McKesson 2012 Annual Report Download - page 48

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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In addition, we develop an estimate of the number of share-based awards, which will ultimately vest primarily
based on historical experience. Changes in the estimated forfeiture rate can have a material effect on share-based
compensation expense. If the actual forfeiture rate materially differs from the estimated forfeiture rate, then an
adjustment is made to revise the estimated forfeiture rate, which will result in an increase or decrease to the expense
recognized in the financial statements. We re-assess the estimated forfeiture rate established upon grant periodically
throughout the requisite service period. As required, the forfeiture estimates will be adjusted to reflect actual
forfeitures when an award vests. The actual forfeitures in future reporting periods could be materially higher or
lower than our current estimates.
Our assessments of estimated share-based compensation charges are affected by our stock price as well as
assumptions regarding a number of complex and subjective variables and the related tax impact. These variables
include the volatility of our stock price, employee stock option exercise behavior, timing, number and types of
annual share-based awards and the attainment of performance goals. As a result, the future share-based
compensation expense may differ from the Company’s historical amounts.
Loss Contingencies: We are subject to various claims, other pending and potential legal actions for damages,
investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of
our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of
our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is
often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable
based on the information available and the potential effect of future events and decisions by third parties that will
determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved
over many years, during which time relevant developments and new information must be reevaluated at least
quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range
of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is
provided.
Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably
possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly
to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or
range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of
potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties,
such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is
possible to reasonably estimate a range of potential loss and boundaries of high and low estimate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations, together with our existing sources of liquidity from
our accounts receivable sales facility and short-term borrowings under the revolving credit facility and commercial
paper, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash
requirements. In addition, from time-to-time, we may access the long-term debt capital markets to discharge our
other liabilities.
Net cash flow from operating activities was $2,950 million in 2012 compared to $2,338 million in 2011 and
$2,316 million in 2010. Operating activities for 2012 reflect an increase in drafts and accounts payable primarily
associated with longer payment terms for certain purchases, partially offset by an increase in receivables and higher
inventories primarily associated with revenue growth.
Operating activities for 2011 reflect an increase in receivables primarily associated with revenue growth,
partially offset by improved management of inventories and longer payment terms for certain purchases.
Operating activities for 2010 were primarily affected by improved management of drafts and accounts payable,
partially offset by an increase in inventories due to our revenue growth and the AWP litigation private payer
settlement payments of $350 million.