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In business for
Better
Health
2016 Annual Report

Table of contents

  • Page 1
    2016 Annual Report In business for Better Health

  • Page 2
    ...owned and banner pharmacies 183 Market Leadership • Global pharmaceutical distribution • U.S. specialty distribution in oncology • U.S. medical-surgical distribution • U.S. pharmacy management systems 17 Billion year history of serving customers pharmacy transactions processed annually

  • Page 3
    ... our global pharmaceutical sourcing and procurement scale, grew the number of banner and retail pharmacies in our networks, and continued to execute on our planned Celesio acquisition synergies. On the Technology Solutions side of the business, we saw a strong performance that reflects our focus on...

  • Page 4
    ...in Europe through the growth of our European Pharmacy Network. In Canada, we announced the acquisition of Rexall Health, which will significantly strengthen McKesson's position in the Canadian pharmaceutical supply chain. Through the planned acquisition of Rexall, McKesson will acquire approximately...

  • Page 5
    ...and an additional 3,500 sites have committed to using CommonWell services in the future. Last year, we also took a bold step forward in healthcare innovation by creating McKesson Ventures, our own corporate venture fund. McKesson Ventures targets companies that both catalyze and benefit from the key...

  • Page 6
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 7
    ... No.) One Post Street, San Francisco, California (Address of principal executive offices) 94104 (Zip Code) (415) 983-8300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Name of each exchange on which...

  • Page 8
    ...and Corporate Governance 11 Executive Compensation 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 13 Certain Relationships and Related Transactions and Director Independence 14 Principal Accounting Fees and Services PART IV 15 Exhibits and Financial...

  • Page 9
    McKESSON CORPORATION PART I Item 1. General McKesson Corporation ("McKesson," the "Company," the "Registrant" or "we" and other similar pronouns) is a global pharmaceutical distribution services and information technology company, currently ranked 11th on the Fortune 500. We deliver a comprehensive ...

  • Page 10
    ... business units: U.S. Pharmaceutical Distribution, McKesson Specialty Health, McKesson Canada, and McKesson Pharmacy Technology & Services. U.S. Pharmaceutical Distribution: This business supplies branded, specialty and generic pharmaceuticals and other healthcare-related products to customers...

  • Page 11
    ... service that leverages our purchasing scale and supplier relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce working capital investment. Inventory Management - An integrated solution comprising forecasting software and automated replenishment...

  • Page 12
    ...to earn service fees and to develop stronger patient relationships. Institutional Healthcare Providers - Electronic ordering/purchasing and supply chain management systems that help customers improve financial performance, increase operational efficiencies and deliver better patient care. Solutions...

  • Page 13
    ... pharmacies, hospitals, long-term care centers, clinics and institutions throughout Canada and through its network of infusion clinics, offers specialty services and adherence programs. Beyond pharmaceutical distribution, logistics and order fulfillment, McKesson Canada provides automation solutions...

  • Page 14
    ...patient safety, reduce the cost and variability of care and better manage their resources and revenue stream. The Technology Solutions segment markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payers. 8

  • Page 15
    ..., Connected Care and Analytics ("CCA"), Imaging and Workflow Solutions, Business Performance Services and Enterprise Information Solutions. McKesson Health Solutions: We offer a suite of services and software products designed to manage the cost and quality of care for payers, providers, hospitals...

  • Page 16
    ... management and extensive reporting of metrics related to the physician practice. We also offer a full suite of physician and hospital consulting services, including financial management, coding and compliance services, revenue cycle services and strategic services. Enterprise Information Solutions...

  • Page 17
    ... any third party. Other Information about the Business Customers: During 2016, sales to our ten largest customers, including group purchasing organizations ("GPOs") accounted for approximately 52.4% of our total consolidated revenues. Sales to our largest customer, CVS Health ("CVS"), accounted for...

  • Page 18
    ... laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2016 and is not expected to be material in the next year. Employees: On March 31, 2016, we employed approximately 68,000 full-time equivalent employees. Financial Information...

  • Page 19
    ...'s or our pharmaceutical suppliers' pricing, selling, inventory, distribution or supply policies or practices could significantly reduce our revenues and net income. Due to the diverse range of healthcare supply management and healthcare information technology products and services that we offer...

  • Page 20
    ... on the basis of utilization) of the most recently reported monthly average manufacturer price ("AMP") using a smoothing process. States had until May 2016 to implement the FULs. Additionally, the final rule established actual acquisition cost as the basis by which states should determine their...

  • Page 21
    ... another example, the Medicare Access and CHIP Reauthorization Act ("MACRA"), signed into law in April 2015, seeks to reform Medicare reimbursement policy for physician fee schedule services and adopts a series of policy changes affecting a wide range of providers and suppliers. Most notably, MACRA...

  • Page 22
    ...Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the Health Information Technology for Economic and Clinical Health ("HITECH") Act portion of the American Recovery and Reinvestment Act of 2009, new laws and regulations in this area could further restrict our or our customers...

  • Page 23
    ... focused on the regulation of medical software and health information technology products as medical devices under the federal Food, Drug and Cosmetic Act. For example, in 2011 the FDA issued a rule on medical device data systems that regulates certain software that electronically stores, transfers...

  • Page 24
    ... of revenue. Delays in providing software and systems that are in compliance with these rules may result in postponement or cancellation of our customers' decisions to purchase our software and systems. Medical Billing and Coding: Medical billing, coding and collection activities are governed by...

  • Page 25
    ... and reducing healthcare costs, continue to exert pressure on the pricing of and reimbursement timelines for pharmaceuticals and may cause our customers to purchase fewer of our products and services and reduce the prices they are willing to pay. Countries with existing healthcare-related austerity...

  • Page 26
    ... and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and challenges retaining the customers of the combined businesses. Further, acquisitions may have a material adverse impact on...

  • Page 27
    ... the expected benefits from our acquisition of Celesio. Our business and results of operations could be impacted if we fail to manage and complete divestitures. We regularly evaluate our portfolio in order to determine whether an asset or business may no longer help us meet our objectives. For...

  • Page 28
    ... the diversity of our customer and revenue base. Our Technology Solutions segment experiences substantial competition from many companies, including other software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care management organizations...

  • Page 29
    ... We generally sell our products and services to customers on credit that is short-term in nature and unsecured. Any adverse change in general economic conditions can adversely reduce sales to our customers, affect consumer buying practices or cause our customers to delay or be unable to pay accounts...

  • Page 30
    ... customers, company and workforce. We routinely process, store and transmit large amounts of data in our operations, including sensitive personal information, protected health information, financial information, and confidential information relating to our business or third parties. Some of the data...

  • Page 31
    ... our Technology Solutions segment, deliver enterprise-wide and single entity clinical, patient care, financial, supply chain and strategic management software solutions to hospitals, physicians, homecare providers, retail and mail order pharmacies and payers. Challenges integrating software products...

  • Page 32
    ... to their data residing in our service center, exposing us to significant costs. We provide remote hosting services that involve operating both our software and the software of third-party vendors for our customers. The ability to access the systems and the data that we host and support on demand...

  • Page 33
    ... with the customer to completion of implementation. How and when to implement, replace, or expand an information system, or modify or add business processes, are major decisions for healthcare organizations. Many of the solutions we provide typically require significant capital expenditures and time...

  • Page 34
    ... fees, returned products or incentives. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms, may have a material adverse impact on our results of operations and cash flow. Changes in accounting standards issued by the Financial...

  • Page 35
    ... financial position, results of operations or cash flows. We may not realize the expected benefits from our restructuring and business process initiatives. On March 14, 2016, the Company committed to a restructuring plan to lower its operating costs ("Cost Alignment Plan"). The Cost Alignment Plan...

  • Page 36
    ..., zoning and real estate delays may negatively affect retail location openings and increase costs and capital expenditures. If we are unable to keep up our existing retail store locations or open new retail store locations in desirable places and on favorable terms, our results of operations could...

  • Page 37
    ...and Chief Financial Officer, AMR Corporation and its principal subsidiary, American Airlines, Inc., from 2004 to 2006, Service with the Company - 2 years. Executive Vice President and Group President since June 2009; President of McKesson Specialty Care Solutions (now McKesson Specialty Health) from...

  • Page 38
    ... Board authorized the repurchase of up to $500 million and $2 billion of the Company's common stock. In 2014, we made no share repurchases. In 2015, we repurchased 1.5 million shares for $340 million at an average price of $226.55 per share. In 2016, we repurchased 4.5 million shares of the Company...

  • Page 39
    ... it is generally available to investors and broadly used by other companies in the same industry. $300 $250 D O L L A R S $200 $150 $100 $50 $0 2011 2012 2013 2014 2015 2016 McKesson Corporation S&P 500 Index S&P 500 Health Care Index 2011 2012 March 31, 2013 2014 2015 2016 McKesson...

  • Page 40
    ... Corporation Financial Position Working capital Days sales outstanding for: (2) Customer receivables Inventories Drafts and accounts payable Total assets Total debt, including capital lease obligations Total McKesson stockholders' equity (3) Payments for property, plant and equipment Acquisitions...

  • Page 41
    ...Primarily reflects guaranteed dividends and annual recurring compensation that McKesson became obligated to pay to the noncontrolling shareholders of Celesio AG upon the effectiveness of the Domination Agreement in December 2014. (2) Based on year-end balances and sales or cost of sales for the last...

  • Page 42
    ...of Business," to the consolidated financial statements appearing in this Annual Report on Form 10-K for a description of these segments. RESULTS OF OPERATIONS Overview: (Dollars in millions, except per share data) 2016 Years Ended March 31, 2015 2014 Change 2016 2015 Revenues Gross Profit Operating...

  • Page 43
    ... in acquisition-related expenses and intangible asset amortization, and higher compensation and benefit costs. Additionally, operating expenses for 2015 included the $150 million settlement charge and for 2014, included $68 million of pre-tax charges associated with our Average Wholesale Price ("AWP...

  • Page 44
    ...to McKesson Corporation from discontinued operations were $0.14, $1.27 and $0.67 in 2016, 2015 and 2014. We have recently acquired or have agreements to acquire a number of businesses whose financial results will be reported within our Distribution Solutions segment from their respective acquisition...

  • Page 45
    ...International Technology business to a third party during the first quarter of 2016. Revenues decreased in 2015 compared to 2014 primarily due to a decline in hospital software revenues, the planned elimination of a product line and lower revenues from the workforce business within our International...

  • Page 46
    ... uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business' practice is to pass on to customers published price changes from suppliers. Manufacturers generally...

  • Page 47
    McKESSON CORPORATION FINANCIAL REVIEW (Continued) 2016 vs. 2015: Gross profit margin benefited from the sale of our nurse triage business, transitioning of our workforce business within our International Technology business to a third party, and higher pull-through of deferred revenue. These ...

  • Page 48
    ... the sale of our nurse triage business in the first quarter of 2016, including a pre-tax gain on sale of $51 million, and lower compensation and benefit costs. These decreases were partially offset by pre-tax charges of $30 million for the Cost Alignment Plan as well as the write-off of internal-use...

  • Page 49
    ..., employee retention incentives, outside service fees and other costs to integrate the business, and bridge loan fees. Additionally, our acquisition-related expenses for our PSSI acquisition include amounts associated with distribution center rationalization and information technology conversions...

  • Page 50
    McKESSON CORPORATION FINANCIAL REVIEW (Continued) Amortization Expenses of Acquired Intangible Assets Amortization expenses of acquired intangible assets in connection with acquisitions recorded in operating expenses were $423 million, $483 million and $308 million in 2016, 2015 and 2014. ...

  • Page 51
    ...and operating profit margin in 2016 includes $161 million of pre-tax charges associated with the Cost Alignment Plan, lower LIFO charges, and a $52 million pre-tax gain on the sale of our ZEE Medical business. Operating profit margin for 2015 decreased primarily due to our acquisition of Celesio and...

  • Page 52
    ..., net of tax, were $32 million, $299 million and $156 million in 2016, 2015 and 2014. In 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business within our Distribution Solutions segment, which we acquired through our February 2014 acquisition of Celesio. Loss from...

  • Page 53
    ... from the sale of our Hospital Automation business. Additionally, during 2014, we recorded an $80 million noncash pre-tax and after-tax impairment charge to reduce the carrying value of our International Technology business to its estimated fair value less costs to sell. Refer to Financial Note...

  • Page 54
    ... for accounts where collection may be in doubt. During 2016, sales to our ten largest customers, including group purchasing organizations ("GPOs") accounted for approximately 52.4% of our total consolidated revenues. Sales to our largest customer, CVS Health ("CVS"), accounted for approximately...

  • Page 55
    ...purchase price using the first-in, first-out method ("FIFO"). Technology Solutions segment inventories consist of computer hardware with cost generally determined by the standard cost method, which approximates average cost. Rebates, cash discounts and other incentives received from vendors relating...

  • Page 56
    ... is conducted at the reporting unit level, which is generally defined as a component - one level below our Distribution Solutions and Technology Solutions operating segments, for which discrete financial information is available and segment management regularly reviews the operating results of...

  • Page 57
    McKESSON CORPORATION FINANCIAL REVIEW (Continued) companies and for the income approach, the required rate of return used in the discounted cash flow method, which reflects capital market conditions and the specific risks associated with the business. Other estimates inherent in both the market and ...

  • Page 58
    ... we use to manage the underlying businesses. We had deferred income tax assets (net of valuation allowances) of $1,272 million and $1,189 million at March 31, 2016 and 2015 and deferred tax liabilities of $3,947 million and $3,791 million. Deferred tax assets primarily consist of timing differences...

  • Page 59
    ... 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. We are in the process of acquiring certain businesses, and the cost...

  • Page 60
    ... billion available under the October 2015 share repurchase plan for future repurchases of the Company's common stock. We believe that our operating cash flow, financial assets and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet...

  • Page 61
    ... and accounts payable, short-term borrowings, current portion of long-term debt, deferred revenue and other current liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory...

  • Page 62
    ... on the Company. These obligations primarily relate to inventory purchases, capital commitments and outsourcing service agreements. (6) Represents minimum rental payments for operating leases. (7) Includes agreements under which we have guaranteed the repurchase of our customers' inventory and...

  • Page 63
    ... financial statements appearing in this Annual Report on Form 10-K for additional information. Credit Resources: We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our credit facilities and commercial paper issuances. Funds...

  • Page 64
    ... on our financial results that are reported in U.S. dollars. We are also exposed to foreign exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We have certain foreign exchange rate risk programs that use foreign currency...

  • Page 65
    ... FINANCIAL INFORMATION Page Management's Annual Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Statements of Operations for the years ended March 31, 2016, 2015 and 2014 Consolidated...

  • Page 66
    ... establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an assessment of the...

  • Page 67
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of McKesson Corporation San Francisco, California We have audited the accompanying consolidated balance sheets of McKesson Corporation and subsidiaries (the "Company") as of March 31, 2016 and 2015, and the related consolidated...

  • Page 68
    ... 1 to the financial statements, the Company early adopted the Financial Accounting Standards Board Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes, as of March 31, 2016 on a prospective basis. /s/ Deloitte & Touche LLP San Francisco, California May 5, 2016 62

  • Page 69
    McKESSON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts) Years Ended March 31, 2015 2016 2014 Revenues Cost of Sales Gross Profit Operating Expenses Selling, distribution and administrative expenses Research and development Restructuring charges Claim and...

  • Page 70
    ... Years Ended March 31, 2016 2015 2014 Net Income Other Comprehensive Income (Loss), Net of Tax Foreign currency translation adjustments arising during the period Unrealized gains (losses) on cash flow hedges arising during the period Retirement-related benefit plans Other Comprehensive Income (Loss...

  • Page 71
    ... Assets Property, Plant and Equipment, Net Goodwill Intangible Assets, Net Other Noncurrent Assets Total Assets LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY Current Liabilities Drafts and accounts payable Short-term borrowings Deferred revenue Deferred tax liabilities...

  • Page 72
    ... Acquisition of Celesio Conversion of Celesio convertible bonds Other comprehensive income Net income (loss) Repurchase of common stock Cash dividends declared, $0.92 per common share Other Balances, March 31, 2014 Issuance of shares under employee plans Share-based compensation Tax benefit related...

  • Page 73
    ... Inventories Drafts and accounts payable Deferred revenue Taxes Claim and litigation charges Litigation settlement payments Other Net cash provided by operating activities Investing Activities Payments for property, plant and equipment Capitalized software expenditures Acquisitions, net of cash...

  • Page 74
    ... FINANCIAL NOTES 1. Significant Accounting Policies Nature of Operations: McKesson Corporation ("McKesson," the "Company," the "Registrant" or "we" and other similar pronouns) delivers a comprehensive offering of pharmaceuticals and medical supplies and provides services to help our customers...

  • Page 75
    ... of credit risk with customers primarily in our Distribution Solutions segment. During 2016, sales to our ten largest customers, including group purchasing organizations ("GPOs") accounted for approximately 52.4% of our total consolidated revenues. Sales to our largest customer, CVS Health ("CVS...

  • Page 76
    McKESSON CORPORATION FINANCIAL NOTES (Continued) cost of inventories held in foreign locations is based on weighted average purchase prices using the first-in, firstout method ("FIFO"). Technology Solutions segment inventories consist of computer hardware with cost generally determined by the ...

  • Page 77
    ... Held for Sale: Development costs for software held for sale, which primarily pertain to our Technology Solutions segment, are capitalized once a project has reached the point of technological feasibility. Completed projects are amortized after reaching the point of general availability using the...

  • Page 78
    ... products only if they can be resold for value or returned to suppliers for credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from customers were approximately $3.1 billion in 2016, $2.7 billion in 2015 and $1.9 billion in 2014. Taxes collected...

  • Page 79
    .... Outsourcing service revenues are recognized as the service is performed. We also offer certain products on an application service provider basis, making our software functionality available on a remote hosting basis from our data centers. The data centers provide system and administrative support...

  • Page 80
    ...assets and comprehensive income that is not allocable to McKesson Corporation. In 2016 and 2015, net income attributable to noncontrolling interests primarily represents guaranteed dividends and recurring compensation that McKesson is obligated to pay to the noncontrolling shareholders of Celesio AG...

  • Page 81
    ...the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred. Several valuation methods may be used to...

  • Page 82
    ...-Based Payments: In March 2016, amended guidance was issued for employee share-based payment awards. The amended guidance makes several modifications related to the accounting for forfeitures, employer tax withholding on share-based compensation and excess tax benefits or deficiencies. The amended...

  • Page 83
    ... annual disclosures related to our pension benefits. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements. Fees Paid in a Cloud Computing Arrangement: In April 2015, amended guidance was issued for a customer's accounting for fees...

  • Page 84
    ... sheet. The Acquisition was initially funded by utilizing a senior bridge loan, our existing accounts receivable sales facility and cash on hand. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio...

  • Page 85
    ...sheet at March 31, 2016. The acquisition was completed on April 1, 2016. The acquired UDG business primarily provides pharmaceutical and other healthcare products to retail and hospital pharmacies. The acquisition of UDG will expand our offerings and strengthen our market position in Ireland and the...

  • Page 86
    ... specialty pharmaceutical distribution scale and oncology-focused pharmacy offerings, solutions for manufacturers and payers, and expand the scope of our community-based oncology and practice management services. In March 2016, we entered into an agreement to purchase Rexall Health from Katz Group...

  • Page 87
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Restructuring charges for our Cost Alignment Plan during the fourth quarter of 2016 consisted of the following: (In millions) Distribution Solutions (1) Technology Solutions Corporate Total Severance and employee-related costs, net Exit-related ...

  • Page 88
    ...of the cost of an asset in 2016, 2015 and 2014. Impact on Net Income The components of share-based compensation expense and related tax benefits are as follows: (In millions) Years Ended March 31, 2016 2015 2014 Restricted stock unit awards (1) Stock options Employee stock purchase plan Share-based...

  • Page 89
    ...2005 Stock Plan. As of March 31, 2016, 29 million shares remain available for future grant under the 2013 Stock Plan. Stock Options Stock options are granted with an exercise price at no less than the fair market value and those options granted under the stock plans generally have a contractual term...

  • Page 90
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Weighted-average assumptions used to estimate the fair value of employee stock options were as follows: Years Ended March 31, 2016 2015 2014 Expected stock price volatility Expected dividend yield Risk-free interest rate Expected life (in years) The ...

  • Page 91
    ... grant date market price of the Company's common stock. The Compensation Committee determines the vesting terms at the time of grant. These awards generally vest in three to four years. We recognize expense for RSUs on a straight-line basis over the requisite service period. Non-employee directors...

  • Page 92
    ... award cost is expected to be recognized Employee Stock Purchase Plan ("ESPP") $104 $144 2 $126 $206 2 $184 $236 2 The Company has an ESPP under which 21 million shares have been authorized for issuance. The ESPP allows eligible employees to purchase shares of our common stock through payroll...

  • Page 93
    ... in 2016 and 2015 and net discrete tax expenses of $94 million in 2014. Discrete tax benefits in 2016 included a $19 million benefit related to enacted tax law changes in foreign jurisdictions and a $25 million benefit due to the reversal of a tax reserve related to the treatment of share-based...

  • Page 94
    ... tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. Our reported income tax rates were 27.9%, 30.7%, and 34.9% in 2016, 2015 and 2014. The fluctuations in our reported income tax...

  • Page 95
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Deferred tax balances consisted of the following: (In millions) March 31, 2016 2015 Assets Receivable allowances Deferred revenue Compensation and benefit related accruals Net operating loss and credit carryforwards Other Subtotal Less: valuation ...

  • Page 96
    McKESSON CORPORATION FINANCIAL NOTES (Continued) We received reassessments from the Canada Revenue Agency ("CRA") related to a transfer pricing matter impacting years 2003 through 2013. During 2016, we reached an agreement to settle the transfer pricing matter for years 2003 through 2013 and ...

  • Page 97
    McKESSON CORPORATION FINANCIAL NOTES (Continued) 9. Discontinued Operations Brazil Distribution Business During the fourth quarter of 2015, we committed to a plan to sell our Brazilian pharmaceutical distribution business, which we acquired through our February 2014 acquisition of Celesio, from our ...

  • Page 98
    ...into the domination and profit and loss transfer agreement (the "Domination Agreement"). The Domination Agreement was approved at the general shareholders' meeting of Celesio on July 15, 2014, approved by the Stuttgart Higher Regional Court for registration on December 2, 2014, and was registered in...

  • Page 99
    ..., Celesio subordinated its management to McKesson and undertook to transfer all of its annual profits to McKesson, and McKesson undertook to compensate any annual losses incurred by Celesio and to grant, subject to a potential court review, the noncontrolling shareholders of Celesio (i) an annual...

  • Page 100
    ... of Celesio. (5) Includes net foreign currency losses of $138 million attributable to noncontrolling interests. 11. Earnings Per Common Share Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the reporting period...

  • Page 101
    ... stock units. Approximately 2 million, 1 million and 2 million of potentially dilutive securities were excluded from the computations of diluted net earnings per common share in 2016, 2015 and 2014, as they were anti-dilutive. 12. Receivables, Net (In millions) March 31, 2016 2015 Customer accounts...

  • Page 102
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Other receivables primarily include amounts due from suppliers and customer unbilled receivables. The allowances are primarily for estimated uncollectible accounts. 13. Property, Plant and Equipment, Net (In millions) March 31, 2016 2015 Land ...

  • Page 103
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Information regarding intangible assets is as follows: March 31, 2016 Weighted Average Remaining Amortization Period (Years) March 31, 2015 (Dollars in millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying ...

  • Page 104
    McKESSON CORPORATION FINANCIAL NOTES (Continued) 16. Debt and Financing Activities Long-term debt consisted of the following: (In millions) March 31, 2016 2015 U.S. Dollar notes (1) Floating Rate Notes due September 10, 2015 0.95% Notes due December 4, 2015 3.25% Notes due March 1, 2016 5.70% Notes...

  • Page 105
    ...'s credit rating. Interest expense for 2014 included a total of $46 million of fees related to the 2014 Bridge Loan and a bridge loan agreement entered into during the third quarter of 2014 in anticipation of an earlier acquisition of Celesio. Other Information Scheduled future payments of long-term...

  • Page 106
    ... these credit lines primarily related to short-term borrowings. Borrowings and repayments during 2014 were not material. As of March 31, 2016 and 2015, there were $28 million and $29 million outstanding under these credit lines. Accounts Receivable Facilities Following the execution of the Global...

  • Page 107
    ... are with oncology and other specialty practices. Under these practice arrangements, we generally own or lease all of the real estate and equipment used by the affiliated practices and manage the practices' administrative functions. We also have relationships with certain pharmacies in Europe with...

  • Page 108
    ... used to fund pensions of Celesio's Management Board. Defined benefit plan assets and obligations are measured as of the Company's fiscal year-end. The net periodic expense for our pension plans, which includes net pension expense of Celesio beginning February 2014, is as follows: U.S. Plans...

  • Page 109
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Information regarding the changes in benefit obligations and plan assets for our pension plans is as follows: U.S. Plans Years Ended March 31, 2016 2015 Non-U.S. Plans Years Ended March 31, 2016 2015 (In millions) Change in benefit obligations ...

  • Page 110
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Amounts recognized in accumulated other comprehensive income (pre-tax) consist of: U.S. Plans March 31, 2016 2015 Non-U.S. Plans March 31, 2016 2015 (In millions) Net actuarial loss Prior service credit Total $185 - $185 $220 - $220 $133 (11) $...

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    ... plan assets at March 31, 2016 and 2015 are 50% equity investments, 45% fixed income investments including cash and cash equivalents and 5% real estate. Equity investments include common stock, preferred stock, and equity commingled funds. Fixed income investments include corporate bonds, government...

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    McKESSON CORPORATION FINANCIAL NOTES (Continued) invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the plans. Plan assets are primarily invested in high-quality corporate and government bond funds and equity securities. Assets are ...

  • Page 113
    ...corporations. Common shares are traded actively on exchanges and price quotes are readily available. Preferred shares may not be actively traded. Holdings of common shares are generally classified as Level 1 investments. Preferred shares are classified as Level 2 investments. Equity commingled funds...

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    ...return credited to this account is determined annually by the SPK based on the performance of long-term government bonds. The following table represents a reconciliation of Level 3 plan assets held during the years ended March 31, 2016 and 2015: U.S. Plans Real Estate Funds Total Non-U.S. Plans Real...

  • Page 115
    ... from the plan. Defined Contribution Plans We have a contributory profit sharing investment plan ("PSIP") for U.S. eligible employees. Eligible employees may contribute to the PSIP up to 75% of their eligible compensation on a pre-tax or post-tax basis not to exceed IRS limits. The Company makes...

  • Page 116
    ... 2016, 2015 and 2014, a one-percentage-point increase or decrease in the assumed healthcare cost trend rate would not have a material impact on the postretirement benefit obligations. Pursuant to various collective bargaining agreements, we contribute to multiemployer health and welfare plans that...

  • Page 117
    McKESSON CORPORATION FINANCIAL NOTES (Continued) 20. Hedging Activities In the normal course of business, we are exposed to interest rate and foreign exchange rate fluctuations. At times, we limit these risks through the use of derivatives such as interest rate swaps, cross currency swaps and ...

  • Page 118
    ...measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows: Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities. Level 2-Valuations based on quoted prices...

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    McKESSON CORPORATION FINANCIAL NOTES (Continued) At March 31, 2016 and 2015, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings and other current liabilities approximated their estimated fair...

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    ...noncash pre-tax and after-tax impairment charge to reduce the carrying value of our International Technology business to its estimated fair value, less costs to sell. The impairment charge was primarily the result of the terms of the preliminary purchase offers received for this business during 2014...

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    .... 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...

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    .... In addition, most of our customers who purchase our software and automation products also purchase annual maintenance agreements. Revenues from these maintenance agreements are recognized on a straight-line basis over the contract period and the cost of servicing product warranties is charged to...

  • Page 123
    ... law in connection with the Company's acquisition of Celesio by paying more to some holders of Celesio's convertible bonds than it paid to the shareholders of Celesio's stock, Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA, No. 3- 05 O 44/14. On December 5, 2014, the court...

  • Page 124
    ...2014. The court has not yet ruled on USOS's motion. On January 26, 2016, the Company was served with an amended complaint filed in the Circuit Court of Boone County, West Virginia, by three relators, including the Attorney General of West Virginia, purportedly on behalf of the State of West Virginia...

  • Page 125
    ...distribution centers to customers that purchase products under its pharmaceutical prime vendor contract with the Department of Veterans Affairs. The Company expects that the suspensions will not result in a supply disruption to any customer. Customers located in the distribution center service areas...

  • Page 126
    ... of future dividends remain within the discretion of the Board and will depend upon the Company's future earnings, financial condition, capital requirements and other factors. Share Repurchase Plans Stock repurchases may be made from time-to-time in open market transactions, privately negotiated...

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    ... announced programs. (3) The number of shares purchased reflects rounding adjustments. In 2016, our share repurchases were transacted through both open market transactions and an ASR program with a third party financial institution. In 2015, all of our share repurchases were conducted through...

  • Page 128
    ... currency translation adjustments result from the conversion of non-U.S. dollar financial statements of our foreign subsidiaries into the Company's reporting currency, U.S. dollars, and were primarily related to our foreign subsidiary, Celesio, in 2016 and 2015. (2) The 2016 net foreign currency...

  • Page 129
    ... $(1,561) 26. Related Party Balances and Transactions Celesio has investments in pharmacies located across Europe that are accounted for under the equitymethod. Celesio maintains distribution arrangements with these pharmacies for the sale of related goods and services under which revenues of $112...

  • Page 130
    ... The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain, strategic management software solutions, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations. Corporate...

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    ... our Distribution Solutions segment, Technology Solutions segment and Corporate. (5) Amounts primarily include amortization of acquired intangible assets purchased in connection with business acquisitions, capitalized software held for sale and capitalized software for internal use. (6) Long-lived...

  • Page 132
    McKESSON CORPORATION FINANCIAL NOTES (Continued) Segment assets and property, plant and equipment, net by geographic areas were as follows: March 31, 2016 2015 (In millions) Segment assets Distribution Solutions Technology Solutions Total Corporate Cash and cash equivalents Other Total Property, ...

  • Page 133
    ... in cost of sales and $203 million in operating expenses. (4) Financial results for the first quarter of 2016 include an after-tax gain of $38 million from the sale of our nurse triage business, and for the second quarter of 2016 include an after-tax gain of $29 million from the sale of ZEE Medical...

  • Page 134
    ...the Company's internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and the related report of our independent registered public accounting firm are included in this Annual Report on Form 10-K, under the headings, "Management's Annual Report...

  • Page 135
    ...and "Audit Committee Report" in our Proxy Statement. Information about the Code of Conduct applicable to all employees, officers and directors can be found on our website, www.mckesson.com, under the caption "Investors-Corporate Governance." The Company's Corporate Governance Guidelines and Charters...

  • Page 136
    ... May 2014, the Company's executive officers are annually granted performance awards called Total Shareholder Return Units ("TSRUs"), which have a threeyear performance period and are payable in shares without an additional vesting period. Non-employee directors may be granted an award on the date of...

  • Page 137
    ...in the Financial Review section of this Annual Report on Form 10-K and Financial Note 26, "Related Party Balances and Transactions," to the consolidated financial statements appearing in this Annual Report on Form 10-K. Item 14. Principal Accounting Fees and Services. Information regarding principal...

  • Page 138
    McKESSON CORPORATION PART IV Item 15. Exhibits and Financial Statement Schedule. Page (a)(1) Consolidated Financial Statements Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm Consolidated Statements of Operations for the years ended March 31, 2016, 2015 and 2014 ...

  • Page 139
    ... the undersigned, thereunto duly authorized. MCKESSON CORPORATION Date: May 5, 2016 /s/ James A. Beer James A. Beer Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 140
    McKESSON CORPORATION SCHEDULE II SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 2016, 2015 and 2014 (In millions) Additions Balance at Beginning of Year Charged to Costs and Expenses Charged to Other Accounts (3) Deductions ...

  • Page 141
    McKESSON CORPORATION EXHIBIT INDEX The agreements included as exhibits to this report are included to provide information regarding their terms and not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain...

  • Page 142
    ...2014, and related Form of Floating Rate Note, Form of 2017 Note, Form of 2019 Note, Form of 2024 Note, and Form of 2044 Note. McKesson Corporation 1997 Non-Employee Directors' Equity Compensation and Deferral Plan, as amended through January 29, 2003. McKesson Corporation Supplemental Profit Sharing...

  • Page 143
    ... Reference File Number Exhibit Filing Date Description Form 10.10* McKesson Corporation Change in Control Policy for Selected Executive Employees, as amended and restated on October 26, 2010. McKesson Corporation Management Incentive Plan, effective July 29, 2015. Form of Statement of Terms and...

  • Page 144
    McKESSON CORPORATION Exhibit Number Incorporated by Reference File Number Exhibit Filing Date Description Form 10.20 Credit Agreement, dated as of October 22, 2015, among the Company and Certain Subsidiaries, as Borrowers, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. (...

  • Page 145
    ... by Reference File Number Exhibit Filing Date Description Form 10.24* Letter dated February 27, 2014 relinquishing certain rights provided in the McKesson Corporation Executive Benefit Retirement Plan by and between the Company and its Chairman, President and Chief Executive Officer. Amended and...

  • Page 146
    McKESSON CORPORATION †††Filed herewith. Furnished herewith. Registrant agrees to furnish to the Commission upon request a copy of each instrument defining the rights of security holders with respect to issues of long-term debt of the registrant, the authorized principal amount of which does...

  • Page 147
    ...financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John H. Hammergren John H. Hammergren Chairman of the Board, President and Chief Executive Officer...

  • Page 148
    ... information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ James A. Beer James A. Beer Executive Vice President and Chief Financial Officer b) Date: May 5, 2016

  • Page 149
    ... Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John H. Hammergren John H. Hammergren Chairman of the Board, President and Chief Executive Officer May 5, 2016...

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    ...02 $ 4.70 SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION In an effort to provide investors with additional information regarding the company's financial results as determined by generally accepted accounting principles ("GAAP"), McKesson Corporation (the "Company" or "we") also presents the following...

  • Page 152
    ... Company internally uses non-GAAP financial measures in connection with its own financial planning and reporting processes. Specifically, Adjusted Earnings serves as one of the measures management utilizes when allocating resources, deploying capital and assessing business performance and employee...

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  • Page 155
    ... Services, 1110 Centre Pointe Curve, Suite 101, Mendota Heights, MN 55120-4100 acts as transfer agent, registrar, dividend-paying agent and dividend reinvestment plan agent for McKesson Corporation stock and maintains all registered stockholder records for the Company. For information about McKesson...

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