McKesson 2016 Annual Report Download - page 29

McKESSON CORPORATION
A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as
substantial defaults in payment by a large customer or group purchasing organization, could have a material
adverse impact on our financial position and results of operations.
In recent years, a significant portion of our revenue growth has been with a limited number of large
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 approximately 20.3% of our total consolidated revenues. At March 31, 2016,
trade accounts receivable from our ten largest customers were approximately 32% of total trade accounts
receivable. Accounts receivable from CVS were approximately 18% of total trade accounts receivable. As a
result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which
functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as
well as with government entities and agencies. A material default in payment, a material reduction in purchases
from these or any other large customers, or the loss of a large customer or GPO could have a material adverse
impact on our financial position, results of operations and liquidity.
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 receivable owed
to us, which may in turn materially reduce our revenue growth and cause a material decrease in our profitability
and cash flow. Further, interest rate fluctuations and changes in capital market conditions may also affect our
customers’ ability to obtain credit to finance their business under acceptable terms, which in turn may materially
reduce our revenue growth and cause a decrease in our profitability.
Contracts with foreign and domestic government entities and their agencies pose additional risks relating to
future funding and compliance.
Contracts with foreign and domestic government entities and their agencies are subject to various
uncertainties, restrictions and regulations, including oversight audits by various government authorities.
Government contracts also are exposed to uncertainties associated with funding. Contracts with the U.S. federal
government, for example, are subject to the uncertainties of Congressional funding. Governments are typically
under no obligation to maintain funding at any specific level, and funds for government programs may even be
eliminated. As a result, our government clients may terminate our contracts for convenience or decide not to
renew our contracts with little or no prior notice. The loss of such contracts could have a material adverse impact
on our results of operations.
In addition, because government contracts are subject to specific procurement regulations and a variety of
other socio-economic requirements, we must comply with such requirements. For example, for contracts with the
U.S. federal government, with certain exceptions, we must comply with the Federal Acquisition Regulation, the
U.S. False Claims Act, the Procurement Integrity Act, the Buy American Act and the Trade Agreements Act. We
must also comply with various other domestic and foreign government regulations and requirements as well as
various statutes related to employment practices, environmental protection, recordkeeping and accounting. These
regulations and requirements affect how we transact business with our clients and, in some instances, impose
additional costs on our business operations. Government contracts also contain terms that expose us to higher
levels of risk and potential liability than non-government contracts.
We also are subject to government audits, investigations, and oversight proceedings. For example,
government agencies routinely review and audit government contractors to determine whether contractors are
complying with specific contractual or legal requirements. If we violate these rules or regulations, fail to comply
with a contractual or other requirement, or do not satisfy an audit, a variety of penalties can be imposed by a
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