominated notes designated as non-derivative net investment hedges. These hedges whichare utilized to hedge portions of ourthe 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 within Accumulated Other Comprehensive Incomein “Accumulated other comprehensive loss” in the statementConsolidated Statements of stockholders’ equityStockholders’ Equity where they offset foreign currency translation gains and losses recorded on ourthe Company’s net investments. To the extent foreign currency denominatedcurrency-denominated notes designated as net investment hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. LossesIn December 2019, the Company prospectively de-designated from net investment hedges €250 million of its Euro-denominated notes which matured in February 2020.
At March 31, 2019, the Company also had £450 million British pound sterling-denominated notes designated as non-derivative net investment hedges. 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.
Gains or losses from net investment hedges recorded in otherwithin Other comprehensive income were $268losses of $118 million in 2021 and gains of $39 million and $13$259 million forin 2020 and 2019, respectively. Ineffectiveness on the years ended March 31, 2018 and 2017.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 Statements of Operations. There was no ineffectiveness in ourthe Company’s net investment hedges for the years ended March 31, 20182021 and 2017.2019.
Derivatives Designated as Hedges
InAt March 2018, we entered into31, 2021 and 2020, the Company had cross-currency swap contracts with total gross notional amounts of £432 million, which areswaps designated as net investment hedges.hedges with a total gross notional amount of $500 million and $1.5 billion Canadian dollars, respectively. Under the terms of the cross-currency swap contracts, we agreethe 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 ourthe Company’s net investments denominated in British pound sterlingCanadian 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 Income“Accumulated other comprehensive loss” in the statementConsolidated Statements of stockholders’ equityStockholders’ Equity where they offset foreign currency translation gains and losses recorded on ourthe 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, 2021, 2020, and 2019. In 2021, cross-currency swaps with an aggregate gross notional amount of $999 million Canadian dollars matured and the remaining cross-currency swaps will mature in November 2024.
At March 31, 2019, the Company also had cross-currency swaps designated as net investment hedges with a total gross notional amount of £932 million British pound sterling. LossesIn 2020, the Company terminated these swaps 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Gains or losses from the Company’s cross-currency swaps designated as net investment hedges recorded in otherOther comprehensive income were $7losses of $119 million in 2021 and gains of $76 million and $53 million in 2020 and 2019, respectively. There was no ineffectiveness in the Company’s hedges for the yearyears ended March 31, 2018.2021 and 2019.
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 cross-currencyswaps 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 betweenin February 2022 and February 2024.
At March 31, 2018 and 2017, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional amounts of $162 million and $243 million, which were designated as cash flow hedges. These contracts will mature between March 2019 and March 2020.2023.
From time to time, we enterthe Company also enters into cross-currency swaps to hedge intercompany loans denominated in non-functional currencies. For our cross-currency swap transactions, we agreethe 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 cross-currency swaps are designed to reduce the income statement effects arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
At March 31, 20182021 and March 31, 2017, we2020, the Company had cross-currency swaps with total gross notional amounts of approximately $3,412 million$2.6 billion and $2,663 million,$2.9 billion, respectively, which are designated as cash flow hedges. These swaps will mature between July 2018May 2021 and January 2024.
For forward contracts and cross-currency swaps that are designated as cash flow hedges, the effective portion of changes in the fair value of the hedges is recorded in Accumulated Other Comprehensive Incomeother comprehensive loss 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. Losses
On April 27, 2020, the Company entered into forward starting interest rate swaps designated as cash flow hedges, with combined notional amounts of $30$500 million and $19€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. Refer to Financial Note 13, “Debt and Financing Activities,” for more information.
Gains or losses from cash flow hedges recorded in Other comprehensive income were losses of $42 million in 2018 and 20172021 and gains of $9$98 million and $28 million in 2016 were recorded in other comprehensive income from cash flow hedges.2020 and 2019, respectively. Gains or losses reclassified from Accumulated Other Comprehensive Incomeother comprehensive income and recorded in operating expenses“Selling, distribution, general, and administrative expenses” in the consolidated statementsConsolidated Statements of operationsOperations were not material in 2018, 20172021, 2020, and 2016.2019. There was no ineffectiveness in ourthe Company’s cash flow hedges for the years ended March 31, 2018, 20172021, 2020, and 2016.2019.
Derivatives Not Designated as Hedges
Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change in value included in earnings.
At March 31, 2017, we had a forward contract to primarily hedge the U.S. dollar against cash flows denominated in Canadian dollars with a total gross notional amount of $173 million. This contract matured in April 2017 and was not designated for hedge accounting. Gains or losses from this contract were not material for the year ended March 31, 2017.
We also haveThe Company has a number of forward contracts to hedge the Euro against cash flows denominated primarily in British pound sterling and other European currencies. At March 31, 20182021 and 2017,2020, the total gross notional amounts of these contracts were $39 million and $29 million, and $62 million.
respectively. These contracts will predominately mature throughbetween April 2021 and December 20182021 and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not designated as hedges are recorded directly into earnings in “Selling, distribution, general, and accordingly, net gainsadministrative expenses” in the Consolidated Statements of nil, $5 millionOperations. Changes in the fair values were not material in 2021, 2020, and $60 million in 2018, 2017 and 2016, were recorded within operating expenses.2019. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.
obligations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2020, the Company also entered into a number of forward contracts and swaps 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 designated for hedge accounting. Changes in 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.
Information regarding the fair value of derivatives on a gross basis is as follows:
| | | | Balance Sheet Caption | March 31, 2018 | | March 31, 2017 | | Balance Sheet
Caption | March 31, 2021 | | March 31, 2020 |
| | 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 | $ | 15 |
| $ | — |
| $ | 81 |
| | $ | 17 |
| $ | — |
| $ | 81 |
| |
Foreign exchange contracts (non-current) | Other Noncurrent Assets | 14 |
| — |
| 81 |
| | 32 |
| — |
| 162 |
| |
| Cross-currency swaps (current) | Prepaid expenses and other/ Other Accrued Liabilities | — |
| 7 |
| 504 |
| | 17 |
| — |
| 174 |
| Cross-currency swaps (current) | Prepaid expenses and other/Other accrued liabilities | $ | 4 | | $ | 47 | | $ | 826 | | | $ | 112 | | $ | 19 | | $ | 1,279 | |
Cross-currency swaps (non-current) | Other Noncurrent Assets/Liabilities | — |
| 222 |
| 3,508 |
| | 90 |
| — |
| 2,489 |
| Cross-currency swaps (non-current) | Other non-current assets/liabilities | 72 | | 92 | | 2,663 | | | 182 | | 0 | | 3,313 | |
| Forward starting interest rate swaps (current) | | Forward starting interest rate swaps (current) | Other accrued liabilities | 0 | | 7 | | 704 | | | 0 | | 0 | | 0 | |
| Total | | $ | 29 |
| $ | 229 |
|
| | $ | 156 |
| $ | — |
|
| Total | | $ | 76 | | $ | 146 | | | $ | 294 | | $ | 19 | | |
| Derivatives not designated for hedge accounting | | | | | Derivatives not designated for hedge accounting | | | | | |
Foreign exchange contracts (current) | Prepaid expenses and other | $ | — |
| $ | — |
| $ | 13 |
| | $ | 1 |
| $ | — |
| $ | 198 |
| Foreign exchange contracts (current) | Prepaid expenses and other | $ | 0 | | $ | 0 | | $ | 29 | | | $ | 2 | | $ | 0 | | $ | 24 | |
Foreign exchange contracts (current) | Other accrued liabilities | — |
| — |
| 16 |
| | — |
| — |
| 37 |
| Foreign exchange contracts (current) | Other accrued liabilities | 0 | | 1 | | 10 | | | 0 | | 0 | | 5 | |
| Total | | $ | — |
| $ | — |
|
| | $ | 1 |
| $ | — |
|
| Total | | $ | 0 | | $ | 1 | | | $ | 2 | | $ | 0 | | |
Refer to Financial Note 21,17, “Fair Value Measurements,” for more information on these recurring fair value measurements.
| |
21. | Fair Value Measurements |
17. 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 participantsValue Measurements
The 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, 2021 and 2020 included investments in money market funds of $1.6 billion and $2.0 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, 2021 and 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 16, “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.
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 $269 million and $170 million at March 31, 2021 and 2020, 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 2021, several 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, while others 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 $133 million for the year ended March 31, 2021. These gains were recorded in “Other income, net” in the Consolidated Statements of Operations. There were no other material changes in the carrying value of these investments during the year ended March 31, 2021. 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.
At March 31, 20182021, assets measured at fair value on a nonrecurring basis included long-lived assets of the Company’s International segment and 2017,goodwill of the Company’s Europe Retail Pharmacy reporting unit within the International segment.
At March 31, 2020, assets measured at fair value on a nonrecurring basis included long-lived assets of the Company’s International segment. Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges” and Financial Note 12, “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 0 liabilities measured at fair value on a nonrecurring basis at March 31, 2021 and 2020.
Other Fair Value Disclosures
At March 31, 2021 and 2020, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings, and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.
The Company determines the fair value of our commercial paper was determined using quoted prices in active markets for identical liabilities,instruments, which are considered to be Level 1 inputs.inputs under the fair value measurements and disclosure guidance.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
OurThe Company’s long-term debt is carriedalso recorded at amortized cost. The carrying amountsvalue and estimated fair valuesvalue of these liabilities were $7.9 billion and $8.1 billion at March 31, 2018 and $8.4 billion and $8.7 billion at March 31, 2017. the Company’s long-term debt was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 | | |
| (In millions) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | |
| Long-term debt, including current maturities | $ | 7,148 | | | $ | 7,785 | | | $ | 7,387 | | | $ | 7,792 | | | |
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 Fair Value on a Recurring Basis
Cash and cash equivalents included investments in money market funds of $799 million and $478 million at March 31, 2018 and 2017. The fair value of the money market funds was determined by using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature. Fair values for our marketable securities were not material at March 31, 2018 and 2017.
Fair values of our forward foreign currency contracts were determined using observable inputs from available market information. Fair values of our cross-currency swaps were determined using quoted foreign currency exchange rates and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note 20, “Hedging Activities,” for fair value and other information on our foreign currency derivatives including forward foreign currency contracts and cross-currency swaps.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended March 31, 2018 and 2017.
Assets Measured at Fair Value on a Nonrecurring Basis
At March 31, 2018, assets measured at fair value on a nonrecurring basis consisted of goodwil, intangible and other long-lived assets for our McKesson Europe and Rexall Health reporting units within our Distribution Solutions segment.
At March 31, 2017, assets measured at fair value on a nonrecurring basis primarily consisted of our equity method investment in Change Healthcare (Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,”) and goodwill for our EIS reporting unit within our Technology Solutions segment.
Goodwill
Fair value assessments of the reporting unit and the reporting unit's net assets, which are performed for goodwill impairment tests, are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specificcompany-specific information. WeThe Company considered a market approach as well as an income approach using thea DCF model to determine the fair value of the reporting unit.
Refer to Financial Note 3,12, “Goodwill Impairment Charges,and Intangible Assets, Net,” for more information regarding goodwill impairment charges recorded for thesecertain reporting units during 20182021 and 2017.2019.
Intangible and Other Long-LivedLong-lived Assets
We measure certain intangibleThe Company utilizes multiple approaches including the DCF model and other long-lived assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. 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.
As discussed in Financial Note 4, “Restructuring and Asset Impairment Charges,” we recorded non-cash pre-tax charges of $479 million ($443 million after-tax) during 2018 to impair the carrying values of certain long-lived assets including intangible assets and capitalized software assets. We utilized an income approach (DCF method) or a combination of an income approach and a market approachapproaches for estimating the fair value of intangible assets. The future cash flows used in the analysis are based on internal cash flow projections based on ourfrom its long-range plans and 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)
Liabilities Measured at Fair Value on a Nonrecurring Basis
At March 31, 2018, we remeasured the contingent consideration liability related to our acquisition of CMM at fair value on a nonrecurring basis. Refer to Financial Note 6, “Business Combinations,” for more information on the fair value of the contingent consideration liability. There were no liabilities measuredThe Company measures certain long-lived and intangible assets at fair value on a nonrecurring basis at March 31, 2017.when events occur that indicate an asset group may not be recoverable. If the carrying amount of an asset group is not recoverable, an impairment charge is recorded to reduce the carrying amount by the excess over its fair value. Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges” under the heading “Long-Lived Assets Impairments” for more information.
We lease facilities18. Financial Guarantees and equipment almost solely under operating leases. At March 31, 2018, 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 |
| 2019 | $ | 502 |
|
| 2020 | 443 |
|
| 2021 | 383 |
|
| 2022 | 333 |
|
| 2023 | 277 |
|
| Thereafter | 1,134 |
|
Total minimum lease payments (1) | $ | 3,072 |
|
| |
(1) | Amount includes future minimum lease payments for the sale-leaseback transaction of $62 million. Minimum lease payments have not been reduced by minimum sublease income of $147 million due under future noncancelable subleases.
|
Rent expense under operating leases was $568 million, $474 million and $433 million in 2018, 2017 and 2016. Rent expense increased in 2018 due to our December 2017 acquisition of Rexall Health. 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 sixteen years, while remaining terms for equipment leases range from one to seven 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 2018, 2017 and 2016.
| |
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 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 twelveten 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, 2018,2021, the maximum amounts of inventory repurchase guarantees and customers’ debt guarantees were $234$329 million and $104$143 million,, respectively, of which we havethe Company has not accrued any material amounts. The expirations of these financial guarantees are as follows: $178$268 million,, $18 $26 million,, $7 $33 million,, $10 $11 million, and $18$15 million from 20192022 through 20232026 and $107$119 million thereafter.
At March 31, 2018, our2021, the Company’s banks and insurance companies have issued $259$146 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, and ourits workers’ compensation and automotive liability programs.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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.
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 |
19. 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.
Disclosure isprobable and reasonably estimable, it records a liability for an estimated amount. The Company also 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 theits recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the potential loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
We are party to the legal proceedings described below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.liability.
I. Litigation and Claims Involving Distribution of Controlled Substances
On September 7, 2007, McKesson Specialty Arizona Inc. was servedThe Company and its affiliates are defendants in many cases asserting claims related to distribution of controlled substances. They are named as defendants along with a complaintother pharmaceutical wholesale distributors, pharmaceutical manufacturers, and retail pharmacy chains. The plaintiffs in these actions include state attorneys general, county and municipal governments, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. These actions have been filed in state and federal courts throughout the New York Supreme Court, New York County by PSKW, LLC,U.S., and in Puerto Rico and Canada. They seek monetary damages and other forms of relief based on a variety of causes of action, including negligence, public nuisance, unjust enrichment, and civil conspiracy, as well as alleging that McKesson Specialty Arizona misappropriated trade secretsviolations of the Racketeer Influenced and confidential information in launching its LoyaltyScript® program, PSKW, LLC v. McKesson Specialty Arizona Inc., Index No. 602921/07. PSKW later amended its complaint twice to add additional, but related claims. On March 9, 2017, the court entered judgment after trial in McKesson Specialty Arizona’s favor on all claims. On April 6, 2017, PSKW appealed the trial court’s judgment. The appeal was dismissed on March 27, 2018.
On April 16, 2013, the Company’s wholly-owned subsidiary, U.S. Oncology, Inc.Corrupt Organizations Act (“USON”RICO”), was served withstate and federal controlled substances laws, and other statutes.
Since December 5, 2017, nearly all such cases pending in federal district courts have been transferred for consolidated pre-trial proceedings to a third amended qui tam complaint filedmulti-district litigation (“MDL”) in the United States District Court for the Northern District of Ohio captioned In re: National Prescription Opiate Litigation, Case No. 17-md-2804. At present, there are approximately 2,900 cases under the jurisdiction of the MDL court.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
NaN cases involving McKesson that were previously part of the federal MDL have been remanded to other federal courts for discovery and trial. On January 14, 2020, the Judicial Panel on Multidistrict Litigation finalized its Conditional Remand Order, ordering that the cases brought by Cabell County, West Virginia and the City of Huntington, West Virginia be remanded to the U.S. District Court for the Southern District of West Virginia. Trial in that case began on May 3, 2021. These two West Virginia plaintiffs are not expected to participate in any broader multistate resolution of opioid-related claims. On February 5, 2020, the case brought by the City and County of San Francisco was remanded to the U.S. District Court for the Northern District of California; trial has been set for December 6, 2021. Also on February 5, 2020, the case brought by the Cherokee Nation was remanded by the MDL court to the U.S. District Court for the Eastern District of New YorkOklahoma. The Cherokee Nation is not expected to participate in any broader multistate resolution of opioid-related claims.
The Company is also named in approximately 300 similar state court cases pending in 38 states plus Puerto Rico, along with 3 cases in Canada. These include actions filed by two relators, purportedly26 state attorneys general, and some by or on behalf of individuals, including wrongful death lawsuits, and putative class action lawsuits brought on behalf of children with neonatal abstinence syndrome due to alleged exposure to opioids in utero. Trial dates have been set in several of these state court cases. For example, trial in the Supreme Court of New York, Suffolk County for a case brought by the New York attorney general and 2 New York county governments, is scheduled to begin in June 2021, the cases brought by the Ohio and Washington attorneys general are scheduled to go to trial in September 2021, and the case brought by the Alabama attorney general is scheduled to go to trial in November 2021.
The Company continues to be involved in discussions with the objective of achieving broad resolution of opioid-related claims of states, their political subdivisions and other government entities (“governmental entities”). The Company is in ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework under which, in order to resolve claims of governmental entities, the 3 largest U.S. pharmaceutical distributors would pay up to approximately $21.0 billion over a period of 18 years, with up to approximately $8.0 billion to be paid by the Company, of which more than 90% is anticipated to be used to remediate the opioids crisis. Most of the remaining amount relates to plaintiffs’ attorneys’ fees and costs, and would be payable over a shorter time period. In addition, the proposed framework would require the 3 distributors, including the Company, to adopt changes to anti-diversion programs.
Under the framework, before the distributors determine whether to enter into any final settlement, they would assess the sufficiency of the scope of settlement, based in part on the number and identities of the governmental entities that would participate in any such settlement. The framework contemplates that if certain governmental entities do not agree to a settlement under the framework, but the distributors nonetheless concluded that there was sufficient participation to warrant the settlement, there would be a corresponding reduction in the amount due from the Company to account for the unresolved claims of the governmental entities that do not participate. Those non-participating governmental entities would be entitled to pursue their claims against the Company and other defendants.
The Company disclosed in its financial statements for the quarter ended December 31, 2020 its determination that discussions under that framework reached a stage at which a broad settlement of opioid claims by governmental entities was probable, and for which the loss could be reasonably estimated.
As a result of that conclusion, and its assessment of certain other opioid-related claims, the Company recorded a charge of $8.1 billion ($6.8 billion after-tax) within “Claims and litigation charges, net” in the Consolidated Statements of Operations related to its share of the settlement framework described above, as well as those certain other opioid-related claims. There was no change to the estimated liability as of March 31, 2021.
In light of the uncertainties, as described below, of the timing of amounts that would be paid with respect to these charges, they were recorded in “Long-term litigation liabilities” in the Company’s Consolidated Balance Sheet as of March 31, 2021. In addition, for the same reasons, the amount of loss that the Company ultimately might incur may differ materially from the amounts accrued.
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FINANCIAL NOTES (Continued)
Discussions with attorneys general and other parties continue. If the negotiating parties agree on terms under the framework for a broad resolution of claims of governmental entities, then those potential terms would need to be agreed to by numerous other state and local governments before an agreement could be accepted by the Company and finalized. In some cases, discovery has been paused during the parties’ discussions. While the Company continues to be involved in discussions regarding a potential broad settlement framework, the Company also continues to prepare for trial in these pending matters. The Company 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.
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 3 cases brought by governmental entities in Canada. These claims, and those of private entities generally, are not included in the settlement framework for governmental entities, 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. The Company has not concluded a loss is probable in any of these matters; nor is the amount of any loss reasonably estimable.
Because of the many uncertainties associated with any potential settlement arrangement or other resolution of all of these opioid-related litigation matters, including the uncertain scope of participation by governmental entities in any potential settlement under the framework described above, the Company is not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on the Company’s financial position, cash flows or liquidity, or results of operations.
On August 8, 2018, the Company was served with a qui tam complaint pending in the United States 21 states andDistrict Court for 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.
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.
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. The court has not yet ruled on USON’s motion.under the AIG and ACE policies seeking declarations and damages for past and future defense and indemnity costs.
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FINANCIAL NOTES (Continued)
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. Both plaintiffs alleged that defendants violated the TCPA by sending faxes that did not contain notices regarding how to opt out of receiving the faxes. On July 16, 2015, plaintiffs filed a motion for class certification. On August 22, 2016, the court denied plaintiffs’ motion for class certification.motion. On November 18, 2016, plaintiffs were granted leave to appeal that ruling toJuly 17, 2018, the United States Court of Appeals for the Ninth Circuit. Oral argument was heardCircuit Court affirmed in part and reversed in part the district court’s denial of class certification and remanded the case to the district court for further proceedings. On August 13, 2019, the court granted plaintiffs’ renewed motion for class certification. After class notice and the opt-out period, 9,490 fax numbers remain in the class, representing 48,769 faxes received. On March 5, 2020, McKesson moved to decertify the class and moved for summary judgment on plaintiffs’ claim for treble damages. Plaintiffs’ moved for summary judgment on the appeal, whichsame day. On December 24, 2020, the court declined to decertify the class but modified the class definition to distinguish between physical faxes (kept in the class) versus online or e-fax recipients (removed from the class). On March 19, 2021, the court denied summary judgment for plaintiffs on the issue of liability but found that McKesson’s affirmative defense of prior consent fails as a matter of law and precluded McKesson from presenting individualized evidence of consent at trial. On McKesson’s motion for summary judgment, the court demurred and will let the issue of treble damages go to the jury. Trial has been fully briefed, onscheduled for October 17, 2017. Separately, in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), certain third parties challenged the Federal Communications Commission’s (“FCC”) authority to require opt-out language on solicited faxes. Simultaneously, other third parties challenged the FCC’s authority to grant waivers, like those granted to the Company, of opt-out language requirements on solicited faxes. On March 31, 2017, the D.C. Circuit vacated the FCC order requiring opt-out language on solicited faxes and dismissed as moot the challenge relating to waivers. On February 20, 2018, the United States Supreme Court denied a petition for certiorari seeking review of the D.C. Circuit’s ruling.18, 2021.
On December 29, 2017, two2 investment funds holding shares in Celesio AG filed a complaint against McKesson Europe Holdings (formerly known as “Dragonfly GmbH & Co KGaA”), a wholly-owned subsidiary of the Company, in a German court in Stuttgart, Germany,Polygon European Equity Opportunity Master Fund et al. v. McKesson Europe Holdings GmbH & Co. KGaA, No. 18 O 455/17 (the “Polygon” matter).17. On December 30, 2017, 4 investment funds, which had allegedly entered into swap transactions regarding shares in Celesio AG that would have enabled them to decide whether to accept McKesson Europe Holdings’s takeover offer in its acquisition of Celesio AG, filed a complaint, Davidson Kempner International (BVI) Ltd. et al. v. McKesson Europe Holdings GmbH & Co. KGaA, No.16 O 475/17. The complaint allegescomplaints allege that the public tender offer document published by McKesson Europe in its acquisition of Celesio AG incorrectly stated that McKesson Europe’s acquisition of convertible bonds would not be treated as a relevant acquisition of shares for the purposes of triggering minimum pricing considerations under Section 4 of the German Takeover Offer Ordinance. On December 30, 2017, four additional investment funds which allegedly entered into swap transactions regarding shares in Celesio AG that would have enabled them to decide whether to accept the takeover offer filed a substantively identical claim, Davidson Kempner International (BVI) Ltd. et al. v. McKesson Europe Holdings GmbH & Co. KGaA, No.16 O 475/17 (the “Davidson” matter). On March 9, 2018, McKesson Europe filed its statement of defense in the Polygon matter. On May 11, 2018, the court in the Polygon matter dismissed the claims against McKesson Europe. McKesson EuropePlaintiffs appealed this ruling and, on December 19, 2018, the Higher Regional Court (Oberlandesgericht) of Stuttgart confirmed the full dismissal of the Polygon matter. Plaintiffs filed its statementa complaint against denial of defenseleave to appeal with the Federal Court of Justice (Bundesgerichtshof), which was rejected on November 17, 2020, making the dismissal final and binding. With no further right to appeal, Plaintiffs filed an objection against the decision of the Federal Court of Justice on November 27, 2020, claiming their right to be heard had been violated. On March 16, 2021, the Federal Court of Justice (Bundesgerichtshof) issued an order granting the Polygon plaintiffs leave to appeal. On March 15, 2019, the lower court in Davidson similarly dismissed the Davidson mattercase. Plaintiffs appealed this ruling and, on April 12, 2018.
October 9, 2019, the Higher Regional Court (Oberlandesgericht) of Stuttgart confirmed the full dismissal of the Davidson matter. On November 13, 2019, plaintiffs filed a complaint against denial of leave to appeal with the Federal Court of Justice (Bundesgerichtshof). On March 16, 2021, the Federal Court of Justice (Bundesgerichtshof) issued an order granting the Davidson plaintiffs leave to appeal.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On June 17, 2014, U.S. Oncology Specialty, LP (“USOS”)March 5, 2018, the Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads), was served with a fifth amended qui tam complaint filed in July 20082017 in the United States District Court for the Southern District of Illinois by a relator against RxC Acquisition Company, among others, alleging that UCB, Inc. provided illegal “kickbacks” to providers, including nurse educator services and reimbursement assistance services provided through RxC Acquisition Company, in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes. United States ex rel. CIMZNHCA, LLC v. UCB, Inc., et al., No. 17-cv-00765. The complaint sought treble damages, civil penalties, and further relief. The United States and the states named in the complaint declined to intervene in the suit. On December 17, 2018, the United States filed a motion to dismiss the complaint in its entirety; this motion was denied on April 15, 2019. On June 7, 2019, the court denied the United States’ motion for reconsideration. On July 8, 2019, the United States appealed to the United States Court of Appeals for the Seventh Circuit seeking interlocutory review of the denial of its motion for reconsideration of the denial of the motion to dismiss the complaint. On September 3, 2019, the United States District Court for the Southern District of Illinois stayed the district court proceedings pending the appeal. On August 17, 2020, the Seventh Circuit reversed the district court’s decision on the United States’ motion to dismiss and remanded the case with instructions that the district court enter judgment for the defendants on the relator’s claims under the False Claims Act. The relator sought a re-hearing en banc at the Seventh Circuit, which was denied. The relator’s False Claims Act case was dismissed, with judgment entered in favor of the defendants on September 30, 2020. On February 10, 2021, the relator filed a Petition for Writ of Certiorari at the United States Supreme Court seeking review of the Seventh Circuit’s ruling.
On April 16, 2013, the Company’s subsidiary, U.S. Oncology, Inc. (“USON”), was served with a third amended qui tam complaint filed in the United States District Court for the Eastern District of New York by 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, and the hearing occurred on October 7, 2014. The court has not yet ruled on USOS’s motion.
with leave to amend. On January 26, 2016, the Company was served with an amended complaint filed in the Circuit Court of Boone County, West Virginia, by the State of West Virginia, including the Attorney General of West Virginia, alleging that since 2007, the Company has oversupplied controlled substances to West Virginia and failed to report suspicious orders of controlled substances in violation of the West Virginia Controlled Substances Act, the West Virginia Consumer and Protection Act, as well as common law claims for negligence, public nuisance and unjust enrichment, and seeking injunctive relief, monetary damages and civil penalties, all in unspecified amounts, State of West Virginia ex rel. Morrisey v. McKesson Corporation, Civil Action No.: 16-C-1. Following removal to the United States District Court for the Southern District of West Virginia (Civil Action No.: 2:16-cv-01772), the court remanded the matter to state court in January 2017. On July 7, 2017, the Company again removed the matter to the United States District Court for the Southern District of West Virginia (Civil Action No. 2:16-cv-03555.) On February 15,November 16, 2018, the court remanded the matter to state court. The trial of the matter is scheduled to begin on April 30, 2019. The Company’s motion for judgment on the pleadings is fully briefed.relators filed a fourth amended complaint.
On May 2, 2017, the CompanyJune 17, 2014, U.S. Oncology Specialty, LP (“USOS”) was served with a fifth amended qui tamcomplaint filed in the District Court of the Cherokee Nation by the Cherokee Nation against the Company and five other defendants, alleging that the defendants oversupplied controlled substances to the Cherokee Nation in violation of the Cherokee National Unfair and Deceptive Practices Act, as well as common law claims for nuisance, negligence, unjust enrichment and civil conspiracy, and seeking injunctive relief, civil penalties, compensatory damages, restitution, punitive damages, and attorneys’ fees and costs, all in unspecified amounts, Cherokee Nation v. AmerisourceBergen, et al., CV-2017-203. On June 8, 2017, the Company and the other defendants in this action filed suit in the United States District Court for the Northern District of Oklahoma, seeking a declaratory judgment that the Cherokee Nation District Court has no jurisdiction over the claims asserted by the Cherokee Nation in its suit, McKesson Corporation, et al. v. Todd Hembree, et al., No.4:17-cv-00323. On January 9, 2018, the court granted the motion for preliminary injunction enjoining the defendants from taking any action in the case pending in the tribal court. On January 19, 2018, the Cherokee Nation refiled its suit against the Company and the five other original defendants in the district court of Sequoyah County, Oklahoma, The Cherokee Nation v. McKesson Corporation, et al., Case no. CT-2081-11. On February 26, 2018, the Company and the other defendants removed this case to the United States District Court for the Eastern District of Oklahoma (Case No. 6:18-cv-00056). On March 1, 2018, the Cherokee Nation filed a motion to remand the matter to state court.
The Company is also a defendant in many cases alleging claims related to the distribution of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. The plaintiffs in these actions include state attorneys general, county and city municipalities, hospitals, Indian tribes, pension funds, and third-party payors. The Company has been served with 394 complaints filed in state and federal courts in Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin and Wyoming. Since December 5, 2017, nearly all the cases pending in federal district courts have been transferred to a multi-district litigation proceeding in the United States District Court for the Northern District of Ohio captions In re: National Prescription Opiate Litigation, Case No. 17-md-28-04. On April 11, 2018, the court issued a case management order setting forth a briefing schedule to resolve legal issues across several bellwether states and a discovery schedule and March 9, 2019 trial date for three Ohio cases, The County of Summit, Ohio v. Purdue Pharma L.P., et al., Case No. 18-OP-45090 (N.D. Ohio); The County of Cuyahoga v. Purdue Pharma, L.P., et al., Case No. 17-OP-45004 (N.D. Ohio); and City of Cleveland v. AmerisourceBergen Drug Corp., et al., Case No. 18-OP-4532 (N.D. Ohio.)
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FINANCIAL NOTES (Continued)
On April 3, 2017, Eli Inzlicht, a purported shareholder, filed a shareholder derivative complaint in the United States District Court for the Northern District of California against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the Drug Enforcement Administration (“DEA”) and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts, Inzlicht v. McKesson Corporation, et.al., No. 5:17-cv-01850. On July 26, 2017, Vladimir Gusinsky, as trustee for the Vladimir Gusinsky Living Trust, a purported shareholder, filed a shareholder derivative complaint in the same court based on similar allegations, Vladimir Gusinsky, as Trustee for the Vladimir Gusinsky Living Trust v. McKesson Corporation, et.al., No. 5:17-cv-4248. On October 9, 2017, the court consolidated the two matters, In re McKesson Corporation Derivative Litigation, No. 4:17-cv-1850. On January 5, 2018, the defendants moved to dismiss the consolidated suit. On May 14, 2018, the court denied in part and granted in part the motions to dismiss.
On October 17, 2017, Chaile Steinberg, a purported shareholder, filed a shareholder derivative complaint in the Delaware Court of Chancery against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking damages and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts, Steinberg v. McKesson Corporation, et.al., No. 2017-0736. Three similar suits were thereafter filed by purported shareholders in the Court of Chancery of the State of Delaware, including Police & Fire Ret. Sys. of the City of Detroit v. McKesson Corporation, et al., No. 2017-0803, Amalgamated Bank v. McKesson Corporation, et al., No. 2017-0881, and Greene v. McKesson Corporation, et al., No. 2018-0042. The court ordered that all four actions be consolidated, and the plaintiffs designated the complaint in the Steinberg action as the operative complaint. The consolidated matter is captioned In re McKesson Corporation Stockholder Derivative Litigation, No. 2017-0736. The defendants filed a motion to dismiss the complaint on January 18, 2018, and a hearing on that motion took place on March 7, 2018.
On March 5, 2018, Rxc Acquisition Company (d/b/a RxCrossroads) was served with a qui tam complaint filed in July 2017 in the United States District Court for the Southern District of Illinois by a relator against Rxc Acquisition Company,alleging that USOS, among others, alleging that UCB, Inc., providedsolicited and received illegal “kickbacks” to providers, including nurse educator services and reimbursement assistance services provided through Rxc Acquisition Company,from Amgen in violation of the Anti-Kickback Statute, the federal False Claims Act, and various state false claims statutes. statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts, United States ex rel. CIMZNHCA, LLCHanks v. UCB,Amgen, Inc., et al., No. 17-cv-00765. The complaint seeks treble damages, civil penalties, and further relief, all in unspecified amounts. The United States andCV-08-03096 (SJ). Previously, the states named in the complaint haveU.S. declined to intervene in the suit.case as to all allegations and 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 response of Rxc Acquisition Company is duedistrict court granted the relator leave to amend the complaint for a seventh time. The relator filed the seventh amended complaint on May 25, 2018.November 30, 2020.
On April 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 two2 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). On April 16, 2018, theThe United States filed a notice decliningand the named states have declined to intervene in the case. On May 9,October 15, 2018, the statesCompany filed a notice also decliningmotion 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 on March 23, 2021.
II.On December 30, 2019, a group of independent pharmacies and a hospital filed a 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 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.
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. Subject to final court approval, 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.
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 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
III. Government Subpoenas and Investigations
From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. For example, in May 2017, the Company was served with a Civil Investigative Demand by the U.S. Attorney’s Office for the Eastern District of New York relating to the certification it obtained for a software product under the U.S. Department of Health and Human Services’ Electronic Health Record Incentive Program. Also in May 2017, the Company received a request for information from the U.S. Attorney’s Office for the Eastern District of Pennsylvania relating to the use of a Company pharmacy management software system to process partially-filled prescriptions. In September 2017, the Company received a request for information and documents from a group of approximately 40 state attorneys general related to an investigation into the factors contributing to the increasing number of opioid-related hospitalizations and deaths in the United States. The Company has also received civil investigative demands, subpoenas or requests for information from several other state attorneys general on the same issues. The Company is currently responding to these requests. 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 2015,May 2017 and August 2018, respectively, the Company recorded a pre-tax chargewas served with 2 separate Civil Investigative Demands by the U.S. Attorney’s Office for the Eastern District of $150 millionNew 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 previously disclosed agreementanti-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 DEAControlled Substances Act and related statutes.
On November 12, 2019, the New York Department of JusticeFinancial Services sent a Notice of Intent to Commence Enforcement Action to McKesson Corporation and variousPSS World Medical, Inc. for alleged violations of the New York Insurance Law and/or New York Financial Services Law, and seeking civil monetary penalties, in connection with manufacturing and distributing opioids in New York.
In January 2020, the United States Attorneys’ officesAttorney’s Office for the District of Massachusetts served a Civil Investigative Demand on the Company seeking documents related to settle all potential administrativecertain discounts and rebates paid to physician practice customers.
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 is also part of the investigation. On April 23, 2021, McKesson received correspondence from the Belgian Competition Authority seeking civil claims relatingpenalties.
IV. State Opioid Statutes
Legislative, regulatory or industry measures to investigations aboutaddress the misuse of prescription opioid medications could affect the Company’s suspicious order reporting practicesbusiness in ways that it may not be able to predict. For example, in April 2018, the State of 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 controlled substances. In Januaryopioids 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 has 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 Company finalizedConsolidated Statement of Operations for the settlementsyear ended March 31, 2021 and paid $150 million in cash.“Other accrued liabilities” in the Consolidated Balance Sheet as of March 31, 2021. The State of New York adopted an excise tax on sales of opioids in the 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 U.S. Court of 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 disposition of a petition for writ of certiorari before the U.S. Supreme Court. The due date for filing such a petition is May 17, 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 $9.5$10 million, net of amounts anticipated from third parties. The $9.5$10 million is expected to be paid out between April 20182021 and March 2048.2051. 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.
In addition, theThe 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 14 sites. With respect to these sites, numerous other PRPs have similarly been designated and while the current state of the law potentially imposes joint and several 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 14 sites is approximately $21.6$28 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.
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 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.
VII. Antitrust Settlements
TableNumerous 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 plaintiff in any of Contentsthese 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 past with the Company receiving proceeds, including $181 million, $22 million, and $202 million in 2021, 2020, and 2019, respectively, which were included in “Cost of sales” in the Consolidated Statements of Operations.McKESSON CORPORATION
FINANCIAL NOTES (Continued)
V.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.
20. Stockholders' Equity
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”).
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In July 2017,2020, the Company’s quarterly dividend was raised from $0.28$0.41 to $0.34$0.42 per common share for dividends declared on or after such date by the Board. Dividends were $1.30$1.67 per share in 2018, $1.122021, $1.62 per share in 20172020, and $1.08$1.51 per share in 2016.2019. 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.
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, 2018 | | | | | | $ | 1,096 | |
| Shares repurchase plans authorized in May 2018 | | | | | | 4,000 | |
| Shares repurchased - Open market | | 10.4 | | | $ | 132.14 | | | (1,377) | |
| Shares repurchased - ASR | | 2.1 | | | $ | 117.98 | | | (250) | |
| Balance, March 31, 2019 | | | | | | 3,469 | |
| Shares repurchased - Open market | | 9.2 | | | $ | 144.68 | | | (1,334) | |
| Shares repurchased - ASR | | 4.7 | | | $ | 127.68 | | | (600) | |
| Balance, March 31, 2020 | | | | | | 1,535 | |
| Shares repurchase plans authorized in January 2021 | | | | | | 2,000 | |
Shares repurchased - Open market (3) | | 4.7 | | | $ | 160.33 | | | (750) | |
| | | | | | |
| Balance, March 31, 2021 | | | | | | $ | 2,785 | |
|
| | | | | | | | | | |
| | Share Repurchases (1) |
| (In millions, except price per share data) | | Total Number of Shares Purchased (2) (4) | | Average Price Paid Per Share | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| Balance, March 31, 2015 | | | | | | $ | — |
|
| Shares repurchase plans authorized | | | | | | |
| May 2015 | | | | | | 500 |
|
| October 2015 | | | | | | 2,000 |
|
| Shares repurchased | | 8.7 | | $ | 173.64 |
| | (1,504 | ) |
| Balance, March 31, 2016 | | | | | | $ | 996 |
|
| Shares repurchase plans authorized | | | | | | |
| October 2016 | | | | | | 4,000 |
|
| Shares repurchased | | 15.5 | | $ | 141.16 |
| | (2,250 | ) |
| Balance, March 31, 2017 | | | | | | $ | 2,746 |
|
| Shares repurchased | | 10.5 | | $ | 151.06 |
| (3) | (1,650 | ) |
| Balance, March 31, 2018 | | | | | | $ | 1,096 |
|
| |
(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 average price paid per share computation includes the initial share settlement of 2.5 million shares from the March 2018 ASR program, of which the actual average price of shares will be determined at the termination of the program. |
| |
(4) | The number of shares purchased reflects rounding adjustments. |
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations. It also excludes shares related to the Company’s Split-off of the Change Healthcare JV as described below.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(3)$8 million was accrued within “Other accrued liabilities” on the Company’s Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April.
During the last three years, ourthe Company’s share repurchases were transacted through both open market transactions and ASR programs with third party financial institutions.
In May and October 2015,2019, the Board authorized the repurchase of up to $500Company retired 5.0 million and $2 billion of the Company’s common stock.
In 2016, we repurchased 4.5or $542 million of the Company’s shares for $854 million through open market transactions at an average price per share of $192.27. In February 2016, we entered into an ASR program with a third-party financial institution to repurchase $650 million of the Company’s common stock. The ASR program was completed during the fourth quarter of 2016 and we repurchased 4.2 million shares at an average price per share of $154.04. During 2016, we completed the May 2015 share repurchase authorization. At March 31, 2016, $1.0 billion remained available for future authorized repurchases of the Company’s common stock under the October 2015 authorization.
In 2016, we retired 115.5 million or $7.8 billion of the Company’sits treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with ourthe Company’s accounting policy, we allocate any excess of share repurchase price over par value is allocated between additional paid-in capital and retained earnings. Accordingly, ourits retained earnings and additional paid-in capital were reduced by $6.4 billion and $1.5 billion during 2016.
In October 2016, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock.
In 2017, we repurchased 14.1 million of the Company’s shares for $2.0 billion through open market transactions at an average price per share of $140.96. In March 2017, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. As of March 31, 2017, we had received 1.4 million shares under this program. This ASR program was completed in April 2017 and we received 0.3 million additional shares. The total number of shares repurchased under this ASR program was 1.7 million shares at an average price per share of $143.19. During 2017, we completed the October 2015 share repurchase authorization. The total authorization outstanding for repurchases of the Company’s common stock was $2.7 billion at March 31, 2017.
In 2018, we repurchased 3.5 million of the Company’s shares for $500 million through open market transactions at an average price per share of $144.43. In June 2017, August 2017 and March 2018, we entered into three separate ASR programs with third-party financial institutions to repurchase $250 million, $400$472 million and $500$70 million, of the Company’s common stock. As of March 31, 2018, we completed and received a total of 1.5 million shares under the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. In addition, we received 2.5 million shares representing the initial number of shares due in March 2018 and an additional 0.5 million shares in April 2018 under the March 2018 ASR program. The total number of shares to be ultimately repurchased by the Company under the March 2018 ASR program will be determined at the completion of the program based on the average daily volume-weighted average price of the Company’s common stockrespectively, during this program, less a discount. The program is anticipated to be completed during the first quarter of 2019. The total authorization outstanding for repurchase of the Company’s common stock was $1.1 billion at March 31, 2018.
In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock. The total authorization outstanding for repurchases of the Company’s common stock was increased to $5.1 billion.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On March 9, 2020, the Company completed the Split-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 in exchange for 15.4 million shares of McKesson stock, which are now held as treasury stock on the Company’s Consolidated Balance Sheets. Following consummation of the exchange offer, on March 10, 2020, SpinCo merged with and into Change with 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. See Note 2, “Investment in Change Healthcare Joint Venture,” for more information.
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) | 2021 | | 2020 | | 2019 |
Foreign currency translation adjustments: (1) | | | | | |
Foreign currency translation adjustments arising during period, net of income tax expense of NaN, NaN, and NaN (2) | $ | 312 | | | $ | (151) | | | $ | (431) | |
Reclassified to income statement, net of income tax expense of NaN, NaN, and NaN (3) | 47 | | | 0 | | | 0 | |
| 359 | | | (151) | | | (431) | |
Unrealized gains (losses) on net investment hedges: (4) | | | | | |
| Unrealized gains (losses) on net investment hedges arising during period, net of income tax (expense) benefit of $62, $(30), and $(71) | (175) | | | 85 | | | 241 | |
| Reclassified to income statement, net of income tax expense of NaN, NaN, and NaN | 0 | | | 0 | | | 0 | |
| (175) | | | 85 | | | 241 | |
| Unrealized gains (losses) on cash flow hedges: | | | | | |
| Unrealized gains (losses) on cash flow hedges arising during period, net of income tax (expense) benefit of $6, $(12), and $(4) | (36) | | | 86 | | | 24 | |
| Reclassified to income statement, net of income tax expense of NaN, NaN, and NaN | 0 | | | 0 | | | 0 | |
| (36) | | | 86 | | | 24 | |
| Changes in retirement-related benefit plans: | | | | | |
Net actuarial gain (loss) and prior service credit (cost) arising during the period, net of income tax (expense) benefit of $2, $(8), and $5 (5) | 9 | | | 27 | | | (51) | |
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax benefit of $1, $1, and NaN (6) | 0 | | | 2 | | | 9 | |
| Foreign currency translation adjustments and other, net of income tax expense of NaN, NaN, and NaN | (11) | | | 6 | | | 10 | |
Reclassified to income statement, net of income tax expense of $9, $33, and NaN (3) (7) | 24 | | | 94 | | | 0 | |
| 22 | | | 129 | | | (32) | |
| | | | | |
| Other comprehensive income (loss), net of tax | $ | 170 | | | $ | 149 | | | $ | (198) | |
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
Foreign currency translation adjustments:(1) | | | | | |
Foreign currency translation adjustments arising during period, net of income tax expense (benefit) of nil, ($1) and ($23) (2) (3) | $ | 804 |
| | $ | (644 | ) | | $ | 113 |
|
Reclassified to income statement, net of income tax expense of nil, nil and nil (4) | — |
| | 20 |
| | — |
|
| | 804 |
| | (624 | ) | | 113 |
|
Unrealized gains (losses) on net investment hedges (5) | | | | | |
| Unrealized gains (losses) on net investment hedges arising during period, net of income tax benefit of $95, $5 and nil | (180 | ) | | (8 | ) | | — |
|
| Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | — |
|
| | (180 | ) | | (8 | ) | | — |
|
| Unrealized gains (losses) on cash flow hedges: | | | | | |
| Unrealized gains (losses) on cash flow hedges arising during period, net of income tax benefit of $9, nil and nil | (30 | ) | | (19 | ) | | 6 |
|
| Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | 3 |
|
| | (30 | ) | | (19 | ) | | 9 |
|
| 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 $2, $4 and $13 (6) | 25 |
| | (20 | ) | | 23 |
|
Amortization of actuarial gain (loss), prior service cost and transition obligation, net of income tax expense (benefit) of $2, $4 and $18 (7) | 5 |
| | 9 |
| | 30 |
|
| Foreign currency translation adjustments and other, net of income tax expense of nil, nil and nil | (15 | ) | | 3 |
| | (3 | ) |
| Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | — |
|
| | 15 |
| | (8 | ) | | 50 |
|
| |
|
| |
| |
|
| Other Comprehensive Income (Loss), net of tax | $ | 609 |
| | $ | (659 | ) | | $ | 172 |
|
| |
(1) | Foreign currency translation adjustments primarily result from the conversion of non-U.S. dollar financial statements of our foreign subsidiaries into the Company’s reporting currency, U.S. dollars. |
| |
(2) | The 2018 net foreign currency translation gains of $804 million were primarily due to the strengthening of the Euro, British pound sterling and Canadian dollar against the U.S. dollar from April 1, 2017 to March 31, 2018. The 2017 net foreign currency translation losses of $644 million were primarily due to the weakening of the Euro and British pound sterling against the U.S. dollar from April 1, 2016 to March 31, 2017. |
| |
(3) | 2018 includes net foreign currency translation gains of $189 million and 2017 includes net foreign currency translation losses of $74 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 our Brazilian pharmaceutical distribution business. |
| |
(5) | 2018 and 2017 include foreign currency losses of $268 million and $13 million on the net investment hedges from the Euro and British pound sterling-denominated notes. |
| |
(6) | The net actuarial losses of $4 million and $5 million were attributable to noncontrolling and redeemable noncontrolling interests in 2018 and 2017. |
| |
(7) | Pre-tax amount was reclassified into cost of sales and operating expenses in the consolidated statements of operations. The related tax expense was reclassified into income tax expense in the consolidated statements of operations. |
(2)2021, 2020, and 2019 include net foreign currency translation adjustments of $(60) million, $1 million, and $(61) million, respectively, attributable to noncontrolling and redeemable noncontrolling interests.
(3)2021 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 3, “Held for Sale.” These amounts were included in the current and prior periods calculation of charges to remeasure the assets and liabilities held for sale to fair value less costs to sell recorded within Operating expenses in the Consolidated Statements of Operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(4)2021, 2020, and 2019 include foreign currency adjustments of $(118) million, $39 million, and $259 million, respectively, on the net investment hedges from the Euro and British pound sterling-denominated notes. 2021, 2020, and 2019 also include foreign currency adjustments of $(119) million, $76 million, and $53 million, respectively, on the net investment hedges from the cross-currency swaps.
(5)The 2021 and 2020 net actuarial gains of $8 million and $2 million, respectively, and 2019 net actuarial loss of $5 million were attributable to noncontrolling and redeemable noncontrolling interests.
(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 benefit (expense)” in the Consolidated Statements of Operations.
(7)2020 primarily reflects a reclassification of losses in 2020 upon the termination of the Plan from “Accumulated other comprehensive loss” to “Other income, net” in the Company’s Consolidated Statement of Operations.
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 | | Unrealized Gains (Losses) on Net Investment Hedges,
Net of Tax | | Unrealized Gains (Losses) on Cash Flow Hedges,
Net of Tax | | Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax | | Total Accumulated Other Comprehensive 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 | 0 | | | 0 | | | 0 | | | 96 | | | 96 | |
| Other comprehensive income (loss) | (151) | | | 85 | | | 86 | | | 129 | | | 149 | |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | 1 | | | 0 | | | 0 | | | 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 | 47 | | | 0 | | | 0 | | | 24 | | | 71 | |
| Other comprehensive income (loss) | 359 | | | (175) | | | (36) | | | 22 | | | 170 | |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | (60) | | | (1) | | | 0 | | | 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) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | | | | | |
| (In millions) | Foreign Currency Translation Adjustments, Net of Tax | | Unrealized Losses on Net Investment Hedges, Net of Tax | | Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax | | Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax | | Total Accumulated Other Comprehensive Income (Loss) |
| Balance at March 31, 2016 | $ | (1,323 | ) | | $ | — |
| | $ | (12 | ) | | $ | (226 | ) | | $ | (1,561 | ) |
| Other comprehensive income (loss) before reclassifications | (644 | ) | | (8 | ) | | (19 | ) | | (17 | ) | | (688 | ) |
| Amounts reclassified to earnings | 20 |
| | — |
| | — |
| | 9 |
| | 29 |
|
| Other comprehensive income (loss) | $ | (624 | ) | | $ | (8 | ) | | $ | (19 | ) | | $ | (8 | ) | | $ | (659 | ) |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | (74 | ) | | — |
| | — |
| | (5 | ) | | (79 | ) |
| Other comprehensive income (loss) attributable to McKesson | $ | (550 | ) | | $ | (8 | ) | | $ | (19 | ) | | $ | (3 | ) | | $ | (580 | ) |
| Balance at March 31, 2017 | $ | (1,873 | ) | | $ | (8 | ) | | $ | (31 | ) | | $ | (229 | ) | | $ | (2,141 | ) |
| Other comprehensive income (loss) before reclassifications | 804 |
| | (180 | ) | | (30 | ) | | 10 |
| | 604 |
|
| Amounts reclassified to earnings and other | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
| Other comprehensive income (loss) | $ | 804 |
| | $ | (180 | ) | | $ | (30 | ) | | $ | 15 |
| | $ | 609 |
|
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | 189 |
| | — |
| | — |
| | (4 | ) | | 185 |
|
| Other comprehensive income (loss) attributable to McKesson | $ | 615 |
| | $ | (180 | ) | | $ | (30 | ) | | $ | 19 |
| | $ | 424 |
|
| Balance at March 31, 2018 | $ | (1,258 | ) | | $ | (188 | ) | | $ | (61 | ) | | $ | (210 | ) | | $ | (1,717 | ) |
| |
26. | Related Party Balances and Transactions |
FINANCIAL NOTES (Continued)
21. Related Party Balances and Transactions
During the fourth quarter of 2018, a public benefit California foundation (“Foundation”) was established to provide opioid education to patients, caregivers, and providers, address policy issues, and increase patient access to life-saving treatments. Certain officers of the Company also serve as directors and officers of the Foundation. In March 2018, we made a pledge toDuring 2019, the Foundation and incurred a pre-tax charitable contribution expense of $100 million ($64 million after-tax) for 2018, which was recorded under the caption, “Selling, distribution and administrative expenses,” in the accompanying consolidated statement of operations. The Company had a pledge payable balancepaid cash of $100 million to the Foundation as of March 31, 2018, which was included underto settle an outstanding pledge it made in 2018. During the caption, “Other accrued liabilities,” in our consolidated balance sheet. The pledge is binding and enforceable and is expected to be paid in the firstfourth quarter of 2019.2020, the Company also contributed $20 million to the McKesson Foundation, which supports the Company’s employees and their community involvement efforts, with a special focus on cancer. A portion of this contribution was directed to an emergency employee assistance fund administered by the Emergency Assistance Foundation, an independent nonprofit organization, to provide support for employees impacted by the COVID-19 pandemic.
McKesson Europe has investments in pharmacies located across Europe that are accounted for under the equity method. McKesson Europe maintains distribution arrangements with these pharmacies for the sale of related goods and services under which revenues of $154$178 million, $112$141 million, and $112$137 million, are included in our consolidated statementsthe Consolidated Statements of operationsOperations for the years ended March 31, 2018, 20172021, 2020, and 20162019, respectively, and receivables of $15 million and $12 million arerelated to these transactions included in our consolidated balance sheetsthe Consolidated Balance Sheets were not material as of March 31, 20182021 and 2017.2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
its equity method investees in the U.S. Pharmaceutical segment totaled $111 million, $60 million, and $34 million, respectively. Trade receivables related to these transactions from this investee were not material as of March 31, 2021 and 2020.
Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,“Investment in Change Healthcare Joint Venture,” for information regarding related party balances and transactions with Change Healthcare.and the Change Healthcare JV.
During22. Segments of Business
Commencing with the second quarter of 2021, the Company implemented a new segment reporting structure which resulted in 4 reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and RxTS. Other, for retrospective periods presented, consists of the Company’s equity method investment in the Change Healthcare JV, which was split-off from McKesson in the fourth quarter of 2017, we completed a sale-leaseback transaction for our corporate headquarters building in San Francisco, California.2020. All prior segment information has been recast to reflect the Company’s new segment structure and current period presentation. The transaction resulted in net cash proceedsorganizational structure also includes Corporate, which consists of $223 millionincome and a pre-tax gain of $15 million, which represents the amount of total gain in excess of the present value of the minimum lease payments. Additionally, we deferred a pre-tax gain of $48 million; such gain will be amortized on a straight-line basis over the lease term as a reduction to selling, distribution, and administrative expense in the accompanying consolidated statements of operations. Refer to Financial Note 22, “Lease Obligations,” for the future minimum lease paymentsexpenses associated with this sale-leaseback.
We report our operations in two reportable segments for 2018, 2017administrative functions and 2016: McKesson Distribution Solutionsprojects, and McKesson Technology Solutions.the results of certain investments. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluateThe Company evaluates the performance of ourits operating segments usingon a number of measures, including revenues and operating profit before interest expense and income taxes and results from discontinued operations.
Our Distribution Solutions segment distributes brand, generic, specialty, biosimilar and OTC pharmaceutical drugs and other healthcare-related products internationally and provides practice management, technology, clinical support and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers including offering multiple distribution channels and clinical trial access to our network of oncology physicians. It also provides medical-surgical supply distribution, logistics and other services to healthcare providers within the United States. Additionally, this segment operates retail pharmacy chains in Europe and Canada, and supports independent pharmacy networks within North America and Europe. It also supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies.
Prior to March 2017, our McKesson Technology Solutions (“MTS”) segment delivered enterprise-wide clinical, patient care, financial, supply chain, strategic management software solutions, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations. On March 1, 2017, upon the closing of Healthcare Technology Net Asset Exchange, we contributed the majority of our MTS businesses to the newly formed joint venture, Change Healthcare. We retained our RHP and EIS businesses. Effective April 1, 2017, our RHP business was transitioned to the Distributions Solution segment. The EIS business was sold to a third party during 2018. Accordingly, the MTS segment only included our equity method investment in Change Healthcare at the end of 2018. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” and Financial Note 5, “Divestitures,” for additional information about Change Healthcare and the sale of our EIS business.
Corporate includes expenses associated with Corporate functions and projects, and the results of certain investments. Corporate expenses are allocated to operating segments to the extent that these items are directly attributable.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial information relating to our reportable segments and reconciliations to the consolidated totals is as follows:
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Revenues | | | | | |
Distribution Solutions (1) | | | | | |
| North America pharmaceutical distribution and services | $ | 174,186 |
| | $ | 164,832 |
| | $ | 158,469 |
|
| International pharmaceutical distribution and services | 27,320 |
| | 24,847 |
| | 23,497 |
|
| Medical-Surgical distribution and services | 6,611 |
| | 6,244 |
| | 6,033 |
|
| Total Distribution Solutions | 208,117 |
| | 195,923 |
| | 187,999 |
|
| | | | | | |
| Technology Solutions - products and services | 240 |
| | 2,610 |
| | 2,885 |
|
| Total Revenues | $ | 208,357 |
| | $ | 198,533 |
| | $ | 190,884 |
|
| | | | | | |
| Operating profit | | | | | |
Distribution Solutions (2) (3) | $ | 1,231 |
| | $ | 3,361 |
| | $ | 3,553 |
|
Technology Solutions (4) | (23 | ) | | $ | 4,215 |
| | $ | 519 |
|
| Total | 1,208 |
| | 7,576 |
| | 4,072 |
|
Corporate Expenses, Net (5) | (564 | ) | | $ | (377 | ) | | $ | (469 | ) |
| Loss on Debt Extinguishment | (122 | ) | | — |
| | $ | — |
|
| Interest Expense | (283 | ) | | $ | (308 | ) | | $ | (353 | ) |
| Income From Continuing Operations Before Income Taxes | $ | 239 |
| | $ | 6,891 |
| | $ | 3,250 |
|
| | | | | | |
Depreciation and amortization (6) | | | | | |
| Distribution Solutions | $ | 831 |
| | $ | 735 |
| | $ | 669 |
|
| Technology Solutions | 9 |
| | 65 |
| | 107 |
|
| Corporate | 111 |
| | 110 |
| | 109 |
|
| Total | $ | 951 |
| | $ | 910 |
| | $ | 885 |
|
| | | | | | |
Expenditures for long-lived assets (7) | | | | | |
| Distribution Solutions | $ | 306 |
| | $ | 276 |
| | $ | 306 |
|
| Technology Solutions | — |
| | 30 |
| | 15 |
|
| Corporate | 99 |
| | 98 |
| | 167 |
|
| Total | $ | 405 |
| | $ | 404 |
| | $ | 488 |
|
| | | | | | |
Revenues, net by geographic area (8) | | | | | |
| United States | $ | 169,943 |
| | $ | 164,428 |
| | $ | 158,255 |
|
| Foreign | 38,414 |
| | 34,105 |
| | 32,629 |
|
| Total | $ | 208,357 |
| | $ | 198,533 |
| | $ | 190,884 |
|
| |
(1) | Revenues derived from services represent less than 2% of this segment’s total revenues. |
| |
(2) | Distribution Solutions segment’s operating profit for 2018 includes non-cash pre-tax goodwill impairment charges of $1,283 million for our McKesson Europe reporting unit and $455 million for our Rexall Health reporting unit. This segment’s operating profit for 2018 also includes non-cash pre-tax asset impairment charges of $446 million and pre-tax restructuring charges of $74 million for our McKesson Europe business. Operating profit for 2017 and 2016 includes $144 million and $76 million of net cash proceeds representing our share of net settlements of antitrust class action lawsuits, and for 2016 also includes a pre-tax gain of $52 million recognized from the sale of our ZEE Medical business. |
| |
(3) | Distribution Solutions segment’s operating profit for 2018 and 2017 includes pre-tax credits of $99 million and $7 million and for 2016 a pre-tax charge of $244 million related to our LIFO method of accounting for inventories. LIFO credits were higher in 2018 compared to 2017 due to higher net effect of price declines, partially offset by lower inventory level. LIFO expense was recognized in 2016 primarily due to net effects of price increases. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| |
(4) | Technology Solutions segment’s operating profit for 2018 includes a pre-tax gain of $109 million from the 2018 third quarter sale of our EIS business. Operating profit for 2017 includes a pre-tax gain of $3,947 million recognized from the Healthcare Technology Net Asset Exchange, net of transaction and related expenses and a non-cash pre-tax charge of $290 million for goodwill impairment related to the EIS reporting unit. Operating profit for 2016 includes a pre-tax gain of $51 million recognized from the sale of our nurse triage business.
|
| |
(5) | In 2016, the Company implemented the Cost Alignment Plan to reduce its operating expenses and recorded pre-tax restructuring charges of $229 million. Pre-tax charges for 2016 were recorded as follows: $161 million, $51 million and $17 million within our Distribution Solutions segment, Technology Solutions segment and Corporate.
|
| |
(6) | Amounts primarily include amortization of acquired intangible assets purchased in connection with business acquisitions, capitalized software held for sale and capitalized software for internal use. |
| |
(7) | Long-lived assets consist of property, plant and equipment. |
| |
(8) | Net revenues were attributed to geographic areas based on the customers’ shipment locations. |
Segment assets and property, plant and equipment, net by geographic areas were as follows:
|
| | | | | | | |
| | March 31, |
| (In millions) | 2018 | | 2017 |
| Segment assets | | | |
| Distribution Solutions | $ | 53,915 |
| | $ | 52,322 |
|
| Technology Solutions | 3,735 |
| | 4,995 |
|
| Corporate | 2,731 |
| | 3,652 |
|
| Total | $ | 60,381 |
| | $ | 60,969 |
|
| | | | |
| Property, plant and equipment, net |
|
| |
|
|
| United States | $ | 1,529 |
| | $ | 1,383 |
|
| Foreign | 935 |
| | 909 |
|
| Total | $ | 2,464 |
| | $ | 2,292 |
|
taxes. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.
The U.S. Pharmaceutical segment 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.
AsThe 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 13 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 retail pharmacies. McKesson Europe was previously disclosedreflected as the European Pharmaceutical Solutions reportable segment and McKesson Canada was previously included in our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2017 and December 31, 2017, the executive who was our segment manager of the DistributionOther.
The Medical-Surgical Solutions segment retired fromprovides 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 275,000 national brand medical-surgical products as well as McKesson’s own line of high-quality products through a network of distribution centers within the Company in January 2018. As a result, the Company’s chief operating decision maker (“CODM”) evaluated our management and operating structure. In connection with the completion of this evaluation in the first quarter of 2019, our operating structure is realigned, and we will report our financial results in three reportable segments on a retrospective basis commencing in the first quarter of 2019, as follows:
U.S. Pharmaceutical and Specialty Solutions;
European Pharmaceutical Solutions; and
Medical-Surgical Solutions.
All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure will be included in Other. Other will primarily consist of McKesson Canada, McKesson Prescription Technology Solutions and our equity method investment in Change Healthcare. The segment changes reflect how our CODM allocates resources and assesses performance commencing in the first quarter of 2019.
United States.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The RxTS segment brings together existing businesses, including CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation, including Multi-Client Central Fill as a Service, to serve the Company’s biopharma and life sciences partners and patients. RxTS works across the healthcare delivery system to connect pharmacies, providers, payers, and biopharma for next-generation patient access and adherence solutions. RxCrossroads was previously included in the former U.S. Pharmaceutical and Specialty Solutions reportable segment and CoverMyMeds, RelayHealth, and McKesson Prescription Automation were previously included in Other.
| |
29. | Quarterly Financial Information (Unaudited) |
Other, for retrospective periods presented consists of the Company’s 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 the Company’s reportable operating segments and reconciliations to the consolidated totals is as follows:
| | | | | | | | | | | | | | | | | |
| | Years Ended March 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
Segment revenues (1) | | | | | |
| U.S. Pharmaceutical | $ | 189,274 | | | $ | 181,700 | | | $ | 166,189 | |
| International | 35,965 | | | 38,341 | | | 38,023 | |
| Medical-Surgical Solutions | 10,099 | | | 8,305 | | | 7,618 | |
| Prescription Technology Solutions | 2,890 | | | 2,705 | | | 2,489 | |
| Total revenues | $ | 238,228 | | | $ | 231,051 | | | $ | 214,319 | |
| | | | | |
Segment operating profit (loss) (2) | | | | | |
U.S. Pharmaceutical (3) | $ | 2,763 | | | $ | 2,745 | | | $ | 2,710 | |
International (4) | (37) | | | (161) | | | (1,903) | |
Medical-Surgical Solutions (5) | 707 | | | 499 | | | 455 | |
Prescription Technology Solutions (6) | 395 | | | 396 | | | 355 | |
Other (7) | 0 | | | (1,113) | | | (104) | |
| Subtotal | 3,828 | | | 2,366 | | | 1,513 | |
Corporate expenses, net (8) | (8,645) | | | (973) | | | (639) | |
| Interest expense | (217) | | | (249) | | | (264) | |
| Income (loss) from continuing operations before income taxes | $ | (5,034) | | | $ | 1,144 | | | $ | 610 | |
| | | | | |
Segment depreciation and amortization (9) | | | | | |
| U.S. Pharmaceutical | $ | 211 | | | $ | 208 | | | $ | 227 | |
| International | 334 | | | 357 | | | 392 | |
| Medical-Surgical Solutions | 130 | | | 136 | | | 118 | |
| Prescription Technology Solutions | 87 | | | 85 | | | 90 | |
| | | | | |
| Corporate | 125 | | | 136 | | | 122 | |
| Total depreciation and amortization | $ | 887 | | | $ | 922 | | | $ | 949 | |
| | | | | |
Segment expenditures for long-lived assets (10) | | | | | |
| U.S. Pharmaceutical | $ | 246 | | | $ | 109 | | | $ | 103 | |
| International | 212 | | | 218 | | | 199 | |
| Medical-Surgical Solutions | 57 | | | 36 | | | 116 | |
| Prescription Technology Solutions | 22 | | | 23 | | | 14 | |
| | | | | |
| Corporate | 104 | | | 120 | | | 125 | |
| Total expenditures for long-lived assets | $ | 641 | | | $ | 506 | | | $ | 557 | |
(1)Revenues from services on a disaggregated basis represent less than 1% of the U.S. Pharmaceutical segment’s total revenues, less than 7% of the International segment’s total revenues, less than 2% of the Medical-Surgical Solutions segment’s total revenues, and approximately 39% of the RxTS segment’s total revenues. The International segment reflects foreign revenues. Revenues for the remaining three reportable segments are domestic.
(2)Segment operating profit (loss) includes gross profit, net of 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 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 2021, 2020, and 2019 includes credits of $38 million, $252 million, and $210 million, respectively, related to the LIFO method of accounting for inventories. Operating profit for 2021, 2020, and 2019 also includes $181 million, $22 million, and $202 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 Note 19, “Commitments and Contingent Liabilities,” and operating profit for 2019 includes a charge of $61 million related to a customer bankruptcy.
(4)The Company’s International segment’s operating loss for 2021 and 2020 includes charges of $58 million and $275 million (both pre-tax and after-tax), respectively, to remeasure to fair value the assets and liabilities of the Company’s German pharmaceutical wholesale business which was contributed to a joint venture, as further discussed in Financial Note 3, “Held for Sale.” Operating loss for 2021, 2020, and 2019 includes long-lived asset impairment charges of $115 million, $112 million, and $245 million, respectively, primarily related to retail pharmacy businesses in Canada and Europe, as discussed in more detail in Financial Note 4, “Restructuring, Impairment, and Related Charges.” Operating loss for 2021 and 2019 includes goodwill impairment charges of $69 million and $1.8 billion (both pre-tax and after-tax), respectively, as discussed in more detail in Financial Note 12, “Goodwill and Intangible Assets, Net.” In addition, operating loss for 2019 includes a gain from an escrow settlement of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to the Company’s 2017 acquisition of Rexall Health.
(5)The Company’s Medical-Surgical Solutions segment’s operating profit for 2021 includes charges totaling $136 million on certain personal protective equipment and other related products due to inventory impairments and excess inventory.
(6)The Company’s RxTS segment’s operating profit for 2019 includes a gain of $56 million recognized from the sale of an equity investment.
(7)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 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 2019 includes a credit of $90 million for the derecognition of the TRA liability payable to the shareholders of Change. Operating loss for 2020 and 2019 also includes the Company’s proportionate share of loss from the Change Healthcare JV of $119 million and $194 million, respectively.
(8)Corporate expenses, net, for 2021 includes a charge of $8.1 billion related to the estimated liability for opioid-related claims, as discussed in more detail in Financial Note 19, “Commitments and Contingent Liabilities." Corporate expenses, net, for 2021 also includes net gains of $133 million associated with certain of the Company’s equity investments and 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. Corporate expenses, net, for 2020 includes settlement charges of $122 million for the termination of the Company’s defined benefit pension plan and a settlement charge of $82 million related to opioid claims.
(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, net and capitalized software.
Segment assets and long-lived assets by geographic areas were as follows:
| | | | | | | | | | | |
| | March 31, |
| (In millions) | 2021 | | 2020 |
| Segment assets | | | |
| U.S. Pharmaceutical | $ | 35,236 | | | $ | 33,541 | |
| International | 14,987 | | | 14,994 | |
| Medical-Surgical Solutions | 5,986 | | | 5,395 | |
| Prescription Technology Solutions | 3,446 | | | 3,786 | |
| | | |
| Corporate | 5,360 | | | 3,531 | |
| Total assets | $ | 65,015 | | | $ | 61,247 | |
| | | |
Long-lived assets (1) | | | |
| United States | $ | 2,110 | | | $ | 1,873 | |
| Foreign | 984 | | | 892 | |
| Total long-lived assets | $ | 3,094 | | | $ | 2,765 | |
(1)Long-lived assets consist of property, plant, and equipment, net and capitalized software.
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
23. 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 2021 | | | | | | | |
| Revenues | $ | 55,679 | | | $ | 60,808 | | | $ | 62,599 | | | $ | 59,142 | |
| Gross profit | 2,700 | | | 3,000 | | | 3,151 | | | 3,297 | |
| Income (loss) after income taxes: | | | | | | | |
Continuing operations | $ | 495 | | | $ | 627 | | | $ | (6,174) | | | $ | 713 | |
| Discontinued operations | (1) | | | 0 | | | 0 | | | 0 | |
| Net income (loss) | $ | 494 | | | $ | 627 | | | $ | (6,174) | | | $ | 713 | |
| Net income (loss) attributable to McKesson Corporation | $ | 444 | | | $ | 577 | | | $ | (6,226) | | | $ | 666 | |
Earnings (loss) per common share attributable to McKesson Corporation (1) | | | | | | | |
Diluted (2) | | | | | | | |
| Continuing operations | $ | 2.72 | | | $ | 3.54 | | | $ | (39.03) | | | $ | 4.15 | |
| Discontinued operations | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 2.72 | | | $ | 3.54 | | | $ | (39.03) | | | $ | 4.15 | |
| Basic | | | | | | | |
| Continuing operations | $ | 2.74 | | | $ | 3.56 | | | $ | (39.03) | | | $ | 4.19 | |
| Discontinued operations | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 2.74 | | | $ | 3.56 | | | $ | (39.03) | | | $ | 4.19 | |
| | | | | | | |
| Fiscal 2020 | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Revenues | $ | 55,728 | | | $ | 57,616 | | | $ | 59,172 | | | $ | 58,535 | |
| Gross profit | 2,787 | | | 2,867 | | | 3,033 | | | 3,336 | |
| Income (loss) after income taxes: | | | | | | | |
| Continuing operations | $ | 483 | | | $ | (676) | | | $ | 247 | | | $ | 1,072 | |
| Discontinued operations | (6) | | | (1) | | | (5) | | | 6 | |
| Net income (loss) | $ | 477 | | | $ | (677) | | | $ | 242 | | | $ | 1,078 | |
| Net income (loss) attributable to McKesson Corporation | $ | 423 | | | $ | (730) | | | $ | 186 | | | $ | 1,021 | |
Earnings (loss) per common share attributable to McKesson Corporation (1) | | | | | | | |
Diluted (2) | | | | | | | |
| Continuing operations | $ | 2.27 | | | $ | (3.99) | | | $ | 1.06 | | | $ | 5.82 | |
| Discontinued operations | (0.03) | | | 0 | | | (0.03) | | | 0.03 | |
| Total | $ | 2.24 | | | $ | (3.99) | | | $ | 1.03 | | | $ | 5.85 | |
| Basic | | | | | | | |
| Continuing operations | $ | 2.28 | | | $ | (3.99) | | | $ | 1.06 | | | $ | 5.86 | |
| Discontinued operations | (0.03) | | | 0 | | | (0.02) | | | 0.03 | |
| Total | $ | 2.25 | | | $ | (3.99) | | | $ | 1.04 | | | $ | 5.89 | |
(1)Certain computations may reflect rounding adjustments.
(2)As a result of the Company’s reported net loss for the third quarter of 2021 and the second quarter of 2020, potentially dilutive securities were excluded from the per share computations for those quarters due to their antidilutive effect.
|
| | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal 2018 | | | | | | | |
| Revenues | $ | 51,051 |
| | $ | 52,061 |
| | $ | 53,617 |
| | $ | 51,628 |
|
Gross profit (1) | 2,560 |
| | 2,834 |
| | 2,715 |
| | 3,075 |
|
| Income (loss) after income taxes: | | | | | | | |
Continuing operations (1) (2) (3) (4) (5) | $ | 363 |
| | $ | 56 |
| | $ | 960 |
| | $ | (1,087 | ) |
| Discontinued operations | 2 |
| | — |
| | 1 |
| | 2 |
|
| Net income (loss) | $ | 365 |
| | $ | 56 |
| | $ | 961 |
| | $ | (1,085 | ) |
| Net income (loss) attributable to McKesson | $ | 309 |
| | $ | 1 |
| | $ | 903 |
| | $ | (1,146 | ) |
Earnings (loss) per common share attributable to McKesson (6) | | | | | | | |
Diluted (7) | | | | | | | |
| Continuing operations | $ | 1.44 |
| | $ | 0.01 |
| | $ | 4.32 |
| | $ | (5.58 | ) |
| Discontinued operations | 0.01 |
| | — |
| | 0.01 |
| | — |
|
| Total | $ | 1.45 |
| | $ | 0.01 |
| | $ | 4.33 |
| | $ | (5.58 | ) |
| Basic | | | | | | | |
| Continuing operations | $ | 1.46 |
| | $ | 0.01 |
| | $ | 4.34 |
| | $ | (5.58 | ) |
| Discontinued operations | — |
| | — |
| | 0.01 |
| | — |
|
| Total | $ | 1.46 |
| | $ | 0.01 |
| | $ | 4.35 |
| | $ | (5.58 | ) |
| |
(1) | Gross profit for the first, second, third and fourth quarters of 2018 includes pre-tax charge of $26 million, pre-tax credits of $29 million, $2 million and $94 million related to our last-in-first-out (“LIFO”) method of accounting for inventories.
|
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(2) | Financial results for the second and fourth quarter of 2018 include non-cash goodwill impairment charges (pre-tax and after-tax) of $350 million and $933 million for our McKesson Europe reporting unit. In addition, financial results for the fourth quarter of 2018 include a non-cash goodwill impairment charge of $455 million for our Rexall Health reporting unit. These charges were recorded within our Distribution Solutions segment. |
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(3) | Financial results for the second and fourth quarter of 2018 include non-cash pre-tax asset impairment charges of $189 million and $257 million for our McKesson Europe business. |
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(4) | Financial results for the third quarter of 2018 include a pre-tax gain of $109 million from the sale of our EIS business. |
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(5) | Financial results for the first, second, third and fourth quarters of 2018 include our proportionate share of loss from Change Healthcare of $120 million, $61 million, $90 million and income of $23 million. |
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(6) | Certain computations may reflect rounding adjustments. |
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(7) | As a result of our reported net loss for the fourth quarter of 2018, potentially dilutive securities were excluded from the 2018 fourth quarter per share computations due to their antidilutive effect. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
| | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal 2017 | | | | | | | |
| Revenues | $ | 49,733 |
| | $ | 49,957 |
| | $ | 50,130 |
| | $ | 48,713 |
|
Gross profit (1) (2) (3) | 2,907 |
| | 2,756 |
| | 2,812 |
| | 2,796 |
|
| Income (loss) after income taxes: | | | | | | | |
Continuing operations (1) (2) (3) (4) | $ | 673 |
| | $ | 325 |
| | $ | 649 |
| | $ | 3,630 |
|
| Discontinued operations | (113 | ) | | (1 | ) | | (3 | ) | | (7 | ) |
| Net income | $ | 560 |
| | $ | 324 |
| | $ | 646 |
| | $ | 3,623 |
|
| Net income attributable to McKesson | $ | 542 |
| | $ | 307 |
| | $ | 633 |
| | $ | 3,588 |
|
Earnings (loss) per common share attributable to McKesson (5) | | | | | | | |
| Diluted | | | | | | | |
| Continuing operations | $ | 2.88 |
| | $ | 1.35 |
| | $ | 2.86 |
| | $ | 16.79 |
|
| Discontinued operations | (0.50 | ) | | (0.01 | ) | | (0.01 | ) | | (0.03 | ) |
| Total | $ | 2.38 |
| | $ | 1.34 |
| | $ | 2.85 |
| | $ | 16.76 |
|
| Basic | | | | | | | |
| Continuing operations | $ | 2.91 |
| | $ | 1.36 |
| | $ | 2.89 |
| | $ | 16.95 |
|
| Discontinued operations | (0.50 | ) | | — |
| | (0.02 | ) | | (0.03 | ) |
| Total | $ | 2.41 |
| | $ | 1.36 |
| | $ | 2.87 |
| | $ | 16.92 |
|
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(1) | Gross profit for the first, second, third and fourth quarters of 2017 includes pre-tax charge of $47 million, pre-tax credits of $43 million, $155 million and pre-tax charge of $144 million related to our LIFO method of accounting for inventories. |
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(2) | Gross profit for the first and third quarters of 2017 includes $142 million and $2 million of cash proceeds representing our share of net settlements of antitrust class action lawsuits. |
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(3) | Financial results for the fourth quarter of 2017 include a pre-tax gain of $3,947 million ($3,018 million after-tax) recognized from the Healthcare Technology Net Asset Exchange, net of transaction and related expenses. |
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(4) | Financial results for the second quarter of 2017 include a non-cash pre-tax charge of $290 million for goodwill impairment related to the EIS reporting unit within our Technology Solutions segment. |
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(5) | Certain computations may reflect rounding adjustments. |
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
On April 25, 2018, the Company announced a multi-year strategic growth initiative. As part of the preliminary phase of this initiative, in April 2018, we committed to a restructuring plan to optimize our operating model and cost structure which will be substantially implemented by the end of 2019. We expect to record total after-tax charges of approximately $150 million to $210 million during 2019. The charges under this plan primarily consist of employee severance, exit-related costs and other charges.
On April 25, 2018, we entered into a definitive agreement to purchase Medical Specialties Distributors LLC (“MSD”) for $800 million, which will be funded from cash on hand. MSD is a leading national distributor of infusion and medical-surgical supplies as well as provider of biomedical services to alternate site and home health providers. The acquisition is subject to regulatory approval and expected to close during the first half of 2019. Upon closing, the financial results of MSD will be included in our consolidated statements of operations within our Medical-Surgical Solutions business.
On May 23, 2018, the Company’s Board of Directors approved the termination of our frozen U.S. defined benefit pension plan (“Plan”). The distribution of plan assets pursuant to the termination will not be made until the plan termination satisfies all regulatory requirements, which is expected to be completed by the second half of 2020. Plan participants will receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The plan termination is expected to result in a one-time expense primarily representing pension settlement, which will be determined based on prevailing market conditions, the actual lump sum distributions and annuity purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate timing nor the amount of such settlement charges. As of March 31, 2018, this defined benefit pension plan had an accumulated comprehensive loss of approximately $120 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
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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 20182021 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.
PART III
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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 20182021 Annual Meeting of Stockholders (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, is incorporated by reference from the discussion under Item 1 of our Proxy Statement under the headings “Audit Committee,“The Board, Committees and Meetings,” “Audit Committee Financial Expert” and “Audit Committee Report” in our Proxy Statement.Report.”
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.
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Item 11. | Executive Compensation. |
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.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
McKESSON CORPORATION
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, 20182021 with respect to the plans under which the Company’s common stock is authorized for issuance:
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| | | | | | | | |
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 | 4.0 (2) | | $ | 161.27 |
| | 31.2 (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 | 4.2 (2) | | $ | 183.29 | | | 21.9 (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.— |
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(3)$ | Represents 3,462,328 shares available for purchase under the 2000 Employee Stock Purchase Plan and 27,706,614 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 2.23 million shares available for purchase under the 2000 Employee Stock Purchase Plan and 19.67 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 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. 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. |
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-Kreport and Financial Note 26,21, “Related Party Balances and Transactions,”Transactions” to the consolidated financial statements appearing 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 2019”2022” 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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| Page |
(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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SCHEDULE II
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2018, 2017 and 2016
(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, 2021 | | | | | | | | | |
| Allowances for doubtful accounts | $ | 252 | | | $ | 4 | | | $ | 1 | | | $ | (46) | | | $ | 211 | |
| Other allowances | 30 | | | 11 | | | 9 | | | 0 | | | 50 | |
| $ | 282 | | | $ | 15 | | | $ | 10 | | | $ | (46) | | | $ | 261 | |
| | | | | | | | | |
| Year Ended March 31, 2020 | | | | | | | | | |
| Allowances for doubtful accounts | $ | 273 | | | $ | 91 | | | $ | (19) | | | $ | (93) | | | $ | 252 | |
| Other allowances | 24 | | | 0 | | | 0 | | | 6 | | | 30 | |
| $ | 297 | | | $ | 91 | | | $ | (19) | | | $ | (87) | | | $ | 282 | |
| | | | | | | | | |
| Year Ended March 31, 2019 | | | | | | | | | |
| Allowances for doubtful accounts | $ | 187 | | | $ | 132 | | | $ | (1) | | | $ | (45) | | | $ | 273 | |
| Other allowances | 39 | | | 0 | | | (15) | | | 0 | | | 24 | |
| $ | 226 | | | $ | 132 | | | $ | (16) | | | $ | (45) | | | $ | 297 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| (1) | Deductions: | | | | | | |
| Written-off | | $ | (40) | | | $ | (93) | | | $ | (45) | |
| Credited to other accounts and other | | (6) | | | 6 | | | 0 | |
| Total | | $ | (46) | | | $ | (87) | | | $ | (45) | |
| | | | | | | |
| (2) | Amounts shown as deductions from current and non-current receivables (current allowances were $250 million, $265 million, and $279 million at March 31, 2021, 2020, and 2019, respectively) | | $ | 261 | | | $ | 282 | | | $ | 297 | |
| | | | | | | |
| (3) | Primarily represents reclassifications to other balance sheet accounts. | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | 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, 2018 | | | | | | | | | |
Allowances for doubtful accounts | $ | 243 |
| | $ | 44 |
| | $ | 13 |
| | $ | (113 | ) | | $ | 187 |
|
| Other allowances | 42 |
| | — |
| | (3 | ) | | — |
| | 39 |
|
| | $ | 285 |
| | $ | 44 |
| | $ | 10 |
| | $ | (113 | ) | | $ | 226 |
|
| | | | | | | | | | |
| Year Ended March 31, 2017 | | | | | | | | | |
Allowances for doubtful accounts | $ | 212 |
| | $ | 93 |
| | $ | 7 |
| | $ | (69 | ) | | $ | 243 |
|
| Other allowances | 41 |
| | — |
| | 2 |
| | (1 | ) | | 42 |
|
| | $ | 253 |
| | $ | 93 |
| | $ | 9 |
| | $ | (70 | ) | | $ | 285 |
|
| | | | | | | | | | |
| Year Ended March 31, 2016 | | | | | | | | | |
Allowances for doubtful accounts | $ | 141 |
| | $ | 113 |
| | $ | 2 |
| | $ | (44 | ) | | $ | 212 |
|
| Other allowances | 33 |
| | — |
| | (3 | ) | | 11 |
| | 41 |
|
| | $ | 174 |
| | $ | 113 |
| | $ | (1 | ) | | $ | (33 | ) | | $ | 253 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | 2018 | | 2017 | | 2016 |
| (1) | Deductions: | | | | | | |
| | Written off | | $ | (113 | ) | | $ | (70 | ) | | $ | (33 | ) |
| | Credited to other accounts | | — |
| | — |
| | — |
|
| | Total | | $ | (113 | ) | | $ | (70 | ) | | $ | (33 | ) |
| | | | | | | | |
| (2) | Amounts shown as deductions from current and non-current receivables | | $ | 226 |
| | $ | 285 |
| | $ | 253 |
|
| | | | | | | | |
| (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;
•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.
|
| | | | | |
| | | 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 |
| 3.1 | | 8-K | 1-13252 | 3.1 | August 2, 2011 |
| 3.2 | | 8-K | 1-13252 | 3.1 | July 31, 2015 |
| 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 |
| 4.4 | | 8-K | 1-13252 | 4.2 | March 5, 2007 |
| 4.5 | | 8-K | 1-13252 | 4.2 | February 12, 2009 |
| | | | | | | | | | | | | | | | | |
| | 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 |
| | | | | | | | | | | | | | | | | |
| | 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† | | — | — | — | — |
| 10.1* | | 10-K | 1-13252 | 10.4 | June 10, 2004 |
| 10.2* | | 10-K | 1-13252 | 10.6 | June 6, 2003 |
| 10.3* | | 10-Q | 1-13252 | 10.2 | October 30, 2019 |
| 10.4* | | 10-K | 1-13252 | 10.7 | May 7, 2008 |
| 10.5* | | 10-Q | 1-13252 | 10.1 | October 30, 2019 |
| 10.6* | | 8-K | 1-13252 | 10.1 | January 25, 2010 |
| 10.7* | | 10-K | 1-13252 | 10.11 | May 7, 2013 |
| 10.8* | | 10-K | 1-13252 | 10.8 | May 22, 2020 |
| 10.9* | | 8-K | 1-13252 | 10.1 | July 31, 2015 |
| 10.10* | | 10-Q | 1-13252 | 10.1 | July 29, 2015 |
|
| | | | | |
| | | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 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 | | 8-K | 1-13252 | 4.1 | December 4, 2012 |
| 4.8 | | 8-K | 1-13252 | 4.2 | December 4, 2012 |
| 4.9 | | 8-K | 1-13252 | 4.2 | March 8, 2013 |
| 4.10 | | 8-K | 1-13252 | 4.2 | March 10, 2014 |
| 4.11 | | 8-K | 1-13252 | 4.1 | February 17, 2017 |
| 4.12 | | 8-K | 1-13252 | 4.1 | February 13, 2018 |
| 4.13 | | 8-K | 1-13252 | 4.1 | February 21, 2018 |
| 10.1* | | 10-K | 1-13252 | 10.4 | June 10, 2004 |
| 10.2* | | 10-K | 1-13252 | 10.6 | June 6, 2003 |
| 10.3* | | 10-Q | 1-13252 | 10.1 | October 28, 2014 |
| 10.4* | | 10-K | 1-13252 | 10.6 | May 13, 2005 |
| 10.5* | | 10-K | 1-13252 | 10.7 | May 7, 2008 |
| 10.6* | | 10-Q | 1-13252 | 10.2 | October 28, 2014 |
| 10.7* | | 10-Q | 1-13252 | 10.3 | October 29, 2008 |
| 10.8* | | 8-K | 1-13252 | 10.1 | January 25, 2010 |
| 10.9* | | 10-K | 1-13252 | 10.11 | May 7, 2013 |
| 10.10* | | 10-Q | 1-13252 | 10.2 | February 1, 2011 |
| 10.11* | | 8-K | 1-13252 | 10.1 | July 31, 2015 |
| 10.12* | | 10-Q | 1-13252 | 10.1 | July 29, 2015 |
| | | | | | | | | | | | | | | | | |
| | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 10.11* | | 10-Q | 1-13252 | 10.1 | October 25, 2018 |
| 10.12* | | 10-K | 1-13252 | 10.14 | May 5, 2016 |
| 10.13* | | 10-Q | 1-13252 | 10.4 | July 30, 2010 |
| 10.14* | | 10-Q | 1-13252 | 10.2 | July 26, 2012 |
| 10.15* | | 8-K | 1-13252 | 10.1 | August 2, 2013 |
| 10.16*† | | — | — | — | — |
| 10.17 | | 8-K | 1-13252 | 10.1 | March 7, 2017 |
| 10.18 | | 10-K | 1-13252 | 10.19 | May 5, 2016 |
| 10.19 | 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 |
| 10.20 | 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 |
|
| | | | | |
| | | Incorporated by Reference |
| Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
| 10.13* | | 10-Q | 1-13252 | 10.2 | July 29, 2015 |
| 10.14* | | 10-K | 1-13252 | 10.14 | May 5, 2016 |
| 10.15* | | 10-Q | 1-13252 | 10.4 | July 30, 2010 |
| 10.16* | | 10-Q | 1-13252 | 10.2 | July 26, 2012 |
| 10.17* | | 8-K | 1-13252 | 10.1 | August 2, 2013 |
| 10.18* | | 10-K | 1-13252 | 10.18 | May 5, 2016 |
| 10.19 | | 8-K | 1-13252 | 10.1 | March 7, 2017 |
| 10.20 | | 10-K | 1-13252 | 10.19 | May 5, 2016 |
| 10.21 | 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 |
| 10.22 | 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 |
| 10.23* | | 10-Q | 1-13252 | 10.10 | October 29, 2008 |
| 10.24* | | 8-K | 1-13252 | 10.1 | April 2, 2012 |
|
| | | | | |
| | Incorporated by Reference |
Exhibit Number | Description | Form | File Number | Exhibit | Filing Date |
10.25* | | 8-K | 1-13252 | 10.1 | February 28, 2014 |
10.26* | | 10-Q | 1-13252 | 10.12 | October 29, 2008 |
10.27* | | 10-K | 1-13252 | 10.27 | May 4, 2010 |
12† | | — | — | — | — |
21† | | — | — | — | — |
23† | | — | — | — | — |
24† | | — | — | — | — |
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, 2018, 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 |
| 10.21 | 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 |
| | 8-K | 1-13252 | 10.2 | April 2, 2021 |
| 10.22* | | 10-K | 1-13252 | 10.27 | May 4, 2010 |
| 10.23 | | 8-K | 1-13252 | — | March 23, 2020 |
| 10.24 | | 8-K | 1-13252 | 10.1 | March 13, 2020 |
| 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, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (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. | — | — | — | — |
| 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 |
| | | |
| | | MCKESSON CORPORATION
|
| | | |
Date: May 24, 201812, 2021 | | /s/ Britt J. Vitalone |
| | | Britt J. Vitalone |
| | | 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:
| | | | | | | | |
| /s/ Brian S. Tyler | | /s/ Marie L. Knowles |
Brian S. Tyler Chief Executive Officer and Director (Principal Executive Officer) | | Marie L. Knowles, Director |
| | |
*/s/ Britt J. Vitalone | | * |
John H. Hammergren
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
| | Donald R. Knauss, Director
|
| | |
* | | */s/ Bradley E. Lerman |
Britt J. Vitalone Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | Marie L. Knowles, Director
|
| | |
* | | * |
Erin M. Lampert
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
| | Bradley E. Lerman, Director |
| | |
* | | * |
Andy D. Bryant, Director
| | Edward A. Mueller, Director
|
| | |
* | | * |
N. Anthony Coles, M.D., Director
| | Susan R. Salka, Director
|
| | |
* | | /s/ Lori A. Schechter |
M. Christine Jacobs, Director | | Lori A. Schechter
*Attorney-in-Fact
|
| | |
| | |
Date: May 24, 2018 | | |
|
| | |
DIRECTORS AND OFFICERS/s/ Sundeep G. Reddy | | /s/ Linda Mantia |
| | |
BOARD OF DIRECTORS | | CORPORATE OFFICERS |
| | |
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 | | Britt J. Vitalone |
Chairman of the Board, | | Executive Vice President and Chief Financial Officer |
Intel Corporation | | |
| | Jorge L. Figueredo |
N. Anthony Coles, M. D. | | Executive Vice President, Human Resources |
Chairman and Chief Executive Officer, | | |
Yumanity Therapeutics, LLC | | Kathleen D. McElligott |
| | Executive Vice President, Chief Information Officer and |
M. Christine Jacobs | | Chief Technology Officer |
Chairman of the Board, President and | | |
Chief Executive Officer, Retired, | | Bansi Nagji |
Theragenics Corporation | | Executive Vice President, |
| | Corporate Strategy and Business Development |
Donald R. Knauss | | |
Executive Chairman of the Board, Retired, | | Lori A. Schechter |
The Clorox Company | | Executive Vice President, General Counsel and |
| | Chief Compliance Officer |
Marie L. Knowles | | |
Executive Vice President and | | Erin M. Lampert |
Chief Financial Officer, Retired, | | Sundeep G. Reddy Senior Vice President and ChiefController (Principal Accounting OfficerOfficer) | | Linda Mantia, Director |
Atlantic Richfield Company | | |
| /s/ Dominic J. Caruso | | Brian P. Moore/s/ Maria Martinez |
Bradley E. LermanDominic J. Caruso, Director | | Senior Vice President and TreasurerMaria Martinez, Director |
Senior Vice President, General Counsel and | | |
Corporate Secretary,/s/ N. Anthony Coles | | Paul A. Smith |
Medtronic plc | | Senior Vice President, Taxes |
| | |
| /s/ Edward A. Mueller | | Michele Lau |
Chairman of the Board andN. Anthony Coles, M.D., Director
| | Corporate SecretaryEdward A. Mueller, Director |
Chief Executive Officer, Retired, | | |
Qwest Communications International Inc./s/ M. Christine Jacobs | | |
| | |
| /s/ Susan R. Salka | | |
Chief Executive Officer and President,M. Christine Jacobs, Director | | Susan R. Salka, Director |
AMN Healthcare Services, Inc. | | |
| /s/ Donald R. Knauss | | /s/ Kenneth E. Washington |
| Donald R. Knauss, Director | | Kenneth E. Washington, Director |
| | |
| Date: May 12, 2021 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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
EQ 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 EQ Shareowner Services’ telephone response center at (866) 614-9635. For the hearing impaired call (651) 450-4144. EQ Shareowner Services also has a website—https://www.shareowneronline.com-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, EQ Shareowner Services. For more information, or to request an enrollment form, call EQ 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. CDT, on July 25, 2018 at the Dallas/Fort Worth Airport Marriott, 8440 Freeport Parkway, Irving, TX 75063.
