McKesson 2016 Annual Report Download - page 52

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Interest Expense: Interest expense decreased in 2016 compared to the prior year primarily due to
repayments of debt and certain foreign currency-denominated credit facilities. Interest expense increased in 2015
compared to the prior year primarily due to the March 2014 issuance of $4.1 billion of new debt to fund the
acquisition of Celesio and due to interest on Celesio’s debt. Interest expense for 2014 also included $46 million
of bridge loan fees associated with the initial funding of the acquisition of Celesio. Partially offsetting these
increases, interest expense benefited from the repayment of debt in the fourth quarter of 2014.
Interest expense fluctuates based on timing, amounts and interest rates of term debt repaid and new term
debt issued, as well as amounts incurred associated with financing fees.
Income Taxes
During 2016, 2015 and 2014, income tax expense related to continuing operations was $908 million,
$815 million and $757 million, which included net discrete tax benefits of $42 million and $33 million in 2016
and 2015 and a net discrete tax expense of $94 million in 2014. Our reported income tax rates were 27.9%,
30.7% and 34.9% in 2016, 2015 and 2014. Fluctuations in our reported income tax rates are primarily due to
changes within our business mix, including varying proportions of income attributable to foreign countries that
have lower income tax rates, and discrete items.
Significant judgments and estimates are required in determining the consolidated income tax provision and
evaluating income tax uncertainties. Although our major taxing jurisdictions include the U.S. and Canada, we are
subject to income taxes in numerous foreign jurisdictions. Our income tax expense, deferred tax assets and
liabilities and uncertain tax liabilities reflect management’s best assessment of estimated current and future taxes
to be paid. We believe that we have made adequate provision for all income tax uncertainties.
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 recorded a net discrete tax benefit of $8 million.
The Internal Revenue Service (“IRS”) is currently examining our U.S. corporation income tax returns for
2007 through 2009 and may issue a Revenue Agent Report during the first quarter of 2017. We believe that
adequate amounts have been reserved for any adjustments that may ultimately result from these examinations,
and we do not anticipate a significant impact to our gross unrecognized tax benefits. During 2015, we reached an
agreement with the IRS to settle all outstanding issues relating to years 2003 through 2006 and recognized
discrete tax benefits of $55 million to record previously unrecognized tax benefits and related interest.
Loss from Discontinued Operations, Net of Tax
Losses from discontinued operations, 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
discontinued operations, net for 2015 included $241 million of non-cash pre-tax ($235 million after-tax)
impairment charges, which were recorded to reduce the carrying value of this business to its estimated fair value,
less costs to sell. On January 31, 2016, we entered into an agreement to sell the Brazilian pharmaceutical
distribution business to a third party. The sale is expected to be completed during the first half of 2017, subject to
regulatory approval and customary closing conditions. We expect to recognize an after-tax charge of
approximately $80 million to $100 million upon the disposition of the business within discontinued operations as
a result of settlement of certain indemnifications.
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