McKesson 2013 Annual Report Download - page 49

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We estimate the grant-date fair value of employee stock options using the Black-Scholes options-pricing model. Our
estimates of employee stock option values rely on assumptions we input into the model. The key assumptions involve
estimates of future uncertain events. The key assumptions influencing the fair value estimates, among others, are the expected
life of the option, the expected stock price volatility and the expected dividend yield. In determining the expected life of the
option, we primarily use historical experience as our best estimate of future exercise patterns. We use a combination of
historical and implied market volatility to determine the expected stock price volatility factor. We believe that the
combination of both historical and implied volatility provides a reasonable estimate of our future stock price movements.
Once the fair values of employee stock options are determined, accounting requirements do not permit them to be changed,
even if the estimates used are different from actual experience.
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 materially differs from the estimated forfeiture rate, then an adjustment is made to revise
the estimated forfeiture rate, which will result in an increase or decrease to the expense recognized in the financial statements.
We re-assess the estimated forfeiture rate established upon grant periodically throughout the requisite service period.
Forfeiture estimates are 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 expense 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, the
attainment of performance goals and the forfeiture rates. As a result, 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. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best
estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to
predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information
available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of
the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant
developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss
and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate
cannot be made, disclosure of the proceeding is provided.
Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible
that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine
whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be
made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the
outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system
and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss
and boundaries of high and low estimate.
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, revolving credit facility and commercial paper issuance, will be sufficient to fund our long-
term and short-term capital expenditures, working capital and other cash requirements. In addition, we may access the long-
term debt capital markets from time-to-time.
Net cash flow from operating activities was $2,483 million in 2013 compared to $2,950 million in 2012 and $2,338
million in 2011. Operating activities for 2013 were primarily affected by $483 million of payments made for AWP litigation
settlements.