McKesson 2006 Annual Report Download - page 47

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Financial Obligations and Commitments:
The table below presents our significant financial obligations and commitments at March 31, 2006:
We define a purchase obligation as an arrangement to purchase goods or services that is enforceable and legally binding on the Company.
These obligations primarily relate to inventory purchases, capital commitments and service agreements.
We have agreements with certain of our customers’ financial institutions (primarily for our Canadian business) under which we have
guaranteed the repurchase of inventory at a discount in the event these customers are unable to meet certain obligations to those financial
institutions. Among other limitations, these inventories must be in resalable condition. We have also guaranteed loans, credit facilities and the
payment of leases for some customers and we are a secured lender for substantially all of these guarantees. Customer guarantees range from
one to ten years and were primarily provided to facilitate financing for certain strategic customers. At March 31, 2006, the maximum amounts
of inventory repurchase guarantees and other customer guarantees were $190 million and $7 million. We consider it unlikely that we would
make significant payments under these guarantees, and accordingly, amounts accrued for these guarantees were nominal.
In addition, our banks and insurance companies have issued $102 million of standby letters of credit and surety bonds on our behalf in order
to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, and our workers’ compensation and
automotive liability programs.
Credit Resources:
We fund our working capital requirements primarily with cash. In addition, we maintain a short-term borrowings and a receivables sale
facility. We have a $1.3 billion five-year, senior unsecured revolving credit facility that expires in September 2009. Borrowings under this
credit facility bear interest at a fixed base rate, a floating rate based on the London Interbank Offering Rate (“LIBOR”) rate or a Eurodollar
rate. We also have a $1.4 billion accounts receivable sales facility, which was renewed in June 2005, with terms substantially similar to those
previously in place. This renewed facility is currently scheduled to expire in June 2006. No amounts were utilized or outstanding under any of
these facilities at March 31, 2006.
Our senior debt credit ratings from S&P, Fitch, and Moody’s are currently BBB, BBB and Baa3, and our commercial paper ratings are
currently A-2, F-2 and P-3. Our ratings outlook is stable with all three agencies. Our various borrowing facilities and certain long-term debt
instruments are subject to covenants. Our principal debt covenant is our debt to capital ratio, which cannot exceed 56.5%. If we exceed this
ratio, repayment of debt outstanding under the revolving credit facility and $235 million of term debt could be accelerated. At March 31, 2006,
this ratio was 14.4% and we were in compliance with all other covenants. A reduction in our credit ratings or the lack of compliance with our
covenants could result in a negative impact on our ability to finance our operations through our credit facilities, as well as the issuance of
additional debt at the interest rates then currently available.
43
Years
(In millions) Total Within 1 Over 1 to 3 Over 3 to 5 After 5
On balance sheet
Securities Litigation $1,014 $1,014 $ — $ — $
—
Long-term debt 991 26 163 222 580
Other (1) 388 34 54 56 244
Off balance sheet
Purchase obligations 2,905 2,830 17 15 43
Interest on borrowings 564 77 139 108 240
Customer guarantees 197 119 24 1 53
Other (2) 350 141 102 60 47
Total $6,409 $4,241 $499 $462 $1,207
(1) Primarily includes estimated payments for pension and postretirement plans.
(2) Primarily includes operating lease obligations and purchase commitments for business acquisitions.