McKesson 2010 Annual Report Download - page 49

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
43
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 is higher than the estimated forfeiture rate, then an adjustment is
made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the
financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is
made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the
financial statements. We re-assess the estimated forfeiture rate established upon grant periodically throughout the
requisite service period. Such estimates are revised if they differ materially from actual forfeitures. 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. We record a provision for a liability when management believes that it is both probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Management reviews these provisions at
least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel
and other information and events pertaining to a particular case. Because litigation outcomes are inherently
unpredictable, these decisions often involve a series of complex assessments by management about future events
that can rely heavily on estimates and assumptions and it is possible that the actual cost of these matters could
impact our earnings, either negatively or positively, in the period of their resolution.
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 $2,316 million in 2010, compared to $1,351 million in 2009 and
$869 million in 2008. 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 payor settlement payments of $350 million. Cash flows from operations can also be significantly impacted
by factors such as the timing of receipts from customers and payments to vendors.
Operating activities for 2009 include a non-cash charge of $493 million and the related income tax benefit of
$182 million for the AWP litigation charge. Operating activities for 2009 reflect an increase in receivables
primarily associated with our revenue growth as well as longer payment terms for certain customers and
improvement in our net financial inventory (inventory, net of drafts and accounts payable).
Operating activities for 2008 were affected by a use of cash of $962 million due to the release of restricted cash
for our Consolidated Securities Litigation Action. In addition, operating activities in 2008 reflect changes in our
working capital accounts due to revenue growth.