McKesson 2011 Annual Report Download - page 96

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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Rental expense under operating leases was $157 million, $154 million and $146 million in 2011, 2010 and
2009. We recognize rent expense on a straight-line basis over the term of the lease, taking into account, when
applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in
rent payments over the term of the lease. Deferred rent is recognized for the difference between the rent expense
recognized on a straight-line basis and the payments made per the terms of the lease. Remaining terms for facilities
leases generally range from one to seven years, while remaining terms for equipment leases range from one to three
years. Most real property leases contain renewal options (generally for five-year increments) and provisions
requiring us to pay property taxes and operating expenses in excess of base period amounts. Sublease rental income
was not material for any period presented.
16. Financial Guarantees and Warranties
Financial Guarantees
We have agreements with certain of our Canadian customers’ financial institutions under which we have
guaranteed the repurchase of our customers’ inventory or our customers’ debt in the event these customers are
unable to meet their obligations to those financial institutions. For our inventory repurchase agreement, among
other requirements, inventories must be in resalable condition and any repurchase would be at a discount. The
inventory repurchase agreements mostly range from one to two years. Customers’ debt guarantees range from one
to five years and were primarily provided to facilitate financing for certain customers. The majority of our
customers’ debt guarantees are secured by certain assets of the customer. We also have an agreement with one
software customer that, under limited circumstances, may require us to secure standby financing. Because the
amount of the standby financing is not explicitly stated, the overall amount of this guarantee cannot reasonably be
estimated. At March 31, 2011, the maximum amounts of inventory repurchase guarantees and customers’ debt
guarantees were $138 million and $38 million, none of which had been accrued.
The expirations of the above noted financial guarantees are as follows: $119 million, $21 million, $3 million, $4
and $1 million from 2012 through 2016 and $28 million thereafter.
In addition, at March 31, 2011, our banks and insurance companies have issued $128 million of standby letters
of credit and surety bonds, which were issued on our behalf mostly related to our customer contracts and in order to
meet the security requirements for statutory licenses and permits, court and fiduciary obligations and our workers’
compensation and automotive liability programs.
Our software license agreements generally include certain provisions for indemnifying customers against
liabilities if our software products infringe a third party’s intellectual property rights. To date, we have not incurred
any material costs as a result of such indemnification agreements and have not accrued any liabilities related to such
obligations.
In conjunction with certain transactions, primarily divestitures, we may provide routine indemnification
agreements (such as retention of previously existing environmental, tax and employee liabilities) whose terms vary
in duration and often are not explicitly defined. Where appropriate, obligations for such indemnifications are
recorded as liabilities. Because the amounts of these indemnification obligations often are not explicitly stated, the
overall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded as
liabilities at the time of divestiture, we have historically not made significant payments as a result of these
indemnification provisions.