McKesson 2008 Annual Report Download - page 55

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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In January 2007, we entered into a $1.8 billion interim credit facility. The interim credit facility was a single-
draw 364-day unsecured facility which had terms substantially similar to those contained in the Company’ s existing
revolving credit facility. We utilized $1.0 billion of this facility to fund a portion of our purchase of Per-Se. On
March 5, 2007, we issued $500 million of 5.25% notes due 2013 and $500 million of 5.70% notes due 2017. The
notes are unsecured and interest is paid semi-annually on March 1 and September 1. The notes are redeemable at
any time, in whole or in part, at our option. In addition, upon occurrence of both a change of control and a ratings
downgrade of the notes to non-investment-grade levels, we are required to make an offer to redeem the notes at a
price equal to 101% of the principal amount plus accrued interest. We utilized net proceeds, after offering expenses,
of $990 million from the issuance of the notes, together with cash on hand, to repay all amounts outstanding under
the interim credit facility plus accrued interest.
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 positive with S&P and stable with
Fitch and Moody’ s. 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 $215 million of term debt could be
accelerated. At March 31, 2008, this ratio was 22.7% 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.
Funds necessary for the resolution of future debt maturities and our other cash requirements are expected to be
met by existing cash balances, cash flows from operations, existing credit sources and other capital market
transactions.
MARKET RISKS
Interest rate risk: Our long-term debt bears interest predominately at fixed rates, whereas our short-term
borrowings are at variable interest rates. If the underlying weighted average interest rate on our variable rate debt
were to have changed by 50 bp in 2008, interest expense would not have been materially different from that
reported.
Our cash and cash equivalent balances earn interest at variable rates. Given recent declines in interest rates, our
interest income may be negatively impacted. If the underlying weighted average interest rate on our cash and cash
equivalent balances changed by 50 bp in 2008, interest income would have increased or decreased by approximately
$9 million.
As of March 31, 2008 and 2007, the net fair value liability of financial instruments with exposure to interest rate
risk was approximately $1,958 million and $2,036 million. Fair value was estimated on the basis of quoted market
prices, although trading in these debt securities is limited and may not reflect fair value. Fair value is subject to
fluctuations based on our performance, our credit ratings, changes in the value of our stock and changes in interest
rates for debt securities with similar terms.
Foreign exchange risk: We derive revenues and earnings from Canada, the United Kingdom, Ireland, other
European countries, Israel, Asia Pacific and Mexico, which expose us to changes in foreign exchange rates. We
seek to manage our foreign exchange risk in part through operational means, including managing same currency
revenues in relation to same currency costs, and same currency assets in relation to same currency liabilities.
Foreign exchange risk is also managed through the use of foreign currency forward-exchange contracts. These
contracts are used to offset the potential earnings effects from mostly intercompany foreign currency investments
and loans. As of March 31, 2008, an adverse 10% change in quoted foreign currency exchange rates would not have
had a material impact on our net fair value of financial instruments that have exposure to foreign currency risk.