McKesson 2006 Annual Report Download - page 42

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approach
include the selection of appropriate guideline companies, the determination of market value multiples for the guideline companies and the
subsequent selection of an appropriate market value multiple for the business based on a comparison of the business to the guideline
companies, the determination of applicable premiums and discounts based on any differences in marketability between the business and the
guideline companies and when considering the income approach, include the required rate of return used in the discounted cash flow method,
which reflects capital market conditions and the specific risks associated with the business. Other estimates inherent in the income approach
include long-term growth rates and cash flow forecasts for the business.
A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on
estimates and assumptions at a point in time. The judgments made in determining an estimate of fair value can materially impact our results of
operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions
that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may
affect the accuracy or validity of such estimates and could potentially result in an impairment charge. Goodwill at March 31, 2006 and 2005
was $1,718 million and $1,439 million and we concluded that there was no impairment in our goodwill.
Securities Litigation: As discussed in Financial Note 18, “Other Commitments and Contingent Liabilities,” to the accompanying
consolidated financial statements, in the third quarter of 2005, we announced that we had reached an agreement to settle the action captioned In
re McKesson HBOC, Inc. Securities Litigation (the “Consolidated Action”). In general, under the agreement to settle the Consolidated Action,
we agreed to pay the settlement class a total of $960 million in cash. The settlement agreement was subject to various conditions, including, but
not limited to, preliminary approval by the court, notice to the Class, and final approval by the court after a hearing. Other than the
Consolidated Action, none of the previously reported Securities Litigation was resolved by the settlement date. As a result, during the third
quarter of 2005, we recorded a $1,200 million pre-tax ($810 million after-tax) charge with respect to the Company’s Securities Litigation. The
charge consisted of $960 million for the Consolidated Action and $240 million for other Securities Litigation proceedings.
During 2006, we settled many of the other Securities Litigation proceedings and paid $243 million pursuant to those settlements. Based on
the payments made in the Consolidated Action and the other Securities Litigation proceedings, settlements reached in certain of the other
Securities Litigation proceedings and our assessment of the remaining cases, the estimated reserves were increased by $52 million and
$1 million in pre-tax charges during the first and third quarters of 2006 and decreased by an $8 million pre-tax credit during the fourth quarter
of 2006, for a total net pre-tax charge of $45 million for 2006. As of March 31, 2006 and 2005, the Securities Litigation accrual was
$1,014 million and $1,214 million. Additionally, on February 24, 2006, the court gave final approval to the settlement of the Consolidated
Action, and as a result, we paid approximately $960 million into an escrow account established by the lead plaintiff in connection with the
settlement of the Consolidated Action.
In addition, for the litigation costs not covered under our directors and officers’ liability insurance policies, we accrue costs when it is
probable that a liability has been incurred and the amount can be reasonably estimated. We recorded $27 million, $43 million and $18 million
of such expenses in 2006, 2005 and 2004.
We believe our accrual is adequate to address our remaining potential exposure with respect to all of the Securities Litigation matters.
However, in view of the number of remaining cases, the uncertainties of the timing and outcome of this type of litigation, and the substantial
amounts involved, it is possible that the ultimate costs of these matters could impact our earnings, either negatively or positively, in the quarter
of their resolution. We do not believe that the resolution of these matters will have a material adverse effect on our results of operations,
liquidity or financial position taken as a whole.
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