Discontinued operations and their cash flows for each of the three years in the period ended March 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. | | | /s/ Deloitte & Touche LLP | San Francisco, California | May 22, 2017 | — |
| | 0.02 |
| | (0.55 | ) | Total | $ | 0.17 |
| | $ | 0.32 |
| | $ | 22.95 |
| | | | | | | Weighted Average Common Shares | | | | | | Diluted | 197 |
| | 209 |
| | 223 |
| Basic | 196 |
| | 208 |
| | 221 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) | | | | | | | | | | | | | | Years Ended March 31, | | 2019 | | 2018 | | 2017 | Net Income | $ | 255 |
| | $ | 297 |
| | $ | 5,153 |
| | | | | | | Other Comprehensive Income (Loss), Net of Tax | | | | | | Foreign currency translation adjustments | (190 | ) | | 624 |
| | (632 | ) | |
|
| |
|
| |
|
| Unrealized gains (losses) on cash flow hedges | 24 |
| | (30 | ) | | (19 | ) | |
|
| |
|
| |
|
| Changes in retirement-related benefit plans | (32 | ) | | 15 |
| | (8 | ) | Other Comprehensive Income (Loss), Net of Tax | (198 | ) | | 609 |
| | (659 | ) | | | | | | | Comprehensive Income | 57 |
| | 906 |
| | 4,494 |
| Comprehensive (Income) Attributable to Noncontrolling Interests | (155 | ) | | (415 | ) | | (4 | ) | Comprehensive Income (Loss) Attributable to McKesson Corporation | $ | (98 | ) | | $ | 491 |
| | $ | 4,490 |
|
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| | | | | | | | | | | | | | Years Ended March 31, | | 2017 | | 2016 | | 2015 | Revenues | $ | 198,533 |
| | $ | 190,884 |
| | $ | 179,045 |
| Cost of Sales | (187,262 | ) | | (179,468 | ) | | (167,634 | ) | Gross Profit | 11,271 |
| | 11,416 |
| | 11,411 |
| Operating Expenses | | | | | | Selling, distribution and administrative expenses | (7,466 | ) | | (7,276 | ) | | (7,901 | ) | Research and development | (341 | ) | | (392 | ) | | (392 | ) | Restructuring charges | (18 | ) | | (203 | ) | | — |
| Goodwill impairment charge | (290 | ) | | — |
| | — |
| Claim and litigation charges | 6 |
| | — |
| | (150 | ) | Gain on Healthcare Technology Net Asset Exchange, net | 3,947 |
| | — |
| | — |
| Total Operating Expenses | (4,162 | ) | | (7,871 | ) | | (8,443 | ) | Operating Income | 7,109 |
| | 3,545 |
| | 2,968 |
| Other Income, Net | 90 |
| | 58 |
| | 63 |
| Interest Expense | (308 | ) | | (353 | ) | | (374 | ) | Income from Continuing Operations Before Income Taxes | 6,891 |
| | 3,250 |
| | 2,657 |
| Income Tax Expense | (1,614 | ) | | (908 | ) | | (815 | ) | Income from Continuing Operations | 5,277 |
| | 2,342 |
| | 1,842 |
| Loss from Discontinued Operations, Net of Tax | (124 | ) | | (32 | ) | | (299 | ) | Net Income | 5,153 |
| | 2,310 |
| | 1,543 |
| Net Income Attributable to Noncontrolling Interests | (83 | ) | | (52 | ) | | (67 | ) | Net Income Attributable to McKesson Corporation | $ | 5,070 |
| | $ | 2,258 |
| | $ | 1,476 |
| | | | | | | Earnings (Loss) Per Common Share Attributable to McKesson Corporation | | | | | | Diluted | | | | | | Continuing operations | $ | 23.28 |
| | $ | 9.84 |
| | $ | 7.54 |
| Discontinued operations | (0.55 | ) | | (0.14 | ) | | (1.27 | ) | Total | $ | 22.73 |
| | $ | 9.70 |
| | $ | 6.27 |
| Basic | | | | | | Continuing operations | $ | 23.50 |
| | $ | 9.96 |
| | $ | 7.66 |
| Discontinued operations | (0.55 | ) | | (0.14 | ) | | (1.29 | ) | Total | $ | 22.95 |
| | $ | 9.82 |
| | $ | 6.37 |
| | | | | | | Weighted Average Common Shares | | | | | | Diluted | 223 |
| | 233 |
| | 235 |
| Basic | 221 |
| | 230 |
| | 232 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| | | | | | | | | | | | | | Years Ended March 31, | | 2017 | | 2016 | | 2015 | Net Income | $ | 5,153 |
| | $ | 2,310 |
| | $ | 1,543 |
| | | | | | | Other Comprehensive Income (Loss), Net of Tax | | | | | | Foreign currency translation adjustments arising during the period | (624 | ) | | 113 |
| | (1,855 | ) | |
|
| |
|
| |
|
| Unrealized losses on net investment hedges arising during the period | (8 | ) | | — |
| | — |
| | | | | | | Unrealized gains (losses) on cash flow hedges arising during the period | (19 | ) | | 9 |
| | (10 | ) | |
|
| |
|
| |
|
| Retirement-related benefit plans | (8 | ) | | 50 |
| | (124 | ) | Other Comprehensive Income (Loss), Net of Tax | (659 | ) | | 172 |
| | (1,989 | ) | | | | | | | Comprehensive Income (Loss) | 4,494 |
| | 2,482 |
| | (446 | ) | Comprehensive (Income) Loss Attributable to Noncontrolling Interests | (4 | ) | | (72 | ) | | 212 |
| Comprehensive Income (Loss) Attributable to McKesson Corporation | $ | 4,490 |
| | $ | 2,410 |
| | $ | (234 | ) |
CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts) | | | March 31, | March 31, | | 2017 | | 2016 | 2019 | | 2018 | ASSETS | | | | | | | Current Assets | | | | | | | Cash and cash equivalents | $ | 2,783 |
| | $ | 4,048 |
| $ | 2,981 |
| | $ | 2,672 |
| Receivables, net | 18,215 |
| | 17,980 |
| 18,246 |
| | 17,711 |
| Inventories, net | 15,278 |
| | 15,335 |
| 16,709 |
| | 16,310 |
| Prepaid expenses and other | 672 |
| | 1,072 |
| 529 |
| | 443 |
| Total Current Assets | 36,948 |
| | 38,435 |
| 38,465 |
| | 37,136 |
| Property, Plant and Equipment, Net | 2,292 |
| | 2,278 |
| 2,548 |
| | 2,464 |
| Goodwill | 10,586 |
| | 9,786 |
| 9,358 |
| | 10,924 |
| Intangible Assets, Net | 3,665 |
| | 3,021 |
| 3,689 |
| | 4,102 |
| Equity Method Investment in Change Healthcare | 4,063 |
| | — |
| 3,513 |
| | 3,728 |
| Other Noncurrent Assets | 3,415 |
| | 3,003 |
| 2,099 |
| | 2,027 |
| Total Assets | $ | 60,969 |
| | $ | 56,523 |
| $ | 59,672 |
| | $ | 60,381 |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | | | | | | | Current Liabilities | | | | | | | Drafts and accounts payable | $ | 31,022 |
| | $ | 28,585 |
| $ | 33,853 |
| | $ | 32,177 |
| Short-term borrowings | 183 |
| | 7 |
| | Deferred revenue | 346 |
| | 919 |
| | Current portion of long-term debt | 1,057 |
| | 1,610 |
| 330 |
| | 1,129 |
| Other accrued liabilities | 3,004 |
| | 3,948 |
| 3,443 |
| | 3,379 |
| Total Current Liabilities | 35,612 |
| | 35,069 |
| 37,626 |
| | 36,685 |
| Long-Term Debt | 7,305 |
| | 6,497 |
| 7,265 |
| | 6,751 |
| Long-Term Deferred Tax Liabilities | 3,678 |
| | 2,734 |
| 2,998 |
| | 2,804 |
| Other Noncurrent Liabilities | 1,774 |
| | 1,809 |
| 2,103 |
| | 2,625 |
| Commitments and Contingent Liabilities (Note 25) |
| |
| | Commitments and Contingent Liabilities (Note 24) | |
| |
| Redeemable Noncontrolling Interests | 1,327 |
| | 1,406 |
| 1,393 |
| | 1,459 |
| McKesson Corporation Stockholders’ Equity | | | | | | | Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding | — |
| | — |
| — |
| | — |
| Common stock, $0.01 par value, 800 shares authorized at March 31, 2017 and 2016, 273 and 271 shares issued at March 31, 2017 and 2016 | 3 |
| | 3 |
| | Common stock, $0.01 par value, 800 shares authorized at March 31, 2019 and 2018, 271 and 275 shares issued at March 31, 2019 and 2018 | | 3 |
| | 3 |
| Additional Paid-in Capital | 6,028 |
| | 5,845 |
| 6,435 |
| | 6,188 |
| Retained Earnings | 13,189 |
| | 8,360 |
| 12,409 |
| | 12,986 |
| Accumulated Other Comprehensive Loss | (2,141 | ) | | (1,561 | ) | (1,849 | ) | | (1,717 | ) | Other | (2 | ) | | (2 | ) | (2 | ) | | (1 | ) | Treasury Shares, at Cost, 62 and 46 at March 31, 2017 and 2016 | (5,982 | ) | | (3,721 | ) | | Treasury Stock, at Cost, 81 and 73 shares at March 31, 2019 and 2018 | | (8,902 | ) | | (7,655 | ) | Total McKesson Corporation Stockholders’ Equity | 11,095 |
| | 8,924 |
| 8,094 |
| | 9,804 |
| Noncontrolling Interests | 178 |
| | 84 |
| 193 |
| | 253 |
| Total Equity | 11,273 |
| | 9,008 |
| 8,287 |
| | 10,057 |
| Total Liabilities, Redeemable Noncontrolling Interests and Equity | $ | 60,969 |
| | $ | 56,523 |
| $ | 59,672 |
| | $ | 60,381 |
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended March 31, 20172019, 20162018 and 20152017 (In millions, except per share amounts) | | | McKesson Corporation Stockholders’ Equity | | | | | McKesson Corporation Stockholders’ Equity | | | | | | Common Stock | | Additional Paid-in Capital | | Other Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury | | Noncontrolling Interests | | Total Equity | Common Stock | | Additional Paid-in Capital | | Other Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury | | Noncontrolling Interests | | Total Equity | | Shares | | Amount | | Common Shares | | Amount | Shares | | Amount | | Common Shares | | Amount | Balances, March 31, 2014 | 381 |
| | $ | 4 |
| | $ | 6,552 |
| | $ | 23 |
| | $ | 11,453 |
| | $ | (3 | ) | | (150 | ) | | $ | (9,507 | ) | | $ | 1,796 |
| | $ | 10,318 |
| | Issuance of shares under employee plans | 3 |
| | — |
| | 152 |
| | | | | | | | — |
| | (109 | ) | | | | 43 |
| | Share-based compensation | | | | | 165 |
| | | | | | | | | | | | | | 165 |
| | Tax benefit related to issuance of shares under employee plans | | | | | 105 |
| | | | | | | | | | | | | | 105 |
| | Purchase of noncontrolling interests | | | | | (2 | ) | | | | | |
| | | | | | (60 | ) | | (62 | ) | | Reclassification of noncontrolling interests to redeemable noncontrolling interests | | | | |
| | | | | | | | | | | | (1,500 | ) | | (1,500 | ) | | Other comprehensive income | | | | |
| | | | | | (1,710 | ) | |
| |
| | (174 | ) | | (1,884 | ) | | Net income |
| | | |
| | | | 1,476 |
| | | |
| |
| | 5 |
| | 1,481 |
| | Repurchase of common stock | | | | |
| | | | | | | | (2 | ) | | (340 | ) | | | | (340 | ) | | Cash dividends declared, $0.96 per common share | | | | | | | | | (226 | ) | | | | | | | | | | (226 | ) | | Other | | | | | (4 | ) | | (30 | ) | | 2 |
| | | | | | | | 17 |
| | (15 | ) | | Balances, March 31, 2015 | 384 |
| | $ | 4 |
| | $ | 6,968 |
| | $ | (7 | ) | | $ | 12,705 |
| | $ | (1,713 | ) | | (152 | ) | | $ | (9,956 | ) | | $ | 84 |
| | $ | 8,085 |
| | Issuance of shares under employee plans | 3 |
| | — |
| | 123 |
| | | | | | | | (1 | ) | | (109 | ) | | | | 14 |
| | Share-based compensation | | | | | 130 |
| | | | | | | | | | | | | | 130 |
| | Tax benefit related to issuance of shares under employee plans | | | | | 117 |
| | | | | | | | | | | | | | 117 |
| | Other comprehensive income | | | | | | | | | | | 152 |
| | | | | |
| | 152 |
| | Net income | | | | | | | | | 2,258 |
| | | | | | | | 8 |
| | 2,266 |
| | Repurchase of common stock | | | | |
| | | | | | | | (9 | ) | | (1,504 | ) | | | | (1,504 | ) | | Retirement of common stock | (116 | ) | | (1 | ) | | (1,493 | ) | | | | (6,354 | ) | | | | 116 |
| | 7,848 |
| | | | — |
| | Cash dividends declared, $1.08 per common share | | | | | | | | | (249 | ) | | | | | | | | | | (249 | ) | | Other | | | | |
| | 5 |
| |
| | | | | | | | (8 | ) | | (3 | ) | | Balances, March 31, 2016 | 271 |
| | $ | 3 |
| | $ | 5,845 |
| | $ | (2 | ) | | $ | 8,360 |
| | $ | (1,561 | ) | | (46 | ) |
| $ | (3,721 | ) | | $ | 84 |
|
| $ | 9,008 |
| 271 |
| | $ | 3 |
| | $ | 5,845 |
| | $ | (2 | ) | | $ | 8,360 |
| | $ | (1,561 | ) | | (46 | ) | | $ | (3,721 | ) | | $ | 84 |
| | $ | 9,008 |
| Issuance of shares under employee plans | 3 |
| | — |
| | 125 |
| | | | | | | | | | (61 | ) | | | | 64 |
| 3 |
| | — |
| | 125 |
| | | | | | | |
| | (61 | ) | | | | 64 |
| Share-based compensation | | | | | 110 |
| | | | | | | | | | | | | | 110 |
| | | | | 110 |
| | | | | | | | | | | | | | 110 |
| Tax benefit related to issuance of shares under employee plans | | | | | | | | | 7 |
| | | | | | | | | | 7 |
| | | | |
|
| | | | 7 |
| | | | | | | | | | 7 |
| Acquisition of Vantage | | | | | | | | | | | | | | | | | 89 |
| | 89 |
| | | | |
| | | | | |
|
| |
| |
| | 89 |
| | 89 |
| Other comprehensive loss | |
| | | |
| | | |
| | (580 | ) | |
| |
| |
| | (580 | ) | Net income | | | | | |
| | | | 5,070 |
| | | |
| |
| | 39 |
| | 5,109 |
| Repurchase of common stock | |
| |
| | (50 | ) | | | |
| | | | (16 | ) | | (2,200 | ) | | | | (2,250 | ) | Cash dividends declared, $1.12 per common share | | | | | | | | | | (249 | ) | | | | | | | | | | (249 | ) | Other | | (1 | ) | | | | (2 | ) | | — |
| | 1 |
| | | | | | | | (34 | ) | | (35 | ) | Balances, March 31, 2017 | | 273 |
| | $ | 3 |
| | $ | 6,028 |
| | $ | (2 | ) | | $ | 13,189 |
| | $ | (2,141 | ) | | (62 | ) | | $ | (5,982 | ) | | $ | 178 |
| | $ | 11,273 |
| Issuance of shares under employee plans | | 2 |
| | — |
| | 126 |
| | | | | | | |
| | (59 | ) | | | | 67 |
| Share-based compensation | | | | | | 67 |
| | | | | | | | | | | | | | 67 |
| Payments to noncontrolling interests | | | | | |
| | | |
| | | | | | | | (98 | ) | | (98 | ) | Other comprehensive income | | | | | | | | | | | (580 | ) | | | | | | | | (580 | ) | | | | | | | | | | | 424 |
| | | | | |
| | 424 |
| Net income | | | | | | | | | 5,070 |
| |
| | | | | | 39 |
| | 5,109 |
| | | | | | | | | 67 |
| |
| | | | | | 187 |
| | 254 |
| Repurchase of common stock | | | | | (50 | ) | | | | | | | | (16 | ) | | (2,200 | ) | | | | (2,250 | ) | | | | | (36 | ) | | | |
| | | | (11 | ) | | (1,614 | ) | |
| | (1,650 | ) | Exercise of put right by noncontrolling shareholders of McKesson Europe | | | | | | 3 |
| | | | | | | |
| |
| | | | 3 |
| Cash dividends declared, $1.30 per common share | | | | | | | | | | (270 | ) | | | | | | | | | | (270 | ) | Other | |
| | | |
| | 1 |
| |
| | | | | | | | (14 | ) | | (13 | ) | Balances, March 31, 2018 | | 275 |
| | $ | 3 |
| | $ | 6,188 |
| | $ | (1 | ) | | $ | 12,986 |
| | $ | (1,717 | ) | | (73 | ) |
| $ | (7,655 | ) | | $ | 253 |
|
| $ | 10,057 |
| Opening Retained Earnings Adjustments: Adoption of New Accounting Standards | | | | | | | | | | 154 |
| | | | | | | | | | 154 |
| Balances, April 1, 2018 | | 275 |
| | 3 |
| | 6,188 |
| | (1 | ) | | 13,140 |
| | (1,717 | ) | | (73 | ) | | (7,655 | ) | | 253 |
| | 10,211 |
| Issuance of shares under employee plans | | 1 |
| | — |
| | 75 |
| | | | | | | | | | (12 | ) | | | | 63 |
| Share-based compensation | | | | | | 92 |
| | | | | | | | | | | | | | 92 |
| Payments to noncontrolling interests | | | | | | | | | | | | | | | | | | (184 | ) | | (184 | ) | Other comprehensive loss | | | | | | | | | | | | (132 | ) | | | | | | | | (132 | ) | Net income | | | | | | | | | | 34 |
| |
| | | | | | 176 |
| | 210 |
| Repurchase of common stock | | | | | | 150 |
| | | | | | | | (13 | ) | | (1,777 | ) | | | | (1,627 | ) | Retirement of common stock | | | | | | | | | | | | | | | | | | | — |
| (5 | ) | | — |
| | (70 | ) | | | | (472 | ) | | | | 5 |
| | 542 |
| | | | — |
| Cash dividends declared, $1.12 per common share | | | | | | | | | (249 | ) | | | | | | | | | | (249 | ) | | Cash dividends declared, $1.51 per common share | | | | | | | | | | (298 | ) | | | | | | | | | | (298 | ) | Other | (1 | ) | | | | (2 | ) | | — |
| | 1 |
| | | | | | | | (34 | ) | | (35 | ) |
| | | |
| | (1 | ) | | 5 |
| | | | | | | | (52 | ) | | (48 | ) | Balances, March 31, 2017 | 273 |
| | $ | 3 |
| | $ | 6,028 |
| | $ | (2 | ) | | $ | 13,189 |
| | $ | (2,141 | ) | | (62 | ) | | $ | (5,982 | ) | | $ | 178 |
| | $ | 11,273 |
| | Balances, March 31, 2019 | | 271 |
| | $ | 3 |
| | $ | 6,435 |
| | $ | (2 | ) | | $ | 12,409 |
| | $ | (1,849 | ) | | (81 | ) | | $ | (8,902 | ) | | $ | 193 |
| | $ | 8,287 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | Years Ended March 31, | Years Ended March 31, | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Operating Activities | | | | | | | | | | | Net income | $ | 5,153 |
| | $ | 2,310 |
| | $ | 1,543 |
| $ | 255 |
| | $ | 297 |
| | $ | 5,153 |
| Adjustments to reconcile to net cash provided by operating activities: | | | | | | | | | | | Depreciation | 324 |
| | 281 |
| | 306 |
| 317 |
| | 303 |
| | 324 |
| Amortization | 586 |
| | 604 |
| | 711 |
| 632 |
| | 648 |
| | 586 |
| Gain on Healthcare Technology Net Asset Exchange, net | (3,947 | ) | | — |
| | — |
| — |
| | (37 | ) | | (3,947 | ) | Goodwill and other impairment charges | 290 |
| | 8 |
| | 241 |
| | Goodwill and other asset impairment charges | | 2,079 |
| | 2,217 |
| | 290 |
| Loss from equity method investment in Change Healthcare | | 194 |
| | 248 |
| | — |
| Deferred taxes | 882 |
| | 64 |
| | 171 |
| 189 |
| | (868 | ) | | 882 |
| Share-based compensation expense | 115 |
| | 123 |
| | 174 |
| | Charges (credits) associated with last-in-first-out inventory method | (7 | ) | | 244 |
| | 337 |
| | Loss (gain) from sales of businesses | 94 |
| | (103 | ) | | — |
| | Credits associated with last-in, first-out inventory method | | (210 | ) | | (99 | ) | | (7 | ) | Loss (gain) from sales of businesses and investments | | (86 | ) | | (169 | ) | | 94 |
| Other non-cash items | 88 |
| | 108 |
| | 47 |
| 52 |
| | 67 |
| | 203 |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Changes in assets and liabilities, net of acquisitions: | | | | | | | Receivables | (762 | ) | | (1,957 | ) | | (2,821 | ) | (967 | ) | | 1,175 |
| | (762 | ) | Inventories | 320 |
| | (1,251 | ) | | (2,144 | ) | (368 | ) | | (458 | ) | | 320 |
| Drafts and accounts payable | 2,070 |
| | 3,302 |
| | 4,718 |
| 1,976 |
| | 271 |
| | 2,070 |
| Deferred revenue | (87 | ) | | (120 | ) | | (141 | ) | | Taxes | 146 |
| | (78 | ) | | (222 | ) | (95 | ) | | 671 |
| | 146 |
| Claim and litigation charges (credit) | (6 | ) | | — |
| | 150 |
| | Litigation settlement payment | (150 | ) | | — |
| | — |
| | Other | (365 | ) | | 137 |
| | 42 |
| 68 |
| | 79 |
| | (458 | ) | Settlement payment | | — |
| | — |
| | (150 | ) | Net cash provided by operating activities | 4,744 |
| | 3,672 |
| | 3,112 |
| 4,036 |
| | 4,345 |
| | 4,744 |
| | | | | | | | | | | | Investing Activities | | | | | | | | | | | Payments for property, plant and equipment | (404 | ) | | (488 | ) | | (376 | ) | (426 | ) | | (405 | ) | | (404 | ) | Capitalized software expenditures | (158 | ) | | (189 | ) | | (169 | ) | (131 | ) | | (175 | ) | | (158 | ) | Acquisitions, net of cash and cash equivalents acquired | (4,237 | ) | | (40 | ) | | (170 | ) | | Proceeds from/(payment for) sale of businesses and other assets, net | 206 |
| | 210 |
| | 15 |
| | Payment received on Healthcare Technology Net Asset Exchange, net | 1,228 |
| | — |
| | — |
| | Restricted cash for acquisitions | (506 | ) | | (939 | ) | | — |
| | Acquisitions, net of cash, cash equivalents and restricted cash acquired | | (905 | ) | | (2,893 | ) | | (4,212 | ) | Proceeds from sale of businesses and investments, net | | 101 |
| | 374 |
| | 206 |
| Payments received on Healthcare Technology Net Asset Exchange, net | | — |
| | 126 |
| | 1,226 |
| Other | 75 |
| | (111 | ) | | 23 |
| (20 | ) | | (20 | ) | | 73 |
| Net cash used in investing activities | (3,796 | ) | | (1,557 | ) | | (677 | ) | (1,381 | ) | | (2,993 | ) | | (3,269 | ) | | | | | | | | | | | | Financing Activities | | | | | | | | | | | Proceeds from short-term borrowings | 8,294 |
| | 1,561 |
| | 3,100 |
| 37,265 |
| | 20,542 |
| | 8,294 |
| Repayments of short-term borrowings | (8,124 | ) | | (1,688 | ) | | (3,152 | ) | (37,268 | ) | | (20,725 | ) | | (8,124 | ) | Proceeds from issuances of long-term debt | 1,824 |
| | — |
| | 3 |
| 1,099 |
| | 1,522 |
| | 1,824 |
| Repayments of long-term debt | (1,601 | ) | | (1,598 | ) | | (353 | ) | (1,112 | ) | | (2,287 | ) | | (1,601 | ) | Payments for debt extinguishments | | — |
| | (112 | ) | | — |
| Common stock transactions: | | | | |
|
| | | | |
|
| Issuances | 120 |
| | 123 |
| | 152 |
| 75 |
| | 132 |
| | 120 |
| Share repurchases, including shares surrendered for tax withholding | (2,311 | ) | | (1,612 | ) | | (450 | ) | (1,639 | ) | | (1,709 | ) | | (2,311 | ) | Dividends paid | (253 | ) | | (244 | ) | | (227 | ) | (292 | ) | | (262 | ) | | (253 | ) | Other | (18 | ) | | 5 |
| | (41 | ) | (355 | ) | | (185 | ) | | (18 | ) | Net cash used in financing activities | (2,069 | ) | | (3,453 | ) | | (968 | ) | (2,227 | ) | | (3,084 | ) | | (2,069 | ) | Effect of exchange rate changes on cash and cash equivalents | (144 | ) | | 45 |
| | (319 | ) | | Net increase (decrease) in cash and cash equivalents | (1,265 | ) | | (1,293 | ) | | 1,148 |
| | Cash and cash equivalents at beginning of year | 4,048 |
| | 5,341 |
| | 4,193 |
| | Cash and cash equivalents at end of year | $ | 2,783 |
| | $ | 4,048 |
| | $ | 5,341 |
| | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (119 | ) | | 150 |
| | (144 | ) | Net increase (decrease) in cash, cash equivalents and restricted cash | | 309 |
| | (1,582 | ) | | (738 | ) | Cash, cash equivalents and restricted cash at beginning of year | | 2,672 |
| | 4,254 |
| | 4,992 |
| Cash, cash equivalents and restricted cash at end of year | | $ | 2,981 |
| | $ | 2,672 |
| | $ | 4,254 |
| | | | | | | | | | | | Supplemental Cash Flow Information | | | | | | | | | | | Cash paid for: | | | | | | | | | | | Interest | $ | 315 |
| | $ | 337 |
| | $ | 359 |
| $ | 383 |
| | $ | 298 |
| | $ | 315 |
| Income taxes, net of refunds | $ | 587 |
| | $ | 923 |
| | $ | 866 |
| $ | 262 |
| | $ | 144 |
| | $ | 587 |
|
McKESSON CORPORATION 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 improve the efficiency and effectiveness of their healthcare operations. We manageCommencing in the first quarter of 2019, our business through twonew segment reporting structure was implemented and we have reported our financial results in three reportable segments on a retrospective basis: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments McKesson Distribution Solutions and McKesson Technology Solutions, as further describedbusiness activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 29,28, “Segments of Business.”Business” for more information. Basis of Presentation: The consolidated financial statements and accompanying notes are prepared in accordance with U. S. generally accepted accounting principles (“GAAP”). The consolidated financial statements of McKesson include the financial statements of all wholly-owned subsidiaries and majority-owned or controlled companies. For those consolidated subsidiaries where our ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net Income or Loss Attributable to Noncontrolling Interests” on the consolidated statements of operations. All significant intercompany balances and transactions have been eliminated in consolidation.consolidation including the intercompany portion of transactions with equity method investees. We consider ourselves to control an entity if we are the majority owner of or have voting control over such entity. We also assess control through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business entity is the primary beneficiary of the VIE. We consolidate VIEs when it is determined that we are the primary beneficiary of the VIE. Investments in business entities in which we do not have control but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Refer to Financial Note 5, “Healthcare Technology Net Asset Exchange” for further information on our equity method investment in Change Healthcare, LLC (“Change Healthcare”). Fiscal Period: The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year. Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual amounts could differ from those estimated amounts. Cash and Cash Equivalents: All highly liquid debt and money market instruments purchased with original maturity of three months or less at the date of acquisition are included in cash and cash equivalents. Cash equivalents are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound sterling. The remaining cash and cash equivalents are deposited with several financial institutions. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds. Restricted Cash: Cash that is subject to legal restrictions or is unavailable for general operating purposes is classified as restricted cash and is included within “Prepaid expenses and other” and “Other Noncurrent Assets” in the consolidated balance sheets. At March 31, 20172019 and 2016,2018, our restricted cash balance was $1.5 billion and $939 million, which primarily represents cash paid into the escrow accounts for acquisitions that closed in early April 2017 and 2016.not material.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Marketable Securities Available-for-Sale: We carry ourOur marketable securities, which are available-for-sale, are carried at fair value and they are included in prepaidwithin “Prepaid expenses and otherother” in the consolidated balance sheets. The unrealized gains and losses, net of the related tax effect, computed in marking these securities to market have been reported within stockholders’ equity. At March 31, 20172019 and 2016,2018, marketable securities were not material. In determining whether an other-than-temporary decline in market value has occurred, we consider the duration that, and extent to which, the fair value of the investment is below its cost, the financial condition and future prospects of the issuer or underlying collateral of a security, and our intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity securities that we intend to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other income, net, in the period in which the loss occurs. Equity Method Investments: Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. We evaluate our equity method investments for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the carrying value of the investment. If a loss in value has occurred that is deemed to be other than temporary,other-than-temporary, an impairment loss is recorded. Refer to Financial Note 2,5, “Healthcare Technology Net Asset Exchange” for further information relating to our equity method investment in Change Healthcare, LLC.LLC (“Change Healthcare”). Concentrations of Credit Risk and Receivables: Our trade receivablesaccounts receivable are subject to a concentrationconcentrations of credit risk with customers primarily in our DistributionU.S. Pharmaceutical and Specialty Solutions segment. During 2017,2019, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 54.2%49.9% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 20.2%19.4% of our total consolidated revenues. At March 31, 2017,2019, trade accounts receivable from our ten largest customers were approximately 33.7%31.9% of total trade accounts receivable. Accounts receivable from CVS were approximately 17.8%18.4% 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. The accounts receivables balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. 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 customer groups could have a material adverse impact on our financial condition, results of operations and liquidity. In addition, trade receivables are subject to a concentrationconcentrations of credit risk with customers in the institutional, retail and healthcare provider sectors, which can be affected by a downturn in the economy and changes in reimbursement policies. This credit risk is mitigated by the size and diversity of the customer base as well as its geographic dispersion. We estimate the receivables for which we do not expect full collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers. An allowance is recorded in our consolidated financial statements for these estimated amounts. Financing Receivables: We assess and monitor credit risk associated with financing receivables, primarily lease and notes receivables, through regular review of our collection experience in determining our allowance for loan losses. On an ongoing basis, we also evaluate credit quality of our financing receivables utilizing aging of receivables and write-offs, as well as considering existing economic conditions, to determine if an allowance is necessary.required. Financing receivables are derecognized if legal title to them has been transferred and all related risks and rewards incidental to ownership have passed to the buyer. As of March 31, 20172019 and 2016,2018, financing receivables and the related allowance were not material to our consolidated financial statements. Inventories: We reportInventories consist of merchandise held for resale. Prior to 2018, we reported inventories at the lower of cost or market (“LCM”). InventoriesEffective in the first quarter of 2018, we report inventories at the lower of cost or net realizable value, except for our Distribution Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment,inventories determined using the last-in, first-out (“LIFO”) method. The majority of the cost of domestic inventories is determined using the last-in, first-out (“LIFO”)LIFO method. The majority of the cost of inventories held in foreign locations is based on first-in, first-out method and weighted average purchase prices 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.prices. Rebates, cash discounts, and other incentives received from vendors are recognized within cost of sales upon the sale of the related inventory.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The LIFO method was used to value approximately 70%62% and 74%63% of our inventories at March 31, 20172019 and 2016.2018. If we had used the FIFOmoving average method of inventory valuation, which approximates current replacement costs, inventories would have been approximately $1,005$696 million and $1,012$906 million higher than the amounts reported at March 31, 20172019 and 2016, respectively.2018. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. We recognized LIFO related credits of $210 million, $99 million and $7 million in 20172019, 2018 and net LIFO charges of $244 million and $337 million in 2016 and 20152017 in cost of sales within our consolidated statements of operations. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. We believe that themoving average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO cost or market. As of March 31, 20172019 and 2016,2018, inventories at LIFO did not exceed market. Shipping and Handling Costs: We include costs to pack and deliver inventory to our customers in selling, distribution and administrative expenses. Shipping and handling costs of $951 million, $914 million, and $814 million $789 million,were recognized in 2019, 2018 and $819 million were included in our selling, distribution and administrative expenses in 2017, 2016 and 2015.2017. Property, Plant and Equipment: We state our property, plant and equipment (“PPE”) at cost and depreciate them under the straight-line method at rates designed to distribute the cost of PPE over estimated service lives ranging from one to thirty years. When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts. Goodwill: Goodwill is tested for impairment on an annual basis in the fourth quarter or more frequently if indicators forof potential impairment exist. Impairment testing is conducted at the reporting unit level, which is generally defined as a component,an operating segment or one level below our Distribution Solutions and Technology Solutionsan operating segments,segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit. The first step in goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. This step may be performed utilizing either a qualitative or quantitative assessment. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is necessary.required. If the carrying value of the reporting unit is higher thanexceeds its estimated fair value, the second step must be performed to measure the amount of impairment loss. Under the second step, the implied fair value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any unrecognized intangible assets, from the fair value of the reporting unit calculated in the first step of the impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess.excess, limited to the total amount of goodwill allocated to that reporting unit. To estimate the fair value of our reporting units, we generally use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow (“DCF”) model in which cash flows anticipated over severalfuture periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriateestimated expected rate of return. The fair value estimates in the goodwill impairment analysis are highly sensitive to the discount rates used in the expected cash flows attributable to the reporting units. The discount rates are the weighted average cost of capital measuring the reporting units’ cost of debt and equity financing weighted by the percentage of debt and percentage of equity in a company’s target capital. Other estimates inherent in both the market and income approaches include long-term growth rates, projected revenues, earnings and cash flow forecasts for the reporting units. In addition, we compare the aggregate of the reporting units’ fair valuevalues to the Company’s market capitalization as a further corroboration of the fair values. TheGoodwill testing requires a complex series of assumptions and judgmentjudgments by management in projecting future operating results, selecting guideline companies for comparisons and assessing risks. The use of alternative assumptions and estimates could affect the fair values and change the impairment determinations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Intangible Assets: Currently all of our intangible assets are subject to amortization and are amortized based on the pattern of their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to 38 years. We review intangible assets for impairment at an asset group level whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset group over its estimated fair market value. Capitalized Software 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 straight-line method based on an estimated useful life of approximately three years. At each balance sheet date, or earlier if an indicator of an impairment exists, we evaluate the recoverability of unamortized capitalized software costs based on estimated future undiscounted revenues net of estimated related costs over the remaining amortization period.
Capitalized Software Held for Internal Use: We capitalize costs of software held for internal use during the application development stage of a project and amortize those costs over their estimated useful lives ranging from one to ten years. As of March 31, 20172019 and 2016,2018, capitalized software held for internal use was $455$394 million and $435$425 million, net of accumulated amortization of $1,177$1,246 million and $1,130$1,182 million, and was included in other noncurrent assets in the consolidated balance sheets.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic exposures as well as those risks required to be insured by law or contract. It is our policy to retain a significant portion of certain losses primarily related to workers’ compensation and comprehensive general, product and vehicle liability. Provisions for losses expected under these programs are recorded based uponon our estimate of the aggregate liability for claims incurred as well as for claims incurred but not yet reported. Such estimates utilize certain actuarial assumptions followed in the insurance industry. Revenue Recognition: Distribution Solutions Revenue is recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service.
Revenues forgenerated from the distribution of pharmaceutical and medical products represent the majority of our Distribution Solutions segment are recognized when persuasive evidence of an arrangement exists, product is delivered and title passes to the customer or when services have been rendered and there are no further obligations to the customer, the price is fixed or determinable, and collection of the amounts are reasonably assured. Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarily to a limited number of large customers who warehouse their own products.revenues. We order bulk product from the manufacturer, receive and processcarry the product primarily throughat our central distribution facilityfacilities and deliver the bulk product (generally in the same form as received from the manufacturer) directly to our customers’ warehouses.warehouses, hospitals or retail pharmacies. The distribution business primarily generates revenue from a contract related to a confirmed purchase order with a customer in a distribution arrangement. Revenue is recognized when control of goods is transferred to the customer which occurs upon our delivery to the customer or upon customer pick-up. We also recordearn revenues from a variety of other sources including our retail, services and technology businesses. Retail revenues are recognized at the point of sale. Service revenues, including technology service revenues, are recognized when services are rendered. Revenues derived from distribution and retail business at the point of sale, and revenues derived from services represent approximately 98% and 2% of total revenues for direct store deliveries of shipments from the manufacturer to our customers. We assume the primary liability to the manufacturer for these products.year ended on March 31, 2019.
Revenues are recorded gross when we are the primary party obligatedprincipal in the transaction, take titlehave the ability to and possessiondirect the use of the inventory,goods or services prior to transfer to a customer, are subjectresponsible for fulfilling the promise to inventory risk,our customer, have latitude in establishing prices, assumeand control the risk of loss for collection from customers as well as delivery or return ofrelationship with the product, are responsible for fulfillment and other customer service requirements, or the transactions have several but not all of these indicators. Revenues are recordedcustomer. We record our revenues net of sales returns, allowances, rebates and other incentives. Our sales return policy generally allows customers to return products only if they can be resold for value or returned to suppliers for credit. Sales returnstaxes. Revenues are accruedmeasured based on the amount of consideration that we expect to receive, reduced by estimates at the time of sale to the customer.for return allowances, discounts and rebates using historical data. Sales returns from customers were approximately $2.9 billion in 2019, and $3.1 billion in 20172018 and 2016 and $2.7 billion in 2015. We collect taxes2017. Assets for the right to recover products from customers and remitthe associated refund liabilities for return allowances were not material as of March 31, 2019. Shipping and handling costs associated with outbound freight after control over a product has transferred to governmental authorities. We report all revenues net of taxes assessed by governmental authorities.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a combination of various products and services. Revenue from a multiple-element arrangement is allocated to the separate elements based on their relative selling price and recognized in accordance with the revenue recognition criteria applicable to each element. Relative selling price is determined based on vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”), if VSOE of selling price is not available, or estimated selling price (“ESP”), if neither VSOE of selling price nor TPE is available.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Technology Solutions
Revenues for our Technology Solutions segmentcustomer are generated primarily by licensing software and software systems consisting of software, hardware and maintenance support, providing software as a service (“Saas”) or SaaS-based solutions and providing claims processing, outsourcing and professional services. Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements. Perpetual software arrangements are recognized at the time of delivery or under the percentage-of-completion method if the arrangements require significant production, modification or customization of the software. Contracts accounted for under the percentage-of-completion methodas fulfillment costs and are generally measured based on the ratioincluded in selling, distribution and administrative expenses. We record deferred revenues when payments are received or due in advance of labor hours incurred to date to total estimated labor hours to be incurred. Changes in estimates to completeour performance. Deferred revenues are primarily from our services arrangements and revisions in overall profit estimates on these contracts are charged to earnings in the period in which they are determined. We accrue for contract losses if and when the current estimate of total contract costs exceeds total contract revenue.
Revenue from time-based software license agreements is recognized ratably over the term of the agreement. Software implementation fees are recognized as the work is performed or under the percentage-of-completion method. Maintenance and support agreements are marketed under annual or multi-year agreements and are recognized ratablyrevenues over the period covered by the agreements. Hardware revenuesperiods when services are generally recognized upon delivery.performed.
SaaS-based subscription, content and transaction processing fees are generally marketed under annual and multi-year agreements and are recognized ratably over the contracted terms beginning
We had no material contract assets, contract liabilities or deferred contract costs recorded on the service start date for fixed fee arrangements and recognized as transactions are performed beginning on the service start date for per-transaction fee arrangements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing service revenues are recognized as the service is performed.consolidated balance sheets. We also offer certain products on an application service provider basis, making our software functionality available onelected the practical expedient and generally expense costs to obtain a remote hosting basis from our data centers. The data centers provide system and administrative support, as well as hosting services. Revenue on products sold on an application service provider basis is recognized on a monthly basis overcontract when incurred because the term of the contract beginning on the service start date of products hosted.amortization period would have been one year or less. This segment engages in multiple-element arrangements, which may contain any combination of software, hardware, implementation, SaaS-based offerings, consulting services or maintenance services. For multiple-element arrangements that do not include software, revenue is allocated to the separate elements based on their relative selling price and recognized in accordance with the revenue recognition criteria applicable to each element. Relative selling price is determined based on VSOE of selling price if available, TPE, if VSOE of selling price is not available, or ESP if neither VSOE of selling price nor TPE is available. For multiple-element arrangements accounted for in accordance with specific software accounting guidance when some elements are delivered prior to others in an arrangement and VSOE of fair value exists for the undelivered elements, revenue for the delivered elements is recognized upon delivery of such items. The segment establishes VSOE for hardware and implementation and consulting services based on the price charged when sold separately, and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is recognized under the residual method only when fair value has been established for all of the undelivered elements in an arrangement. If fair value cannot be established for any undelivered element, all of the arrangement’s revenue is deferred until the delivery of the last element or until the fair value of the undelivered element is determinable. For multiple-element arrangements with both software elements and nonsoftware elements, arrangement consideration is allocated between the software elements as a whole and nonsoftware elements. The segment then further allocates consideration to the individual elements within the software group, and revenue is recognized for all elements under the applicable accounting guidance and our policies described above.
Supplier Incentives: Fees for serviceservices and other incentives received from suppliers, relating to the purchase or distribution of inventory, are considered product discounts and are generally reported as a reduction to cost of sales. We consider these fees and other incentives to represent product discounts and as a result, the amounts are recognized within cost of sales upon the sale of the related inventory.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplier Reserves: We establish reserves against amounts due from suppliers relating to various fees for services and price and rebate incentives, including deductions taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in factualfacts and circumstances. All adjustmentsAdjustments to supplier reserves are generally included inwithin cost of sales. The ultimate outcome of any outstanding claims may be different than our estimate. As of March 31, 2017 and 2016The supplier reserves were $201 million and $144 million. All of the supplier reserves at March 31, 2017 and 2016primarily pertain to our DistributionU.S. Pharmaceutical and Specialty Solutions segment. Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or the tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement. Deferred taxes are not provided on undistributed earnings of our foreign operations that are considered to be permanently reinvested.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Foreign Currency Translation: The reporting currency of the Company and its subsidiaries is the U.S. dollar. Our foreign subsidiaries generally consider their local currency to be their functional currency. Foreign currency-denominated assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at year-endperiod-end exchange rates, andwhile revenues and expenses are translated at average exchange rates during the corresponding period and stockholders’ equity accounts are primarily translated at historical exchange rates. Foreign currency translation adjustments are included in other comprehensive income or loss in the consolidated statements of consolidated comprehensive income, and the cumulative effect is included in the stockholders’ equity section of the consolidated balance sheets. Realized gains and losses from currency exchange transactions are recorded in operating expenses in the consolidated statements of operations and were not material to our consolidated results of operations in 2017, 20162019, 2018 or 2015.2017. We release cumulative translation adjustmentadjustments from stockholders’ equity into net incomeearnings as a gain or loss only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. We also release all or a pro rata portion of the cumulative translation adjustmentadjustments into net incomeearnings upon the sale of an equity method investment that is a foreign entity. Derivative Financial Instruments: Derivative financial instruments are used principally in the management of foreign currency exchange and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized as a charge or credit toin earnings. We use foreign currency-denominated notes and cross-currency swaps to hedge a portion of our net investment in our foreign subsidiaries. We use cash flow hedges primarily to reduce the effects of foreign currency exchange rate risk related to intercompany loans denominated in non-functional currencies. If the financial instrument is designated as a cash flow hedge or net investment hedge, the effective portions of changes in the fair value of the derivative are included in other comprehensive income or loss in the consolidated statements of consolidated comprehensive income, and the cumulative effect is included in the stockholders’ equity section of the consolidated balance sheets. The cumulative changes in fair value are reclassified to the same line as the hedged item in the consolidated statements of operations when the hedged item affects earnings. We periodically evaluate hedge effectiveness at inception and on an ongoing basis, and ineffective portions of changes in the fair value of cash flow hedges and net investment hedges are recognized in earnings following the date when ineffectiveness was identified. In the fourth quarter of 2018, we adopted amended guidance for derivatives and hedging which eliminates the existing requirement to recognize periodic hedge ineffectiveness in earnings for cash flow hedges and net investment hedges that are highly effective. The adoption had no material impact on our financial statements as a chargethere was no ineffectiveness recognized on our cash flow hedges or creditnet investment hedges prior to earnings.adoption. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change included in earnings. Comprehensive Income: Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses and gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income.earnings. Our other comprehensive income primarily consists of foreign currency translation adjustments from those subsidiaries where the local currency is the functional currency including gains and losses on net investment hedges, unrealized gains and losses on cash flow hedges and net investment hedges, as well as unrealized gains and losses on retirement-related benefit plans.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Noncontrolling Interests and Redeemable Noncontrolling Interests: Noncontrolling interests represent the portion of profit or loss, net assets and comprehensive income that is not allocable to McKesson Corporation. In 2017, 2016 and 2015, netNet income attributable to noncontrolling interests included guaranteed dividends or recurring compensation that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe AG (“McKesson Europe”), formerly known as Celesio AG, (“Celesio”) under the domination and profit and loss transfer agreement. In 2017, netNet income attributable to noncontrolling interests also included third-party equity interests in our consolidated entities including Vantage Oncology Holdings, LLC (“Vantage”) and ClarusOneClarusONE Sourcing Services LLC,LLP (“ClarusONE”), which was established between McKesson and Wal-Mart Stores, Inc.Walmart, Inc in 2017. Noncontrolling interests with redemption features, such as put rights, that are not solely within the Company’s control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of Stockholders’ Equitystockholders’ equity on our consolidated balance sheet.sheets. Refer to Financial Note 11, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” for more information. Share-Based Compensation: We account for all share-based compensation transactions using a fair-value based measurement method.at fair value. The share-based compensation expense, for the portion of the awards that is ultimately expected to vest, is recognized on a straight-line basis over the requisite service period. The share-based compensation expense recognized has been classified in the consolidated statements of operations or capitalized on the consolidated balance sheets in the same manner as cash compensation paid to our employees.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Loss Contingencies: We are subject to various claims, including claims with customers and vendors, 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 the loss or a range of possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Disclosure is also provided when it is reasonably possible that a material 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 a 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
Restructuring Charges: Employee severance costs are generally recognized when payments are probable and amounts are reasonably estimable. Costs related to reasonably estimate a rangecontracts without future benefit or contract termination are recognized at the earlier of potential loss and boundaries of high and low estimate.the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred.
Business Combinations: We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributedattributable to noncontrolling interests, be recorded at 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 including transaction and related restructuringintegration costs are expensed as incurred. Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use a method that is a form or variation of the income method. This method startsapproach. Income approach methods start with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or otherapproach methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Recently Adopted Accounting Pronouncements Share-Based PaymentsRevenue Recognition:: In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee share-based compensation arrangements are recognized within income tax expense. Under the previous guidance, windfalls were recognized in additional paid-in capital (“APIC”) and shortfalls were only recognized to the extent they exceeded the pool of windfall tax benefits. The amended guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows, rather than a financing activity. The amended guidance is effective for us commencing in the first quarter of 2018. Early adoption is permitted. We elected to early adopt this amended guidance in the first quarter of 2017. The primary impact of the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than APIC. As a result, discrete tax benefits of $54 million were recognized in income tax expense in 2017. We also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of 2017. None of the other provisions in this amended guidance had a material impact on our consolidated financial statements.
Business Combinations: In the first quarter of 2017,2019, we adopted amended guidance for an acquirer’s accounting for measurement-period adjustments. The amended guidance eliminatesrevenue recognition using the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectivelymodified retrospective method and instead requires that measurement-period adjustments be recognized during the period in which it determines the adjustment. In addition,applied the amended guidance requires that the acquirer record, in the same period’s financial statements, the effect on earningsto those contracts which were not completed as of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.April 1, 2018. The adoption of this amended guidance did not have a material effectimpact on our consolidated financial statements.
Fair Value Measurement: In Our equity method investee, Change Healthcare, is required to adopt the amended guidance in our first quarter of 2017, we adopted amended fair value guidance on a retrospective basis. This amended guidance limits disclosures and removes the requirement to categorize investments within the fair value hierarchy if the fair value of the investment is measured using the net asset value (“NAV”) per share practical expedient. The amended guidance primarily affected our fiscal 2017 annual disclosures related to our pension benefits. Refer to Financial Note 19, “Pension Benefits,” for more information regarding the impact of this amended guidance on our pension benefits.2020. The adoption of this amended guidance didby Change Healthcare is not expected to have a material effect on our consolidated financial statements.
Fees Paid inWe elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed and (iii) contracts for which the variable consideration is allocated entirely to a Cloud Computing Arrangement: In the first quarter of 2017, we adopted amended guidance forwholly unsatisfied performance obligation or to a customer’s accounting for fees paid inwholly unsatisfied promise to transfer a cloud computing arrangement. The amended guidance requires customers to determine whetherdistinct good or not an arrangement contains a software license element. If the arrangement contains a software element, the related fees paid should be accounted for as an acquisitionservice that forms part of a software license. If the arrangement does not contain a software license, it is accounted for as a service contract. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.single performance obligation.
Debt Issuance Costs: In the first quarter of 2017, we adopted amended guidance for the balance sheet presentation of debt issuance costs on a retrospective basis. The amended guidance requires debt issuance costs related to a recognized debt liability to be reported on the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amended guidance. In August 2015, a clarification was added to this amended guidance that debt issuance costs related to line-of-credit arrangements can continue to be deferred and presented as an asset on the balance sheet. Upon adoption, unamortized debt issuance costs of $40 million were reclassified primarily from other noncurrent assets to long-term debt at March 31, 2016.
Consolidation:Share-Based Payments: In the first quarter of 2017,2019, we prospectively adopted amended guidance for consolidating legal entities in which a reporting entity holds a variable interest. The amended guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs and changes the consolidation analysis of reporting entities that are involved with VIEs that have fee arrangements and related party relationships. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred Income Taxes: In November 2015, amended guidance was issued for the balance sheet classification of deferred income taxes. The amended guidance requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The amended guidance would have been effective for us commencing in the first quarter of 2018, however, early adoption was permitted. We early adopted this amended guidance in the fourth quarter of 2016 on a prospective basis. As a result, we reclassified current net deferred tax liabilities of approximately $2 billion on our consolidated balance sheet as of March 31, 2016. The adoption of this guidance had no impact on our consolidated statements of earnings, comprehensive income or cash flows. This amended guidance only resulted in a change in presentation of our deferred income taxes on our consolidated balance sheet as of March 31, 2016.
Discontinued Operations: In the first quarter of 2016, we adopted amended guidance for reporting of discontinued operations and disclosures of disposals of components. The amended guidance revises the criteria for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Refer to Financial Note 7, “Divestiture of Businesses,” for more information regarding the impact of this amended guidance on our consolidated financial statements.
Cumulative Translation Adjustment: In the first quarter of 2015, we adopted amended guidance for a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The amended guidance requires the release of any cumulative translation adjustment into net income only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. Also, it requires the release of all or a pro rata portion of the cumulative translation adjustment to net income in the case of sale of an equity method investment that is a foreign entity. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Share-Based Payments: In May 2017, amended guidance was issued for employee share-based payment awards. This amendment provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the amended guidance, we are required to account for the effects of a modification ifof the fair value, the vesting conditions or the classification (as an equity instrument or a liability instrument) of the modified award change from that of the original award immediately before the modification. The amended guidance is effective for us on a prospective basis commencing in the first quarter of 2019. Early adoption is permitted. We are currently evaluating the impact of this amended guidance did not have a material effect on our consolidated financial statements.
Premium Amortization
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Compensation - Retirement Benefits: In March 2017,the first quarter of 2019, we retrospectively adopted amended guidance was issued which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit costcosts are required to be presented in the statements of operations separately from the service cost component. This amended guidance is effective for us in the first quartercomponent outside of 2019 on a retrospective basis. Earlyoperating income. The adoption is permitted. We are currently evaluating the impact of this amended guidance did not have a material effect on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
other components of net benefit costs on our consolidated statement of operations (a reclassification from operating income to other income, net).
Derecognition of Nonfinancial Assets: In February 2017,the first quarter of 2019, we adopted on a modified retrospective basis amended guidance was issued that defines the term “in substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the asset that is promised is concentrated in nonfinancial assets. The scope of this amendment includes nonfinancial assets transferred within a legal entity including a parent entity’s transfer of nonfinancial assets by transferring ownership interests in consolidated subsidiaries. The amendment excludes all businesses and nonprofit activities from its scope and therefore all entities, with limited exceptions, are required to account for the derecognition of a business or nonprofit activity in accordance with the consolidation guidance once this amended guidance becomes effective. We are required to apply this amended guidance at the same time we apply the amended revenue guidance in the first quarter of 2019. It allows for either full retrospectiveThe adoption or modified retrospective adoption. Early adoption is permitted but not prior to our first quarter of 2018. We are currently evaluating the impact of this amended guidance on our consolidated financial statements. Goodwill Impairment Testing: In January 2017, amended guidance was issued to simplify goodwill impairment testing by eliminating the second step of the impairment test as previously described. The amended guidance requiresdid not have a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The amended guidance is effective for us on a prospective basis commencing in the first quarter of 2021. Early adoption is permitted. We are currently evaluating the impact of this amended guidancematerial effect on our consolidated financial statements.
Business Combinations:In January 2017,the first quarter of 2019, we prospectively adopted amended guidance was issued to clarifythat clarifies the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amended guidance provides a practical screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amended guidance requires that to be considered a business, a set must include an input and a substantive process that together significantly contribute to the ability to create output. The amended guidance is effective for us commencing in the first quarter of 2019 on a prospective basis. Early adoption is permitted in certain circumstances. We are currently evaluating the impact of this amended guidance did not have a material effect on our condensed consolidated financial statements. Restricted Cash: In November 2016,the first quarter of 2019, we retrospectively adopted amended guidance was issued that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash or restricted cash equivalents are not reported as cash flow activities in the statement of cash flows. Our restricted cash balances at March 31, 2019 and 2018 were not material. The adoption of this amended guidance had no effect on our consolidated statements of operations, comprehensive income or our balance sheets. This amended guidance resulted in a change in presentation of restricted cash on our consolidated statement of cash flows. Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In the first quarter of 2019, we adopted on a modified retrospective basis amended guidance that requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Upon adoption of this amended guidance, we recorded $152 million of deferred tax assets with a corresponding cumulative-effect increase to the beginning balance of retained earnings in our consolidated financial statements for the tax consequences relating to an intra-entity transfer of certain software in December 2016. Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments: In the first quarter of 2019, we retrospectively adopted amended guidance that provides clarification on cash flow classification related to eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees. The adoption of this amended guidance did not have a material effect on our consolidated financial statements. Financial Instruments: In the first quarter of 2019, we adopted amended guidance that requires investments in equity securities, excluding equity method investments or investees that are consolidated, to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. The amended guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The adoption of this amended guidance did not have a material effect on our consolidated financial statements.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Recently Issued Accounting Pronouncements Not Yet Adopted Collaborative Arrangements: In November 2018, amended guidance was issued which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under revenue recognition guidance when the counterparty is a customer. The amended guidance is effective for us commencing in the first quarter of 20192021 on a retrospective basis.basis with a cumulative-effect adjustment to beginning retained earnings. We may elect to apply this amended guidance retrospectively either to all contracts or only to contracts that are not completed at the date of initial adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
Consolidation:Derivatives and Hedging: In October 2016,2018, amended guidance was issued that requireswhich allowed for the inclusion of the Secured Overnight Financing Rate Overnight Index Swap Rate as a single decision maker of a VIE to consider indirect economic interests in the entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. This amendment does not change the existing characteristics of a primary beneficiary.benchmark interest rate for hedge accounting purposes. The amended guidance becomesis effective for us on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the first quarter of 2020. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial statements.
Disclosure Update and Simplification: In August 2018, the Securities and Exchange Commission (“SEC”) issued a final rule to simplify certain disclosure requirements. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. In August and September 2018, further amendments were issued to provide implementation and transition guidance on adoption of this SEC rule. The amended guidance is effective for us commencing in the first quarter of 2020. We do not expect the adoption of this amended guidance to have a material effect on our consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures. Intangibles - Goodwill and Other - Internal-Use Software: In August 2018, amended guidance was issued for a customer’s accounting for implementation and other upfront costs incurred in a cloud computing arrangement that is a service contract. The amended guidance aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs for a cloud computing arrangement that has a software license. The amended guidance is effective for us either on a retrospective or prospective basis commencing in the first quarter of 2021. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements. Compensation - Retirement Benefits - Defined Benefit Plans: In August 2018, amended guidance was issued for defined benefit pension or other postretirement plans. The amended guidance requires us to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of reasons for significant gains and losses related to changes in the benefit obligation for the period. The amended guidance also requires us to remove disclosures on the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs over the next fiscal year. The amended guidance is effective for us on a retrospective basis commencing in the fiscal year ended March 31, 2021. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures. Fair Value Measurement: In August 2018, amended guidance was issued to remove, modify and add disclosure requirements on the fair value measurements. The amended guidance removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains or losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance is effective for us commencing in the first quarter of 2021. Certain requirements will be applied prospectively while other changes will be applied retrospectively upon the effective date. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Accumulated Other Comprehensive Income: In February 2018, amended guidance was issued to address a narrow-scope financial reporting issue that arose as a consequence of the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”). Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in net income, such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate. These differences are referred to as stranded tax effects. The amended guidance allows for a reclassification of only those amounts related to the 2017 Tax Act to retained earnings thereby eliminating the stranded tax effects. The amended guidance also requires certain disclosures about stranded tax effects. The amended guidance is effective for us commencing in the first quarter of 2020 on a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements. Income Taxes - Intra-Entity TransfersPremium Amortization of Assets Other Than Inventory: Purchased Callable Debt Securities:In October 2016,March 2017, amended guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The amended guidance requires the premium of callable debt securities to be amortized to the earliest call date but does not require entitiesan accounting change for securities held at a discount as they would still be amortized to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.maturity. The amended guidance is effective for us on a modified retrospective basis commencing in the first quarter of 2019 on a modified retrospective basis.2020. Early adoption is permitted. We are currently evaluatingdo not expect the impactadoption of this amended guidance to have a material effect on our consolidated financial statements.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments: In August 2016, amended guidance was issued to provide clarification on cash flow classification related to eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees. The amended guidance is effective for us commencing in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial Instruments - Credit Losses: In June 2016, amended guidance was issued, which will change the impairment model for most financial assets and require additional disclosures. The amended guidance requires financial assets that are measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets. The amended guidance also requires us to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibilitycollectability of the reported amount in estimating credit losses. The amended guidance becomes effective for us commencing in the first quarter of 2021 and will be applied through a cumulative-effect adjustment to the beginning retained earnings in the year of adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements. Investments: In March 2016, amended guidance was issued to simplify the transition to the equity method of accounting. This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings. The amended guidance is effective for us prospectively commencing in the first quarter of 2018. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Derivatives and Hedging: In March 2016, amended guidance was issued for derivative instrument novations. The amendments clarify that a novation, a change in the counterparty, to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationships provided all other hedge accounting criteria continue to be met. The amended guidance is effective for us commencing in the first quarter of 2018. The amended guidance allows for either prospective or modified retrospective adoption. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our consolidated financial statements.
Leases: In February 2016, amended guidance was issued for lease arrangements. The amended standard will requireguidance requires lessees to recognize assetslease liabilities and liabilitiesright-of-use (“ROU”) assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures on key information of leasing arrangements. The amended guidance is effective for us commencing in the first quarter of 2020, on a modified retrospective basis.2020. Early adoption is permitted. We plan towill adopt the new standardamended guidance on a modified retrospective basis through a cumulative-effect adjustment to the beginning retained earnings in the period of adoption.
We will elect the transition package of practical expedients provided within the amended guidance, which eliminates the requirements to reassess lease identification, lease classification and initial direct costs for leases commenced before the effective date. The Company will also elect not to separate lease from non-lease components and to exclude short-term leases from its consolidated balance sheets.
The adoption of the amended guidance is expected to have a material impact on our consolidated balance sheet from the recognition of lease assets and liabilities. While we continue to assess all the impacts of adoption, we anticipate recognizing operating lease liabilities in excess of $2.0 billion based on the present value of the remaining minimum lease commitments using our incremental borrowing rate as of the effective date under the full lease term. We also expect to record corresponding ROU assets based upon the operating lease liabilities adjusted for prepaid and are currently evaluatingdeferred rents, unamortized initial direct costs, liabilities associated with lease termination costs and impairments of ROU assets recognized to opening retained earnings at the impact of this amended guidanceeffective date. Additionally, existing deferred gain on our sale-leaseback transaction will be derecognized from the consolidated financial statements. Webalance sheet and recognized to opening retained earnings at the effective date. While we have not completed our evaluation of impairments of ROU assets upon adoption, we anticipate that the historical impairments of certain retail pharmacy stores in the historical periods prior to adoption will result in impairments of retail store ROU assets recognized through retained earnings upon adoption. We are finalizing the impact that the amended lease guidance will materially affecthave on our consolidated balance sheetsfinancial statements, systems, processes and will require certain changes to our systemsinternal controls.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | 2. | Goodwill Impairment Charges |
We evaluate goodwill for impairment on an annual basis as of January 1 each year and processes.at an interim date, if indicators of potential impairment exist. Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit. Financial Instruments: In January 2016, amended guidance was issued that requires equity investments to be measured atThe fair value withof the reporting unit was determined using a combination of an income approach based on a DCF model and a market approach based on appropriate valuation multiples observed for the reporting unit’s guideline public companies. Fair value estimates result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by management as of the measurement date. Any material changes in fairkey assumptions, including failure to improve operations of certain retail pharmacy stores, additional government reimbursement reductions, deterioration in the financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry, or other unanticipated events and circumstances, may affect such estimates. The discount rates are the weighted average cost of capital measuring the reporting unit’s cost of debt and equity financing weighted by the percentage of debt and percentage of equity in a company’s target capital. The unsystematic risk premium is an input factor used in calculating discount rate that specifically addresses uncertainty related to the reporting unit’s future cash flow projections. Fair value recognized in net income and enhanced disclosures about those investments. This guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The investments thatthe reporting unit are accountedconsidered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information.
In 2019, we recorded total non-cash pre-tax goodwill impairment charges of $1,776 million ($1,756 million after-tax) for our two reporting units in our European Pharmaceutical Solutions segment. In 2018, we recorded non-cash goodwill impairment charges of $1,283 million (pre-tax and after-tax) in our European Pharmaceutical Solutions segment and $455 million (pre-tax and after-tax) for our Rexall Health reporting unit included in Other. In 2017, we recorded a non-cash pre-tax goodwill impairment charge of $290 million ($282 million after-tax) for our Enterprise Information Solutions (“EIS”) reporting unit included in Other. These charges were recorded under the equity methodcaption, “Goodwill Impairment Charges” within operating expenses in the accompanying consolidated statements of accounting or result in consolidationoperations. Most of the investee are excluded fromgoodwill impairment for these reporting units were generally not deductible for income tax purposes. McKesson Europe: Fiscal 2019 In 2019, we recorded total non-cash pre-tax charges of $1,776 million ($1,756 million after-tax) to impair the scopecarrying value of this amended guidance. The amended guidance will become effectivegoodwill for us commencingour Consumer Solutions (“CS”) and Pharmacy Solutions (“PS”) reporting units in our European Pharmaceutical Solutions segment. Prior to implementing the new segment reporting structure in the first quarter of 2019, our European operations were considered a single reporting unit. Following the change in reportable segments, our European Pharmaceutical Solutions segment was split into two distinct reporting units, CS and will be adopted through a cumulative-effect adjustment. Early adoption is not permitted except for certain provisions. We are currently evaluating the impact of this amended guidance on our consolidated financial statements. Inventory: In July 2015, amended guidance was issuedPS, for the subsequent measurementpurposes of inventory. The amended guidance requires entitiesgoodwill impairment testing. As a result, we were required to measure inventory atperform a goodwill impairment test for these two new reporting units upon the lowerchange in reportable segment. Consequently, we recorded a non-cash goodwill impairment charge of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,$238 million (pre-tax and transportation. The requirement would replace the current lower of cost or market evaluation. Accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail method. The amended guidance will become effective for us commencingafter-tax) in the first quarter of 2019 because the estimated fair value of the PS reporting unit was determined to be lower than its reassigned carrying value.
In the first quarter of 2019, both CS and PS reporting units projected a decline in the estimated future cash flows primarily triggered by additional U.K. government actions which were announced on June 29, 2018. Early adoption is permitted. We do not expectAccordingly, we performed an interim goodwill impairment test for these reporting units. As a result, we determined that the adoptioncarrying values of these reporting units exceeded their estimated fair value and recorded non-cash goodwill impairment charges of $332 million (pre-tax and after-tax) primarily for our CS reporting unit. The discount rate and terminal growth rate used for the CS reporting unit in the first quarter 2019 impairment test were 8.5% and 1.25%. The discount rate and terminal growth rate used for the PS reporting unit in the first quarter 2019 impairment test were 8.0% and 1.25%.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
In the fourth quarter of 2019, as a result of our annual goodwill impairment test, we determined that the carrying values of our CS and PS reporting units exceeded their estimated fair value and recorded non-cash charges of $465 million ($445 million after-tax) for the CS reporting unit and $741 million (pre-tax and after-tax) for the PS reporting unit. The additional impairments were primarily due to declines in the reporting units’ estimated future cash flows and the selection of higher discount rates. The declines in estimated future cash flows were primarily attributed to additional government reimbursement reductions and competitive pressures within the U.K. The risk of successfully achieving certain business initiatives was the primary factor in the use of a higher discount rate. The discount rate and terminal growth rate used for the CS reporting unit in our 2019 annual impairment test were 10.0% and 1.25%. The discount rate and terminal growth rate used for the PS reporting unit in our 2019 annual impairment test were 9.0% and 1.25%. At March 31, 2019, both CS and PS reporting units had no remaining goodwill balances.
Fiscal 2018
In 2018, we recorded total non-cash charges of $1,283 million (pre-tax and after-tax) to impair the carrying value of goodwill within our European Pharmaceutical Solutions segment.
During the second quarter of 2018, our former McKesson Europe reporting unit projected a decline in its estimated future cash flows primarily triggered by government reimbursement reductions in their retail business in the U.K. Accordingly, we performed an interim one-step goodwill impairment test in accordance with the amended goodwill guidance for this reporting unit prior to our annual impairment test. As a result of the interim impairment test, we determined that the carrying value of this amendedreporting unit exceeded its estimated fair value and recorded a non-cash charge of $350 million (pre-tax and after-tax) to impair the carrying value of this reporting unit’s goodwill. The discount rate and terminal growth rate used in our 2018 second quarter impairment test were 7.5% and 1.25% compared to 7.0% and 1.5% in our 2017 annual impairment test.
Additionally, as a result of our 2018 annual impairment test, we determined that the carrying value of the former McKesson Europe reporting unit further exceeded its estimated fair value and recorded a non-cash goodwill impairment charge of $933 million (pre-tax and after-tax) in the fourth quarter of 2018. This reporting unit had a further decline in its estimated future cash flows driven by weakening script growth outlook in our U.K. business and by a more competitive environment in France during the fourth quarter of 2018. The discount rate and terminal growth rate used in our 2018 annual impairment test were 8.0% and 1.25%.
Rexall Health:
Fiscal 2018
In 2018, as a result of our 2018 annual impairment test, we determined that the carrying value of our Rexall Health reporting unit within Other exceeded its estimated fair value and recorded a non-cash goodwill impairment charge of $455 million (pre-tax and after-tax). The impairment was the result of a decline in estimated future cash flows primarily driven by significant generics reimbursement reductions across Canada and minimum wage increases in multiple provinces which can only be partially mitigated through the business’ cost saving efforts. The discount rate and terminal growth rate used in our impairment testing for this reporting unit were 10.0% and 2.0%. At March 31, 2019 and 2018, the Rexall Health reporting unit had no remaining goodwill related to our acquisition of Rexall Health.
Enterprise Information Solutions:
Fiscal 2017
In conjunction with the 2017 Healthcare Technology Net Asset Exchange, we evaluated strategic options for our EIS business, which was a reporting unit within Other. In 2017, we recorded a non-cash pre-tax charge of $290 million ($282 million after-tax) to impair the carrying value of this reporting unit’s goodwill. The impairment primarily resulted from a decline in estimated cash flows. The amount of goodwill impairment for the EIS reporting unit was determined under the former accounting guidance on goodwill impairment testing, and computed as the excess of the carrying value of the reporting unit’s goodwill over its implied fair value of its goodwill.
Refer to haveFinancial Note 21, “Fair Value Measurements,” for more information on this nonrecurring fair value measurement.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | 3. | Restructuring and Asset Impairment Charges |
We recorded pre-tax restructuring and asset impairment charges of $597 million, $567 million and $18 million in 2019, 2018 and 2017. These charges are included under the caption, “Restructuring and Asset Impairment Charges” within operating expenses in the accompanying consolidated statements of operations. Fiscal 2019 Initiatives On April 25, 2018, the Company announced a material effectstrategic growth initiative intended to drive long-term incremental profit growth and increase operational efficiency. The initiative consists of multiple growth priorities and plans to optimize the Company’s operating models and cost structures primarily through the centralization and outsourcing of certain administrative functions and cost management.
As part of the growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation and store closures. We expect to record total pre-tax charges of approximately $140 million to $180 million, of which we recorded pre-tax charges of $135 million ($122 million after-tax) in 2019. This set of the initiatives will be substantially completed by the end of 2020. Estimated remaining charges primarily consist of exit-related costs including contract termination costs.
As previously announced on November 30, 2018, the Company relocated its corporate headquarters from San Francisco, California to Irving, Texas to improve efficiency, collaboration and cost competitiveness, effective April 1, 2019. We anticipate that the relocation will be completed by January 2021. We expect to record total pre-tax charges of approximately $80 million to $130 million and for 2019 recorded pre-tax charges of $33 million ($24 million after-tax) primarily representing employee severance. Estimated remaining charges primarily consist of lease and other exit-related costs, employee retention and relocation expenses.
During the fourth quarter of 2019, the Company committed to additional programs to continue our operating model and cost optimization efforts. We continue to implement centralization of certain functions and outsourcing through the expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of our business operations and related headcount reductions as well as the further closures of retail pharmacy stores in Europe and facilities. We expect to incur total pre-tax charges of approximately $300 million to $350 million for these programs, which are expected to be completed by the end of 2021. In 2019, pre-tax charges of $163 million ($127 million after-tax) were recorded, which primarily represent employee severance and accelerated depreciation expense. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.
Restructuring charges for the fiscal 2019 initiatives for the year ended March 31, 2019 consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended March 31, 2019 | (In millions) | U.S. Pharmaceutical and Specialty Solutions | | European Pharmaceutical Solutions | | Medical-Surgical Solutions | | Other | | Corporate | | Total | Severance and employee-related costs, net | $ | 50 |
| | $ | 33 |
| | $ | 19 |
| | $ | 16 |
| | $ | 36 |
| | $ | 154 |
| Exit and other-related costs (1) | 7 |
| | 3 |
| | 20 |
| | 57 |
| | 57 |
| | 144 |
| Asset impairments and accelerated depreciation | 6 |
| | 5 |
| | 3 |
| | 18 |
| | 1 |
| | 33 |
| Total | $ | 63 |
| | $ | 41 |
| | $ | 42 |
| | $ | 91 |
| | $ | 94 |
| | $ | 331 |
|
(1) Exit and other-related costs primarily include lease and other contract exit costs associated with closures of facilities and retail pharmacy stores as well as project consulting fees.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The following table summarizes the activity related to the restructuring liabilities associated with the fiscal 2019 initiatives for the year ended March 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | U.S. Pharmaceutical and Specialty Solutions | | European Pharmaceutical Solutions | | Medical-Surgical Solutions | | Other | | Corporate | | Total | Balance, March 31, 2018 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Restructuring charges recognized | 63 |
| | 41 |
| | 42 |
| | 91 |
| | 94 |
| | 331 |
| Non-cash charges | (6 | ) | | (5 | ) | | (3 | ) | | (18 | ) | | (1 | ) | | (33 | ) | Cash payments | (8 | ) | | (5 | ) | | (23 | ) | | (52 | ) | | (53 | ) | | (141 | ) | Other | (18 | ) | | 7 |
| | (1 | ) | | 8 |
| | (3 | ) | | (7 | ) | Balance, March 31, 2019 (1) | $ | 31 |
| | $ | 38 |
| | $ | 15 |
| | $ | 29 |
| | $ | 37 |
| | $ | 150 |
|
| | (1) | As of March 31, 2019, the total reserve balance was $150 million of which $117 million was recorded in other accrued liabilities and $33 million was recorded in other noncurrent liabilities. |
Fiscal 2018 McKesson Europe Plan In the second quarter of 2018, we committed to a restructuring plan, which primarily consists of the closures of underperforming retail pharmacy stores in the U.K. and a reduction in workforce. Under this plan, we expect to record total pre-tax charges of approximately $90 million to $130 million for our European Pharmaceutical Solutions segment, of which $92 million of pre-tax charges were recorded to date. The plan will be substantially completed by 2020. In 2019 and 2018, we recorded pre-tax charges of $18 million ($16 million after-tax) and $74 million ($67 million after-tax) in operating expenses primarily representing employee severance and lease exit costs. We made cash payments of $32 million and $10 million during 2019 and 2018, primarily related to severance. The reserve balances as of March 31, 2019 and 2018 were $19 million and $42 million, recorded in other accrued liabilities in our consolidated financial statements.balance sheets. Estimated remaining restructuring charges primarily consist of lease termination and other exit costs. Fiscal 2016 Cost Alignment Plan On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives. We expected to record total pre-tax charges of approximately $250 million to $270 million, of which $256 million of pre-tax charges were recorded to date. There were no material restructuring charges recorded during 2019, 2018 and 2017. We made cash payments of $18 million and $45 million during 2019 and 2018, primarily related to severance. The reserve balances as of March 31, 2019 and 2018 were $9 million and $39 million, recorded in other accrued liabilities, and $25 million and $30 million recorded in other noncurrent liabilities in our consolidated balance sheets. Estimated remaining restructuring charges primarily consist of exit-related activities for our European Pharmaceutical Solutions segment.
Other plans
There were no material restructuring charges for other plans recorded during 2019, 2018 and 2017.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Revenue Recognition: Long-Lived Asset Impairments
McKesson Europe
In May 2014, amended guidance was issued2019, we recorded non-cash pre-tax charges of $210 million ($172 million after-tax) to impair the carrying value of certain long-lived assets (primarily pharmacy licenses) for recognizing revenue from contracts with customers. The amended guidance eliminates industry specific guidanceour U.K. retail business primarily driven by government reimbursement reductions and applies to all companies. Revenues will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. The amended guidance also requires additional quantitative and qualitative disclosures. In March, April and May 2016, amended guidance was further issued including clarifying guidance on principal versus agent considerations, ability to choose an accounting policy election to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good, and provided certain scope improvements and practical expedients. The amended standard is effective for us commencingcompetitive pressures in the first quarterU.K. In 2018, we recorded non-cash pre-tax charges of $446 million ($410 million after-tax) to impair the carrying value of certain intangible assets (primarily customer relationships and pharmacy licenses), store assets and capitalized software assets due to continuing declines in estimated future cash flows in our European businesses including consideration of significant government reimbursement reductions in our U.K. retail business. In 2019 and allows for either full retrospective adoption2018, we used an income approach (DCF method) or modified retrospective adoption. Early adoption is permitted but not priora combination of an income approach and a market approach to our first quarter of 2018. While we continue to evaluateestimate the effectfair value of the amended standard,long-lived assets. The fair value of the intangible assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information.
Rexall Health
In 2019 and 2018, we have conducted a preliminary assessmentrecorded non-cash charges of $35 million and $33 million (pre-tax and after-tax) to impair certain intangible assets (primarily customer relationships) for our Distribution Solutions segment and do not expect adoptionRexall Health retail business. The impairments were primarily the results of the amended standard to have a material impact to our consolidated financial statements. We generally anticipate having substantially similar performance obligations underdecline in estimated future cash flows for this business. The estimated cash flow projections were negatively affected by lower projected overall growth rate resulting from the amended guidance as compared with deliverables and units of account currently being recognized. We intend to make policy elections within the amended standard that are consistent with our current accounting. Our preliminary assessment does not include certain businesses for which we are exploring strategic alternatives and we continue to evaluate the potentialongoing impact of government regulations in 2019 and significant generics reimbursement reductions across Canada and minimum wage increases in multiple provinces in 2018. We utilized an income approach (DCF method) for estimating the recent acquisitions. This preliminary assessmentfair value of long-lived assets. The fair value of the intangible assets is subjectconsidered a Level 3 fair value measurement due to change prior to adoption. Additionally, we anticipate adopting this amended standard on a modified retrospective basisthe significance of unobservable inputs developed using company specific information.
There were no material impairments of long-lived assets in our first quarter of 2019.2017. | | 2.4. | Business Combinations |
2019 Acquisitions Medical Specialties Distributors LLC (“MSD”) On June 1, 2018, we completed our acquisition of MSD for the net purchase consideration of $784 million, which was funded from cash on hand. MSD is a leading national distributor of infusion and medical-surgical supplies as well as a provider of biomedical services to alternate site and home health providers. The financial results of MSD have been included in our consolidated statements of operations within our Medical-Surgical Solutions segment since the acquisition date. The adjusted provisional fair value of assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $240 million and $163 million. Approximately $381 million of the adjusted preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits from certain synergies and intangible assets that do not qualify for separate recognition. The adjusted preliminary purchase price allocation includes acquired identifiable intangibles of $326 million primarily representing customer relationships with a weighted average life of 18 years. These amounts are provisional within the measurement period and subject to change as our fair value assessments are finalized.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The following table summarizes the preliminary recording of the fair value of the assets acquired and liabilities assumed for this acquisition as of the acquisition date. | | | | | | | (In millions) | Amounts Recognized as of Acquisition Date (Provisional As Adjusted) | Receivables | $ | 113 |
| Other current assets, net of cash and cash equivalents acquired | 72 |
| Goodwill | 381 |
| Intangible assets | 326 |
| Other long-term assets | 55 |
| Current liabilities | (72 | ) | Other long-term liabilities | (91 | ) | Net assets acquired, net of cash and cash equivalents | $ | 784 |
|
2018 Acquisitions
RxCrossroads On January 2, 2018, we completed our acquisition of RxCrossroads for the net purchase consideration of $720 million, which was funded from cash on hand. The financial results of RxCrossroads have been included in the consolidated statements of operations within our U.S. Pharmaceutical and Specialty Solutions segment since the acquisition date. The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement period. As of December 31, 2018, the final amounts of fair value recognized for assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $129 million and $57 million. Approximately $386 million of the final purchase price allocation was assigned to goodwill, which reflects the expected future benefits from certain synergies and intangible assets that do not qualify for separate recognition. The final purchase price allocation included acquired identifiable intangibles of $262 million primarily representing customer relationships and trade names with a weighted average life of 14 years. CoverMyMeds LLC (“CMM”) On April 3, 2017, we completed our acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement period in April 2018. The financial results of CMM have been included in our consolidated statements of operations within Other since the acquisition date. Pursuant to the agreement, McKesson may pay up to an additional $160 million of contingent consideration based on CMM’s financial performance for 2018 and 2019. As a result, we recorded a liability for this remaining contingent consideration at its estimated fair value of $113 million as of the acquisition date on our consolidated balance sheet. The contingent consideration was estimated using a Monte Carlo simulation, which utilized Level 3 inputs under the fair value measurement and disclosure guidance, including estimated financial forecasts. The contingent liability was re-measured at fair value at each reporting date until the liability is extinguished with changes in fair value being recorded in our consolidated statements of operations. The initial fair value of this contingent consideration was a non-cash investing activity. In May 2018, we made a cash payment of $68 million representing the contingent consideration for 2018. As of March 31, 2019 and 2018, the related liability was $69 million and $124 million.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Other During 2018, we also completed our acquisitions of intraFUSION, Inc. (“intraFUSION”), BDI Pharma, LLC (“BDI”) and Uniprix Group (“Uniprix”) for net cash consideration of $485 million, which was funded from cash on hand. The fair value of assets acquired and liabilities assumed of intraFUSION, BDI and Uniprix as of the acquisition dates were finalized upon completion of the measurement period. As of September 30, 2018, the final amounts of fair value recognized for the assets acquired and liabilities assumed for these acquisitions as of the acquisition dates, excluding goodwill and intangibles, were $292 million and $160 million. Approximately $246 million of the final purchase price allocation was assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. The final purchase price allocation included acquired identifiable intangibles of $118 million primarily representing customer relationships. The financial results of intraFUSION and BDI have been included within our U.S. Pharmaceutical and Specialty Solutions segment since the acquisition dates. The financial results of Uniprix have been included within Other since the acquisition date. 2017 Acquisitions Rexall Health In the third quarter of 2017, we completed our acquisition of Rexall Health which operated approximately 400 retail pharmacies in Canada, particularly in Ontario and Western Canada. The net cash purchase consideration of $2.9 billion Canadian dollars (approximately $2.1 billion) was funded from cash on hand. The measurement period to finalize the accounting for this acquisition ended in the third quarter of 2018. As part of the transaction, McKesson agreed to divest 27 local stores that the Competition Bureau of Canada identified during its review of the transaction. During 2018, we completed the sales of all 27 stores and received net cash proceeds of $116 million Canadian dollars (approximately $94 million) from a third-party buyer. We also received $147 million Canadian dollars (approximately $119 million) in cash from the third-party seller of Rexall Health as the settlement of the post-closing purchase price adjustment related to these store divestitures. No gain or loss was recognized from the sales of these stores. On May 23, 2018, as the result of resolving certain indemnity and other claims related to this acquisition, $125 million Canadian dollars (approximately $97 million) was released to us from an escrow account. The receipt of this cash was recorded as a settlement gain within operating expenses in our consolidated statement of operations in 2019. Other During 2017, we also completed our acquisitions of Vantage, Biologics, Inc. (“Biologics”) and UDG Healthcare PLC (“UDG”) for net cash consideration of $1.6 billion.
Other Acquisitions During the three years presented, we also completed a number of other small acquisitions within all of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition. Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. | | 5. | Healthcare Technology Net Asset Exchange |
On June 28, 2016, we entered into a contribution agreement (“Contribution Agreement”) with Change Healthcare Holdings, Inc. (“Change”), a Delaware corporation, and others including shareholdersIn the fourth quarter of Change to form a joint venture, Change Healthcare, LLC (“Change Healthcare”), a Delaware limited liability company. On December 21, 2016, we received notification from the Department of Justice that their review was closed and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, was terminated. On March 1, 2017, the transaction closed upon satisfaction of all other closing conditions pursuant to the Contribution Agreement. Under the terms of the Contribution Agreement, we contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare. We retained our RelayHealth PharmacyHealthcare, under the terms of a contribution agreement previously entered into between McKesson and Enterprise Information SolutionsChange Healthcare Inc. (“EIS”Change”, formerly known as Change Healthcare Holdings, Inc.) businesses. Change contributed substantially alland others including shareholders of its businesses to the joint venture excluding its pharmacy switch and prescription routing business.Change. In exchange for the contribution, we own 70% of the joint venture with the remaining equity ownership held by Change shareholders.shareholders of Change. The joint venture is jointly governed by us and Change shareholders. Change Healthcare is a healthcare technology company which provides software and analytics, network solutions and technology-enabled services that will deliver wide-ranging financial, operational and clinical benefits to payers, providers and consumers.
In connection with the closingshareholders of the transaction, Change Healthcare issued long-term debt of $6.1 billion, which was utilized to fund cash payments for our promissory notes (as described below) and approximately $1.75 billion to Change stockholders, to cover transaction costs and to repay approximately $2.8 billion of existing Change’s debt.
McKesson and Change shareholders have agreed to take steps to launch an initial public offering of an entity which holds equity in Change Healthcare, subject to market conditions. Sometime thereafter, we expect to exit our investment in Change Healthcare through a distribution to McKesson shareholders..
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Change Healthcare Inc., the entity that owns 30% of the joint venture, filed a registration statement with the Securities and Exchange Commission on March 15, 2019 and amended on April 5, 2019 regarding its intent to pursue an initial public offering. Gain from Healthcare Technology Net Asset Exchange We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a 70% interest in the newly formed joint venture. Accordingly, in the fourth quarter of 2017, we deconsolidated the Core MTS Business and recorded a pre-tax gain of $3,947$3.9 billion (after-tax gain of $3.0 billion) in operating expenses. Additionally, in 2018, we recorded a pre-tax gain of $37 million (after-tax gain of $3,018$22 million). The pre-tax gain was calculated based on in operating expenses upon the difference between the fair valuefinalization of our 70% equity interest in the joint venture, less the carrying amount of the contributed Core MTS Business’ net assets of $1,132 million and $1,258 million of promissory notes, a $136 million noncurrent liability associated with a tax receivable agreement (as described below) and transaction and other related expenses. The $1,258 million of promissory notes were subsequently repaid in cash from proceeds of Change Healthcare’s long term debt issuance. The gain is subject to final net working capital and other adjustments within 90 daysadjustments. During 2018, we received $126 million in cash from Change Healthcare representing the transaction close date, and is included under the caption “Gain from Healthcare Technology Net Asset Exchange, net” within operating expenses in our consolidated statements of operations. This transaction did not meet the criteria to be reported as a discontinued operation since it did not constitute a significant strategic business shift for the Company. The fair valuefinal settlement of the joint venture was determined using a combination of the incomenet working capital and the market valuation approaches. Under the income approach, we used a discounted cash flow model (“DCF”) in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. The discount rate used for cash flows reflects capital market conditions and the specific risks associated with the business. Under the market approach, valuation multiples of reasonably similar publicly traded companies or guideline companies are applied to the operating data of the subject business to derive the estimated fair value. These valuation approaches are considered a Level 3 fair value measurement. Fair value determination requires complex assumptions and judgment by management in projecting future operating results, selecting guideline companies for comparisons, determining appropriate market value multiples, selecting the discount rate to measure the risks inherent in the future cash flows and assessing the asset’s life cycle and the competitive trends impacting the assets, including considering technical, legal, regulatory, or economic barriers to entry. Any material changes in key assumptions, including failure to meet business plans, deterioration in the financial market, an increase in interest rate or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may affect such estimates.adjustments.
Equity Method Investment in Change HealthcareOther Acquisitions
Our investmentDuring the three years presented, we also completed a number of other small acquisitions within all of our operating segments. Financial results for our business acquisitions have been included in the joint venture is accounted for using the equity method of accounting on a one-month reporting lag. We disclose intervening events at the joint venture in the lag period that could materially affect our consolidated financial statements if applicable. In March 2017,since their respective acquisition dates. Purchase prices for our proportionate sharebusiness acquisitions have been allocated based on estimated fair values at the date of transaction expenses incurred by the joint ventureacquisition.
Goodwill recognized for our business acquisitions is estimatedgenerally not expected to be approximately $80 million to $120 million.deductible for tax purposes. However, due toif we acquire the timingassets of a company, the transaction and the one-month reporting lag, no net income or loss from our investment was recorded in our financial results for 2017. Commencing April 1, 2017, our proportionate share of the net income or loss from the joint venture including these transaction expenses will be recorded in “Other Income, Net” in our consolidated statement of operations. At March 31, 2017, our carrying value in our investment was $4,063 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately $4,762 million, primarily reflecting equity method intangible and goodwill assets and other fair value adjustments including a non-cash reduction to the carrying value of deferred revenue.
Agreements with Change Healthcare and Related Party Transactions
At the closing of the transaction, McKesson, Change Healthcare and certain Change shareholders also entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other commercial agreements.
Pursuant to the TSA, McKesson provides various transitional services to the joint venture to support certain operations including information technology, accounting and other administrative services. The total fees charged by us for such transition services were immaterial for 2017. Transition services fees are included under the caption “Selling, distribution and administrative expenses” in our consolidated statements of operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Pursuant to the Advisory Agreement, the joint venture will pay McKesson and Change shareholders an agreed upon amount for each fiscal year on a quarterly basis. Additionally, McKesson and Change are entitled to receive transaction fees equal to 1% of the aggregate transaction value upon the consummation of any acquisition, divestiture, disposition, merger, consolidation, business combination, change of control, restructuring, reorganization or recapitalization, financing or refinancing or issuance of securities. The foregoing advisory and transaction fees are non-refundable and allocated to McKesson and Change shareholders based on their respective equity ownership percentages. In 2017, we did not earn material advisory fees and transaction fees.
Pursuant to the TRA, McKesson may be required to make certain payments or may be entitled to receive certain payments related to the cashdeductible for tax savings attributable to the utilization of certain tax attributes, including certain amortizable tax basis in software contributed by McKesson to Change Healthcare. At March 31, 2017, we have recorded a $136 million noncurrent liability payable to Change Healthcare shareholders associated with the TRA. The amount is based on certain estimates and could become payable in periods after a disposition of our investment in Change Healthcare. No such payments were required to be made or received for 2017.
Revenues recorded and expenses incurred under commercial arrangements with Change Healthcare were not material during 2017. At March 31, 2017, receivables from and payables to the joint venture were not material.purposes.
| | 3.5. | Goodwill ImpairmentHealthcare Technology Net Asset Exchange |
In conjunction with Healthcare Technology Net Asset Exchange, we are evaluating strategic options for our EIS business, which is a reporting unit within our McKesson Technology Solutions segment. During the year ended March 31, 2017, we recorded a non-cash pre-tax charge of $290 million ($282 million after-tax) to impair the carrying value of this business’ goodwill. The impairment primarily resulted from a decline in estimated future cash flows. The goodwill impairment test requires us to compare the fair value of the reporting unit to the fair value of the reporting unit's net assets, excluding goodwill but including any unrecognized intangible assets, to determine the implied fair value of goodwill. The impairment charge was then determined by comparing the carrying value of the reporting unit’s goodwill with its implied fair value. At March 31, 2017, the remaining goodwill balance for this reporting unit was $124 million. Refer to Financial Note 22, “Fair Value Measurements,” for more information on this nonrecurring fair value measurement.
In 2017, we completed our acquisitions of Rexall Health, a division of the Katz Group Canada Inc., Vantage, Biologics, Inc. (“Biologics”) and UDG Healthcare Plc (“UDG”), and subsequently our acquisition of CoverMyMeds, LLC (“CMM”) in April 2017, as further discussed below.
Rexall Health
On December 28, 2016, we completed our acquisition of Rexall Health which operates approximately 470 retail pharmacies in Canada, particularly in Ontario and Western Canada. The net cash purchase consideration of $2.9 billion Canadian dollars (or, approximately $2.1 billion) was funded from cash on hand. As part of the transaction, McKesson agreed to divest 26 local stores that the Competition Bureau of Canada (the “Bureau”) identified during its review of the transaction. We expect to complete the sale of these local market divestitures in the first quarter of 2018. We do not anticipate any store closures as a result of these divestitures. The acquisition of Rexall Health enhances our capability to continue to deliver a broad range of pharmaceutical care and choices to Canadian consumers. Commencing in the fourth quarter of 2017, financial resultswe contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare, under the terms of a contribution agreement previously entered into between McKesson and Change Healthcare Inc. (“Change”, formerly known as Change Healthcare Holdings, Inc.) and others including shareholders of Change. In exchange for Rexall were included in our North America pharmaceutical distributionthe contribution, we own 70% of the joint venture with the remaining equity ownership held by shareholders of Change. The joint venture is jointly governed by us and services business within our Distribution Solutions segment.shareholders of Change.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The following table summarizesChange Healthcare Inc., the preliminary recordingentity that owns 30% of the fair valuesjoint venture, filed a registration statement with the Securities and Exchange Commission on March 15, 2019 and amended on April 5, 2019 regarding its intent to pursue an initial public offering.
Gain from Healthcare TechnologyNet Asset Exchange We accounted for this transaction as a sale of the assets acquiredCore MTS Business and liabilities assumed fora subsequent purchase of a 70% interest in the acquisition asnewly formed joint venture. Accordingly, in 2017, we deconsolidated the Core MTS Business and recorded a pre-tax gain of $3.9 billion (after-tax gain of $3.0 billion) in operating expenses. Additionally, in 2018, we recorded a pre-tax gain of $37 million (after-tax gain of $22 million) in operating expenses upon the finalization of net working capital and other adjustments. During 2018, we received $126 million in cash from Change Healthcare representing the final settlement of the acquisition date: | | | | | | | | | | | | | (In millions) | Amounts Previously Recognized as of Acquisition Date (Provisional) (1) | Measurement Period Adjustments | Amounts Recognized as of Acquisition Date (Provisional as Adjusted) | Receivables | $ | 114 |
| $ | — |
| $ | 114 |
| Inventory | 271 |
| (36 | ) | 235 |
| Other current assets, net of cash and cash equivalents acquired | 141 |
| 75 |
| 216 |
| Goodwill | 1,142 |
| (185 | ) | 957 |
| Intangible assets | 656 |
| 199 |
| 855 |
| Other long-term assets | 161 |
| (45 | ) | 116 |
| Current liabilities | (154 | ) | — |
| (154 | ) | Other long-term liabilities | (45 | ) | (10 | ) | (55 | ) | Fair value of net assets, less cash and cash equivalents | 2,286 |
| (2 | ) | 2,284 |
| Less: Settlement of pre-existing payables | 165 |
| (2 | ) | 163 |
| Purchase consideration paid in cash, net of cash acquired | $ | 2,121 |
| $ | — |
| $ | 2,121 |
|
(1) As reported on Form 10-Q for the quarter ended December 31, 2016.During the fourth quarter of 2017, we recorded certain measurement period adjustments to the provisional fair value of assets acquired and liabilities assumed as of the acquisition date. The amounts as of the acquisition date are provisional and subject to change within the measurement period as our fair value assessments are finalized.
Total provisional fair value of assets acquired and liabilities assumed, excluding goodwill and intangibles, were $681 million and $209 million. Approximately $1 billion of the adjusted preliminary purchase price allocation has been assigned to goodwill, which primarily reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. Included in the adjusted preliminary purchase price allocation are acquired identifiable intangibles of $855 million, net of intangibles classified as held for sale, primarily representing trade names with a weighted average life of 19 years and customer relationships with a weighted average life of 19 years. Additionally, we classified those stores that we agreed to divest under the agreement reached with the Bureau as held for sale as of the acquisition date. As a result, assets and liabilities which included “Prepaid expenses and other” and “Other accrued liabilities” in the accompanying consolidated balance sheet as of March 31, 2017 are approximately $184 million and nil.
Vantage & Biologics
On April 1, 2016, we acquired Vantage, which is headquartered in Manhattan Beach, California. Vantage provides comprehensive oncology management services, including radiation oncology, medical oncology,working capital and other integrated cancer care services, through over 51 cancer treatment facilities in 13 states. The net purchase consideration of $515 million was funded from cash on hand. On April 1, 2016, we also acquired Biologics for a net purchase consideration of $692 million, which was funded from cash on hand. Biologics is one of the largest independent oncology-focused specialty pharmacies in the U.S., and is headquartered in Cary, North Carolina. Financial results for these acquisitions since the acquisition date are included in our consolidated statements of operations within our North America pharmaceutical distribution and services business, which is part of our Distribution Solutions segment. These acquisitions collectively enhance our specialty pharmaceutical distribution scale and oncology-focused pharmacy offerings, provide solutions for manufacturers and payers, and expand the scope of our community-based oncology and practice management services.adjustments.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the final amounts of the fair values recognized for the assets acquired and liabilities assumed for these two acquisitions as of the acquisition date as well as adjustments made during the measurement period:
| | | | | | | | | | | | | (In millions) | Amounts Previously Recognized as of Acquisition Date (Provisional) (1) | | Measurement Period Adjustments | | Amounts Recognized as of Acquisition Date | Receivables | $ | 106 |
| | $ | (5 | ) | | $ | 101 |
| Other current assets, net of cash and cash equivalents acquired | 19 | | | — | | | 19 | | Goodwill | 1,219 | | | (87 | ) | | 1,132 | | Intangible assets | 136 | | | 79 | | | 215 | | Other long-term assets | 76 | | | 54 | | | 130 | | Current liabilities | (117 | ) | | (15 | ) | | (132 | ) | Other long-term liabilities | (80 | ) | | (89 | ) | | (169 | ) | Fair value of net assets, less cash and cash equivalents | 1,359 | | | (63 | ) | | 1,296 | | Less: Noncontrolling Interests | (152 | ) | | 63 | | | (89 | ) | Net assets acquired, net of cash and cash equivalents | $ | 1,207 |
| | $ | — |
| | $ | 1,207 |
|
| | (1) | As reported on Form 10-Q for the quarter ended June 30, 2016. |
At March 31, 2017, approximately $558 million and $574 million of the final purchase price allocations for Vantage and Biologics have been assigned to goodwill, which primarily reflects the expected future benefits of synergies upon integrating the businesses. Goodwill represents the excess of the purchase price and the fair value of noncontrolling interests over the fair value of the acquired net assets.
Included in the final purchase price allocation are acquired identifiable intangibles of $22 million and $193 million for Vantage and Biologics. Acquired intangibles for Vantage primarily consist of $13 million of non-competition agreements with a weighted average life of 4 years, and for Biologics primarily consist of $170 million of trade names with a weighted average life of 9 years. The final fair value of Vantage’s noncontrolling interests as of the acquisition date was approximately $89 million, which represents the portion of net assets of Vantage’s consolidated entities that is not allocable to McKesson.
UDG
In the first quarter of 2017, we completed our acquisition of the pharmaceutical distribution businesses of UDG based in Ireland and the United Kingdom (“U.K.”) with a net purchase consideration of €380 million (or, approximately $431 million), which was funded with cash on hand. The acquired UDG businesses primarily provide pharmaceutical and other healthcare products to retail and hospital pharmacies. The acquisition of UDG expands our offerings and strengthens our market position in Ireland and the U.K. Financial results for UDG since the acquisition date are included in our results of operations within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment.
The fair value measurements of assets acquired and liabilities assumed of UDG as of the acquisition date were finalized upon completion of the measurement period. At March 31, 2017, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $469 million and $340 million. Included in the final purchase price allocation are acquired identifiable intangibles of $120 million primarily comprised of customer relationships with a weighted average life of 10 years. At March 31, 2017, $181 million of the final purchase price allocation has been assigned to goodwill. Goodwill reflects the expected future benefits of synergies upon integrating the businesses. The net effect of the cumulative adjustments was an increase in goodwill of approximately $16 million from the provisional amounts as previously reported at June 30, 2016.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
CMM
On April 3, 2017, we completed our acquisition of CMM, a privately-owned company headquartered in Columbus, Ohio. CMM provides electronic prior authorization solutions to pharmacies, providers, payers, and pharmaceutical manufacturers helping patients get their prescribed drugs more efficiently to live healthy lives. The net purchase consideration of $1.3 billion was paid into an escrow account prior to our fiscal year end, and is included in “Other Noncurrent Assets” within our consolidated balance sheet at March 31, 2017. The cash paid as of acquisition date was funded from cash on hand. Pursuant to the agreement, McKesson may pay up to an additional $0.2 billion of contingent consideration based on CMM’s financial performance through the end of 2019. Upon closing, the financial results of CMM will be included in our North America pharmaceutical and services business within our Distribution Solutions segment.
The fair value of acquired intangibles was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.
Other Acquisitions During the last twothree years presented, we also completed a number of other small acquisitions within bothall of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition. Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. | | 5. | Discontinued OperationsHealthcare Technology Net Asset Exchange |
Brazil Distribution Business
DuringIn the fourth quarter of 2015,2017, we committedcontributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare, under the terms of a contribution agreement previously entered into between McKesson and Change Healthcare Inc. (“Change”, formerly known as Change Healthcare Holdings, Inc.) and others including shareholders of Change. In exchange for the contribution, we own 70% of the joint venture with the remaining equity ownership held by shareholders of Change. The joint venture is jointly governed by us and shareholders of Change.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Change Healthcare Inc., the entity that owns 30% of the joint venture, filed a registration statement with the Securities and Exchange Commission on March 15, 2019 and amended on April 5, 2019 regarding its intent to pursue an initial public offering. Gain from Healthcare TechnologyNet Asset Exchange We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a 70% interest in the newly formed joint venture. Accordingly, in 2017, we deconsolidated the Core MTS Business and recorded a pre-tax gain of $3.9 billion (after-tax gain of $3.0 billion) in operating expenses. Additionally, in 2018, we recorded a pre-tax gain of $37 million (after-tax gain of $22 million) in operating expenses upon the finalization of net working capital and other adjustments. During 2018, we received $126 million in cash from Change Healthcare representing the final settlement of the net working capital and other adjustments. Equity Method Investment in Change Healthcare Our investment in the joint venture is accounted for using the equity method of accounting on a one-month reporting lag. We recorded our proportionate share of loss from Change Healthcare of $194 million and $248 million in 2019 and 2018, which included transaction and integration expenses incurred by the joint venture and basis differences between the joint venture and McKesson including amortization of fair value adjustments primarily representing incremental intangible amortization and removal of profit associated with the recognition of deferred revenue. The proportionate share of loss from Change Healthcare recorded in 2018, was partially offset by a provisional tax benefit of $76 million recognized by Change Healthcare primarily due to a planreduction in the future applicable tax rate related to sell our Brazilian pharmaceutical distribution business, which we acquired through our February 2014 acquisitionthe December 2017 enactment of Celesio,the 2017 Tax Act. These amounts were recorded under the caption, “Loss from our Distribution Solutions segment. Accordingly, the results of operations and cash flows of this business were classified as discontinued operations for all periods presentedEquity Method Investment in Change Healthcare,” in our consolidated financial statements. We recorded pre-tax non-cash impairment chargesstatement of $241 million ($235 million after-tax) to reduce theoperations. At March 31, 2019 and 2018, our carrying value of this Brazilianequity method investment was $3,513 million and $3,728 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately $4,158 million and $4,472 million, primarily reflecting equity method intangible assets and goodwill. Related Party Transactions In connection with the transaction, McKesson, Change Healthcare and certain shareholders of Change entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”) and certain other commercial agreements. Fees incurred or earned from Advisory Agreement were not material for 2019 and 2018. Fees incurred or earned from TSA were $60 million in 2019, $91 million in 2018 and not material in 2017. Transition service fees are included within operating expenses in our consolidated statements of operations. Revenues recognized and expenses incurred under commercial arrangements with Change Healthcare were not material during 2019, 2018 and 2017. At March 31, 2019 and 2018, receivables due from the joint venture were not material. Tax Receivable Agreement
In connection with the net asset exchange transaction, we also entered into a tax receivable agreement (“TRA”) with the shareholders of Change. At March 31, 2018, we had a $90 million noncurrent liability payable to the shareholders of Change. During 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability. In exchange for the shareholders of Change agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution businessfrom the Change Healthcare joint venture that would otherwise have been required to its estimated fair value, less costsbe made to the shareholders of Change. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in the accompanying consolidated statement of operations in 2019. We had no outstanding payable balance to the shareholders of Change at March 31, 2019.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Fiscal 2019
Equity Investment
In November 2018, we divested all of our ownership interest in an equity investment included in Other for proceeds of approximately $61 million. As a result, we recorded a pre-tax gain of $56 million ($41 million after-tax) in the third quarter of 2019. The gain is included within other income, net, in our consolidated statement of operations. Under the terms of agreements entered into for this transaction, we elected to receive cash consideration of $23 million and concurrently contribute $38 million of the proceeds to obtain an equity interest in a newly formed entity.
Fiscal 2018
Enterprise Information Solutions
On August 1, 2017, we entered into an agreement with a third party to sell based on our assessment at that time.EIS business included in Other for $185 million, subject to adjustments for net debt and working capital. On October 2, 2017, the transaction closed upon satisfaction of all closing conditions including the termination of the waiting period under U.S. antitrust laws. We received net cash proceeds of $169 million after $16 million of assumed net debt by the third party. We recognized a pre-tax gain of $109 million ($30 million after-tax) upon the disposition of this business in the third quarter of 2018 within operating expenses.
Equity Investment
On July 18, 2017, we completed the sale of an equity investment included in our U.S. Pharmaceutical and Specialty Solutions segment to a third party for total cash proceeds of $42 million and recorded a pre-tax gain of $43 million ($26 million after-tax) within other income, net, in the second quarter of 2018.
Fiscal 2017
There were no material divestitures in 2017.
These divestitures did not meet the criteria to be reported as discontinued operations since they did not constitute a significant strategic business shift. Accordingly, pre-tax gains from 2019 and 2018 divestitures were recorded within continuing operations of our consolidated statements of operations. Pre- and after-tax income of divested businesses were not material for 2019 and 2018. | | 7. | Discontinued Operations |
On May 31, 2016, we completed the sale of our Brazilian pharmaceutical distribution business and recognized an after-tax loss of $113 million within discontinued operations in the first quarter of 2017 primarily for the settlement of certain indemnification matters as well as the release of the cumulative translation losses. We made a payment of approximately $100 million related to the sale of this business.
Technology Solutions Businesses
During the first quarter of 2015, we decided to retain the workforce business within our International Technology business. This business consists of workforce management solutions for the National Health Service in the United Kingdom. We reclassified the workforce business, which had been designated as a discontinued operation since the first quarter of 2014, to continuing operations in the first quarter of 2015. As a result, during the first quarter of 2015, we recorded non-cash pre-tax charges of $34 million ($27 million after-tax) primarily associated with depreciation and amortization expense for 2014 when the business was classified as held for sale. The non-cash charge was recorded in our consolidated statement of operations primarily in cost of sales.
During the second quarter of 2015, we completed the sale of a software business within our International Technology business and recorded a pre-tax and after-tax loss of $6 million.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
A summary of results of discontinued operations is as follows:
| | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | Revenues | $ | — |
| | $ | 1,603 |
| | $ | 2,196 |
| | | | | | | Loss from discontinued operations | $ | (10 | ) | | $ | (24 | ) | | $ | (321 | ) | Loss on sale | (113 | ) | | — |
| | (6 | ) | Loss from discontinued operations before income tax | (123 | ) | | (24 | ) | | (327 | ) | Income tax (expense) benefit | (1 | ) | | (8 | ) | | 28 |
| Loss from discontinued operations, net of tax | $ | (124 | ) | | $ | (32 | ) | | $ | (299 | ) |
for the years ended March 31, 2019, 2018 and 2017 were not material except for the loss recognized upon the disposition of our Brazilian business in 2017. As of March 31, 20172019 and 2016,2018, the carrying amounts of total assets and liabilities of discontinued operations were $24 million and $43 million and $635 million and $660 million. On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives that will be substantially implemented prior to the end of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms, as well as the disposal and abandonment of certain non-core businesses. As a result of the Cost Alignment Plan, we expect to record total pre-tax charges of approximately $250 million to $270 million, of which $243 million of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of exit-related costs and accelerated depreciation and amortization, which are largely attributed to our Distribution Solutions segment.
For the year ended March 31, 2017, we recorded restructuring charges of $14 million primarily including asset impairment and accelerated depreciation and amortization.
Restructuring charges for our Cost Alignment Plan for the year ended 2016 consisted of the following:
| | | | | | | | | | | | | | | | | (In millions) | Distribution Solutions | | Technology Solutions | | Corporate | | Total | Severance and employee-related costs, net (1) | $ | 147 |
| | $ | 44 |
| | $ | 16 |
| | $ | 207 |
| Exit-related costs | 3 |
| | 1 |
| | 1 |
| | 5 |
| Asset impairments and accelerated depreciation and amortization (2) | 11 |
| | 6 |
| | — |
| | 17 |
| Total | $ | 161 |
| | $ | 51 |
| | $ | 17 |
| | $ | 229 |
| | | | | | | | | Cost of Sales | $ | 5 |
| | $ | 21 |
| | $ | — |
| | $ | 26 |
| Operating Expenses | 156 |
| | 30 |
| | 17 |
| | 203 |
| Total | $ | 161 |
| | $ | 51 |
| | $ | 17 |
| | $ | 229 |
|
| | (1) | Severance and employee-related costs, net, include charges of $117 million and $90 million, for a total of $207 million, for a reduction in workforce and business process initiatives. |
| | (2) | Asset impairments and accelerated depreciation and amortization charges primarily include impairments for capitalized software projects and software licenses due to abandonments. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to the restructuring liabilities associated with the Cost Alignment Plan for the year ended March 31, 2017 and 2016:
| | | | | | | | | | | | | | | | | (In millions) | Distribution Solutions | | Technology Solutions | | Corporate | | Total | Balance, March 31, 2015 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Net restructuring charges recognized | 161 |
| | 51 |
| | 17 |
| | 229 |
| Non-cash charges | (4 | ) | | (3 | ) | | 5 |
| | (2 | ) | Cash payments | (1 | ) | | — |
| | — |
| | (1 | ) | Other | — |
| | (3 | ) | | (1 | ) | | (4 | ) | Balance, March 31, 2016 (1) | $ | 156 |
| | $ | 45 |
| | $ | 21 |
| | $ | 222 |
| Net restructuring charges recognized | 19 |
| | (10 | ) | | 5 |
| | 14 |
| Non-cash charges | (10 | ) | | — |
| | 1 |
| | (9 | ) | Cash payments | (67 | ) | | (20 | ) | | (19 | ) | | (106 | ) | Other | (8 | ) | | (5 | ) | | (2 | ) | | (15 | ) | Balance, March 31, 2017 (2) | $ | 90 |
| | $ | 10 |
| | $ | 6 |
| | $ | 106 |
|
| | (1) | The reserve balance as of March 31, 2016 includes $172 million recorded in other accrued liabilities and $50 million recorded in other noncurrent liabilities in our consolidated balance sheet. |
| | (2) | The reserve balance as of March 31, 2017 includes $71 million recorded in other accrued liabilities and $35 million recorded in other noncurrent liabilities in our consolidated balance sheet. |
| | 7. | Divestiture of Businesses |
During the second quarter of 2016, we sold our ZEE Medical business within our Distribution Solutions segment for total proceeds of $134 million and recorded a pre-tax gain of $52 million ($29 million after-tax) from this sale.
During the first quarter of 2016, we also sold our nurse triage business within our Technology Solutions segment for net sale proceeds of $84 million and recorded a pre-tax gain of $51 million ($38 million after-tax) from the sale.
These divestitures did not meet the criteria to be reported as discontinued operations since they did not constitute a significant strategic business shift. Accordingly, pre-tax gains from both divestitures were recorded in operating expenses within continuing operations of our consolidated statements of operations. Pre- and after-tax income of these businesses were not material for the year ended March 31, 2016.material.
| | 8. | Share-Based Compensation |
We provide share-based compensation to our employees, officers and non-employee directors, including stock options, an employee stock purchase plan (“ESPP”), restricted stock units (“RSUs”), performance-based restricted stock units (“PeRSUs”) and performance-based stock units ("PSUs", formerly referred to as total shareholder return units (“TSRUs”or “TSRUs”) (collectively, “share-based awards”). Most of our share-based awards are granted in the first quarter of each fiscal year.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Compensation expense for the share-based awards is recognized for the portion of awards ultimately expected to vest. We estimate the number of share-based awards that will ultimately vest primarily based on historical experience. The estimated forfeiture rate established upon grant is re-assessed throughout the requisite service period and is adjusted when actual forfeitures occur. The actual forfeitures in future reporting periods could be higher or lower than current estimates. The compensation expense recognized has been classified in the consolidated statements of operations or capitalized in the consolidated balance sheets in the same manner as cash compensation paid to our employees. There was no materialNo share-based compensation expenseexpenses were capitalized as part of the cost of an asset in 2017, 20162019, and 2015.no material amounts were capitalized in 2018 and 2017.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Impact on Net Income The components of share-based compensation expense and related tax benefits are as follows: | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Restricted stock unit awards (1) | $ | 79 |
| | $ | 88 |
| | $ | 137 |
| $ | 75 |
| | $ | 46 |
| | $ | 79 |
| Stock options | 24 |
| | 22 |
| | 24 |
| 12 |
| | 14 |
| | 24 |
| Employee stock purchase plan | 12 |
| | 13 |
| | 13 |
| 8 |
| | 9 |
| | 12 |
| Share-based compensation expense (2) | 115 |
| | 123 |
| | 174 |
| 95 |
| | 69 |
| | 115 |
| Tax benefit for share-based compensation (3) | (92 | ) | | (41 | ) | | (61 | ) | | Tax benefit for share-based compensation expense (2) | | (12 | ) | | (28 | ) | | (92 | ) | Share-based compensation expense, net of tax | $ | 23 |
| | $ | 82 |
| | $ | 113 |
| $ | 83 |
| | $ | 41 |
| | $ | 23 |
|
| | (1) | Includes compensation expense recognized for RSUs, PeRSUs and TSRUs. Our TSRUs were awarded beginning in 2015.PSUs. |
| | (2) | 2016 includes non-cash credits of $14 million representing the reversal of previously recognized share-based compensation, which was recorded due to employee terminations associated with the March 2016 restructuring plan.
|
| | (3) | Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax compensation expense is not tax-deductible. Income tax expense for 2019 included discrete income tax expense of $4 million, 2018 and 2017 included discrete income tax benefits of $8 million and $54 million related to the early adoption of the amended accounting guidance on share-based compensation. |
Stock Plans In July 2013, our stockholders approved the 2013 Stock Plan to replace the 2005 Stock Plan. These stock plans provide our employees, officers and non-employee directors the opportunity to receive equity-based, long-term incentives in the form of stock options, restricted stock, RSUs, PeRSUs, TSRUsPSUs and other share-based awards. The 2013 Stock Plan reserves 30 million shares plus the remaining number of shares reserved but unused under the 2005 Stock Plan. As of March 31, 20172019, 2825 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 of seven years and follow a four-year year vesting schedule.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We use the Black-Scholes options-pricing model to estimate the fair value of our stock options. Once the fair value of an employee stock option is determined, current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The options-pricing model requires the use of various estimates and assumptions as follows: Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market volatility. We believe that this market-based input provides a reasonable estimate of our future stock price movements and is consistent with employee stock option valuation considerations. Expected dividend yield is based on historical experience and investors’ current expectations. The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury rate in effect at the time of grant. Expected life of the options is based primarily on historical employee stock option exercises and other behavior data and reflects the impact of changes in contractual life of current option grants compared to our historical grants.
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, | Years Ended March 31, | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Expected stock price volatility | 21% | | 21% | | 22% | 26% | | 25% | | 21% | Expected dividend yield | 0.7% | | 0.4% | | 0.6% | 0.9% | | 0.8% | | 0.7% | Risk-free interest rate | 1.1% | | 1.4% | | 1.3% | 2.8% | | 1.7% | | 1.1% | Expected life (in years) | 4 | | 4 | | 4 | 4.6 | | 4.5 | | 4 |
The following is a summary of stock options outstanding at March 31, 20172019: | | | | | Options Outstanding | | Options Exercisable | | | Options Outstanding | | Options Exercisable | Range of Exercise Prices | Range of Exercise Prices | | Number of Options Outstanding at Year End (In millions) | | Weighted- Average Remaining Contractual Life (Years) | | Weighted- Average Exercise Price | | Number of Options Exercisable at Year End (In millions) | | Weighted- Average Exercise Price | Range of Exercise Prices | | Number of Options Outstanding at Year End (In millions) | | Weighted- Average Remaining Contractual Life (Years) | | Weighted- Average Exercise Price | | Number of Options Exercisable at Year End (In millions) | | Weighted- Average Exercise Price | $ | 67.81 |
| – | $ | 153.87 |
| | 2 | | 2 | | $ | 95.74 |
| | 2 | | $ | 93.13 |
| 87.24 |
| – | $ | 162.55 |
| | 1 | | 4 | | $ | 133.54 |
| | 1 | | $ | 119.65 |
| 153.88 |
| – | 239.93 |
| | 2 | | 5 | | 196.35 |
| | — | | 196.78 |
| | 162.56 | | 162.56 |
| – | 239.93 |
| | 2 | | 3 | | 197.98 |
| | 1 | | 199.08 |
| | | | | | 4 | | | | 2 | | | | | | | 3 | | | | 2 | | |
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The following table summarizes stock option activity during 20172019: | | (In millions, except per share data) | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (2) | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (2) | Outstanding, March 31, 2016 | 4 | | $ | 118.95 |
| | 3 | | $ | 201 |
| | Outstanding, March 31, 2018 | | 3 | | $ | 161.27 |
| | 4 | | $ | 36 |
| Granted | 1 | | 181.76 |
| | | 1 | | 141.93 |
| | | Cancelled | — | | 192.82 |
| | | — | | 167.37 |
| | | Exercised | (1) | | 60.28 |
| | | (1) | | 86.65 |
| | | Outstanding, March 31, 2017 | 4 | | $ | 145.76 |
| | 4 | | $ | 97 |
| | | | | | | | Outstanding, March 31, 2019 | | 3 | | $ | 166.72 |
| | 3 | | $ | 4 |
| Vested and expected to vest (1) | 4 | | $ | 145.54 |
| | 4 | | $ | 96 |
| 3 | | $ | 166.88 |
| | 3 | | $ | 3 |
| Vested and exercisable, March 31, 2017 | 2 | | 114.00 |
| | 2 | | 92 |
| | Vested and exercisable, March 31, 2019 | | 2 | | 167.27 |
| | 2 | | 4 |
|
| | (1) | The number of options expected to vest takes into account an estimate of expected forfeitures. |
| | (2) | The intrinsic value is calculated as the difference between the period-end market price of the Company’s common stock and the exercise price of “in-the-money” options. |
The following table provides data related to stock option activity: | | | | | | | | | | | | | | Years Ended March 31, | (In millions, except per share data) | 2017 | | 2016 | | 2015 | Weighted-average grant date fair value per stock option | $ | 32.19 |
| | $ | 44.04 |
| | $ | 35.49 |
| Aggregate intrinsic value on exercise | $ | 97 |
| | $ | 107 |
| | $ | 153 |
| Cash received upon exercise | $ | 54 |
| | $ | 47 |
| | $ | 76 |
| Tax benefits realized related to exercise | $ | 38 |
| | $ | 42 |
| | $ | 60 |
| Total fair value of stock options vested | $ | 18 |
| | $ | 18 |
| | $ | 20 |
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 21 |
| | $ | 20 |
| | $ | 22 |
| Weighted-average period in years over which stock option compensation cost is expected to be recognized | 2 |
| | 2 |
| | 2 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | Years Ended March 31, | (In millions, except per share data) | 2019 | | 2018 | | 2017 | Weighted-average grant date fair value per stock option | $ | 34.98 |
| | $ | 34.24 |
| | $ | 32.19 |
| Aggregate intrinsic value on exercise | $ | 16 |
| | $ | 60 |
| | $ | 97 |
| Cash received upon exercise | $ | 29 |
| | $ | 77 |
| | $ | 54 |
| Tax benefits realized related to exercise | $ | 4 |
| | $ | 22 |
| | $ | 38 |
| Total fair value of stock options vested | $ | 16 |
| | $ | 20 |
| | $ | 18 |
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 15 |
| | $ | 15 |
| | $ | 21 |
| Weighted-average period in years over which stock option compensation cost is expected to be recognized | 2 |
| | 2 |
| | 2 |
|
Restricted Stock Unit Awards RSUs, which entitle the holder to receive at the end of a vesting term a specified number of shares of the Company’s common stock, are accounted for at fair value at the date of grant. Total compensation expense for RSUs under our stock plans is determined by the product of the number of shares that are expected to vest and the 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 compensation expense for RSUs on a straight-line basis over the requisite service period. Non-employee directors receive an annual grant of RSUs, which vest immediately and are expensed upon grant. The director may elect to receive the underlying shares immediately or defer receipt of the shares if they meet director stock ownership guidelines. The shares will be automatically deferred for those directors who do not meet the director stock ownership guidelines. At March 31, 2017,2019, approximately 109,00063,000 RSUs for our directors are vested.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
PeRSUs are RSUsawards for which the number of RSUs awarded is conditional upon the attainment of one or more performance objectives over a specified period. Each year, the Compensation Committee approves the target number of PeRSUs representing the base number of awardsRSUs that could be grantedawarded if performance goals are attained. PeRSUs are accounted for as variable awards until the performance goals are reached at which time the grant date is established. Total compensation expense for PeRSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company’s common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PeRSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted and classified as RSUs and accounted for on that basis. We recognize compensation expense for these awards on a straight-line basis over the requisite aggregate service period of generally four years. PSUs, formerly referred to as TSRUs, replaced PeRSUs for our executive officers beginning in 2015.are conditional upon the attainment of market and performance objectives over a specified period. The number of vested TSRUsPSUs is assessed at the end of a three-year performance period and is conditioned upon attainment of a total shareholder return metric relative to a peer group of companies.companies and meeting certain earnings per share targets, and for special PSUs granted in 2019 meeting certain cumulative operating profit metric. We use the Monte Carlo simulation model to measure the fair value of TSRUs. TSRUsthe total shareholder return portion of the PSUs. The earnings per share portion of the PSUs is measured at the grant date market price. PSUs have a requisite service period of approximately three years. Expense is attributed to the requisite service period on a straight-line basis based on the fair value of the TSRUs.PSUs, adjusted for the performance modifier at the end of each reporting period. For TSRUsPSUs that are designated as equity awards, the fair value is measured at the grant date. For TSRUsPSUs that are eligible for cash settlement and designated as liability awards, we re-measure the fair value at the end of each reporting period and also adjust a corresponding liability on our balance sheet for changes in fair value.
The weighted-average assumptions used to estimatein the fair value of TSRUsMonte Carlo valuations are as follows: | | | Years Ended March 31, | Years Ended March 31, | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Expected stock price volatility | 23% | | 18% | | 21% | 31% | | 29% | | 23% | Expected dividend yield | 0.7% | | 0.4% | | 0.5% | 0.9% | | 0.8% | | 0.7% | Risk-free interest rate | 1.1% | | 0.9% | | 0.7% | 2.6% | | 1.5% | | 1.1% | Expected life (in years) | 3 | | 3 | | 3 | 3 | | 3 | | 3 |
The following table summarizes activity for restricted stock unit awards (RSUs, PeRSUs, and TSRUs)PSUs) during 2017:2019: | | | | | | | (In millions, except per share data) | Shares | | Weighted- Average Grant Date Fair Value Per Share | Nonvested, March 31, 2016 | 3 | | $ | 176.59 |
| Granted | 1 | | 182.37 |
| Cancelled | (1) | | 190.41 |
| Vested | (1) | | 119.96 |
| Nonvested, March 31, 2017 | 2 | | $ | 188.54 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | (In millions, except per share data) | Shares | | Weighted- Average Grant Date Fair Value Per Share | Nonvested, March 31, 2018 | 2 | | $ | 176.74 |
| Granted | 1 | | 143.94 |
| Cancelled | — | | 147.88 |
| Vested | (1) | | 210.30 |
| Nonvested, March 31, 2019 | 2 | | $ | 142.77 |
|
The following table provides data related to restricted stock unit award activity: | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Total fair value of shares vested | $ | 109 |
| | $ | 104 |
| | $ | 126 |
| $ | 59 |
| | $ | 156 |
| | $ | 109 |
| Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax | $ | 99 |
| | $ | 144 |
| | $ | 206 |
| $ | 119 |
| | $ | 97 |
| | $ | 99 |
| Weighted-average period in years over which restricted stock unit award cost is expected to be recognized | 2 |
| | 2 |
| | 2 |
| 2 |
| | 2 |
| | 2 |
|
Employee Stock Purchase Plan (“ESPP”)
McKESSON CORPORATION FINANCIAL NOTES (Continued)
ESPP 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 deductions. The deductions occur over three-month purchase periods and the shares are then purchased at 85% of the market price at the end of each purchase period. Employees are allowed to terminate their participation in the ESPP at any time during the purchase period prior to the purchase of the shares. The 15% discount provided to employees on these shares is included in compensation expense. The shares related to funds outstanding at the end of a quarter are included in the calculation of diluted weighted average shares outstanding. These amounts have not been significant.significant for all the years presented. We recognize costs for employer matching contributions as ESPP expense over the relevant purchase period. Shares issued under the ESPP were not material in 20172019, 20162018, and 2015.2017. At March 31, 20172019, 43 million shares remain available for issuance. | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | Interest income | $ | 29 |
| | $ | 18 |
| | $ | 20 |
| $ | 39 |
| | $ | 48 |
| | $ | 29 |
| Equity in earnings, net (1) | 30 |
| | 15 |
| | 12 |
| 43 |
| | 32 |
| | 30 |
| Other, net (1) | 31 |
| | 25 |
| | 31 |
| | Gain from sale of equity investment (2) | | 56 |
| | 43 |
| | — |
| Other, net | | 44 |
| | 7 |
| | 18 |
| Total | $ | 90 |
| | $ | 58 |
| | $ | 63 |
| $ | 182 |
| | $ | 130 |
| | $ | 77 |
|
| | (1) | Primarily recorded within our DistributionEuropean Pharmaceutical Solutions segment. |
| | (2) | Amount represented a pre-tax gain from the sale of an equity investment to a third party included in Other during 2019 and in our U.S. Pharmaceutical and Specialty Solutions segment during 2018. |
| | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Income from continuing operations before income taxes | | | | | | | | | | | U.S. | $ | 5,772 |
| | $ | 2,319 |
| | $ | 1,893 |
| $ | 1,512 |
| | $ | 1,175 |
| | $ | 5,772 |
| Foreign | 1,119 |
| | 931 |
| | 764 |
| (902 | ) | | (936 | ) | | 1,119 |
| Total income from continuing operations before income taxes | $ | 6,891 |
| | $ | 3,250 |
| | $ | 2,657 |
| $ | 610 |
| | $ | 239 |
| | $ | 6,891 |
|
Income tax expense (benefit) related to continuing operations consists of the following: | | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2019 | | 2018 | | 2017 | Current | | | | | | Federal | $ | (20 | ) | | $ | 577 |
| | $ | 524 |
| State | 35 |
| | 33 |
| | 86 |
| Foreign | 152 |
| | 205 |
| | 122 |
| Total current | 167 |
| | 815 |
| | 732 |
| | | | | | | Deferred | | | | | | Federal | 223 |
| | (767 | ) | | 767 |
| State | 44 |
| | 17 |
| | 164 |
| Foreign | (78 | ) | | (118 | ) | | (49 | ) | Total deferred | 189 |
| | (868 | ) | | 882 |
| Income tax expense (benefit) | $ | 356 |
| | $ | (53 | ) | | $ | 1,614 |
|
McKESSON CORPORATION FINANCIAL NOTES (Continued)
IncomeWe recorded income tax expense of $356 million, benefit of $53 million and expense of $1,614 million related to continuing operations consists of the following:
| | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | Current | | | | | | Federal | $ | 524 |
| | $ | 658 |
| | $ | 453 |
| State | 86 |
| | 96 |
| | 90 |
| Foreign | 122 |
| | 90 |
| | 101 |
| Total current | 732 |
| | 844 |
| | 644 |
| | | | | | | Deferred | | | | | | Federal | 767 |
| | 95 |
| | 195 |
| State | 164 |
| | 42 |
| | 53 |
| Foreign | (49 | ) | | (73 | ) | | (77 | ) | Total deferred | 882 |
| | 64 |
| | 171 |
| Income tax expense | $ | 1,614 |
| | $ | 908 |
| | $ | 815 |
|
During 2017, 2016in 2019, 2018 and 2015, income tax expense related to continuing operations was $1,614 million, $908 million and $815 million, which included net discrete tax benefits of $82 million, $42 million and $33 million. Our discrete tax benefits during 2017 include a tax benefit of $54 million related to the adoption of the amended accounting guidance on employee share-based compensation.
In 2016, we recognized a $19 million discrete tax benefit due to a reduction in our deferred tax liabilities as a result of enacted tax law changes in certain foreign jurisdictions and a $25 million discrete tax benefit associated with the U.S. Tax Court’s decision in Altera Corp. v. Commissioner related to the treatment of share-based compensation expense in an intercompany cost-sharing agreement. Discrete tax benefits in 2015 included a $55 million benefit related to an agreement reached with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to years 2003 through 2006.2017.
Our reported income tax rates wereexpense rate for 2019 was 58.4% compared to income tax benefit rate of 22.2% for 2018 and an income tax expense rate of 23.4%, 27.9%, and 30.7% in 2017, 2016 and 2015. The fluctuations2017. Fluctuations in our reported income tax rates are primarily due to changes within our business mix, includingthe impact of the 2017 Tax Act, the impact of nondeductible impairment charges, and varying proportions of income attributable to foreign countries that have lower income tax rates discrete items anddifferent from the impact of an intercompany sale of software.U.S. rate. The reconciliation between our effectiveof income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate onof 21% for 2019, 31.6% for 2018 and 35% for 2017 to the income from continuing operations and statutory tax ratebefore income taxes is as follows: | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Income tax expense at federal statutory rate | $ | 2,411 |
| | $ | 1,137 |
| | $ | 930 |
| $ | 128 |
| | $ | 75 |
| | $ | 2,411 |
| State income taxes net of federal tax benefit | 153 |
| | 92 |
| | 81 |
| 70 |
| | 50 |
| | 153 |
| Foreign income taxed at various rates | (326 | ) | | (295 | ) | | (247 | ) | | Tax effect of foreign operations | | (86 | ) | | (146 | ) | | (326 | ) | Unrecognized tax benefits and settlements | 57 |
| | (14 | ) | | 10 |
| 20 |
| | 454 |
| | 57 |
| Controlled substance distribution reserve | — |
| | — |
| | 58 |
| | Non-deductible goodwill impairment | 106 |
| | — |
| | — |
| | Share-Based Compensation excess tax deduction | (54 | ) | | — |
| | — |
| | Non-deductible goodwill | | 357 |
| | 585 |
| | 106 |
| Share-based compensation | | 4 |
| | (8 | ) | | (54 | ) | Net tax benefit on intellectual property transfer | (137 | ) | | — |
| | — |
| (42 | ) | | (178 | ) | | (137 | ) | Rate differential on gain from Change Healthcare Net Asset Exchange | (587 | ) | | — |
| | — |
| — |
| | — |
| | (587 | ) | Other, net | (9 | ) | | (12 | ) | | (17 | ) | | Income tax expense | $ | 1,614 |
| | $ | 908 |
| | $ | 815 |
| | Impact of change in U.S. tax rate on temporary differences | | (81 | ) | | (1,324 | ) | | — |
| Transition tax on foreign earnings | | (5 | ) | | 457 |
| | — |
| Other, net (1) | | (9 | ) | | (18 | ) | | (9 | ) | Income tax expense (benefit) | | $ | 356 |
| | $ | (53 | ) | | $ | 1,614 |
|
| | (1) | Our effective tax rates were impacted by other favorable U.S. federal permanent differences including research and development credits of $7 million, $11 million and $14 million in 2019, 2018 and 2017. |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
TheOur reported income tax expense rate for 2019 was unfavorably impacted by non-cash pre-tax chargecharges of $290$1,776 million ($1,756 million after-tax) to impair the carrying value of goodwill related tofor our EIS business within our TechnologyEuropean Pharmaceutical Solutions segment, described in Financial Note 3, “Goodwill Impairment,” had an unfavorable impact on our effectivegiven that these charges are generally not deductible for tax purposes. Our reported income tax benefit rate in 2017for 2018 was unfavorably impacted by non-cash charges of $1,738 million (pre-tax and after-tax) to impair the carrying value of goodwill, given that generally no tax benefit was recognized for these charges. Our reported income tax expense rate for 2017 was unfavorably impacted by the non-cash pre-tax charge of $290 million ($282 million after-tax) to impair the carrying value of goodwill, given that generally the majority of this charge was not deductible for tax purposes.
In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee share-based compensation arrangements are recognized within income tax expense. We electedpurposes. Refer to early adopt this amended guidanceFinancial Note 2, “Goodwill Impairment Charges,” for more information.
During 2019, we sold software between wholly-owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. An entity based in the first quarter of 2017. The primary impactU.S. was the acquirer of the adoption wassoftware and is entitled to amortize the recognitionpurchase price of excessthe assets for tax benefits inpurposes. In accordance with the recently adopted amended accounting guidance on income statement ontaxes, a prospective basis, rather than APIC. As a result, adiscrete tax benefit of $54$42 million was recognized in 2017.the second quarter of 2019 with a corresponding increase to a deferred tax asset for the future tax amortization. On December 19, 2016, we sold various software and ancillary intellectual property relating to our Technology Solutions businesstechnology businesses between wholly owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. A McKesson entity based in the U.S. was the recipient of the software and ancillary intellectual property and is entitled to amortize the fair value of the assets for book and tax purposes. The tax benefit associated with the amortization of these assets is being recognized over the tax lives of the assets. As a result, we recognized a net tax benefit of $178 million and $137 million was recognized priorin 2018 and 2017. We no longer recognize the tax benefit associated with this amortization in continuing operations upon adoption of the amended guidance related to the contributionintra-entity transfer of a portion of these assetsan asset other than inventory in 2019. Refer to Change Healthcare as described in Financial Note 2, “Healthcare Technology Net Asset Exchange”.1, “Significant Accounting Policies,” for more information.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
On March 1, 2017, we contributed assets to Change Healthcare as described in Financial Note 2,5, “Healthcare Technology Net Asset Exchange”. While this transaction was predominantly structured as a tax free asset contribution for U.S. federal income tax purposes under Section 721(a) of the Internal Revenue Code, we recorded tax expense of $929 million on the gain. The tax expense was primarily driven by the recognition of a deferred tax liability on the excess book over tax basis in our equity investment in Change Healthcare. In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all windfalls and shortfalls related to employee share-based compensation arrangements are recognized within income tax expense. We elected to early adopt this amended guidance in the first quarter of 2017. The primary impact of the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than additional paid-in capital. As a result, we recognized net tax expense of $4 million in 2019 and net tax benefits of $8 million and $54 million in 2018 and 2017. Deferred tax balances consisted of the following: | | | | | | | | | | March 31, | (In millions) | 2017 | | 2016 | Assets | | | | Receivable allowances | $ | 124 |
| | $ | 110 |
| Deferred revenue | 19 |
| | 77 |
| Compensation and benefit related accruals | 593 |
| | 710 |
| Net operating loss and credit carryforwards | 594 |
| | 367 |
| Long-term contractual obligations | 107 |
| | — |
| Other | 222 |
| | 275 |
| Subtotal | 1,659 |
| | 1,539 |
| Less: valuation allowance | (503 | ) | | (267 | ) | Total assets | 1,156 |
| | 1,272 |
| Liabilities | | | | Inventory valuation and other assets | (2,818 | ) | | (2,619 | ) | Fixed assets and systems development costs | (224 | ) | | (326 | ) | Intangibles | (921 | ) | | (981 | ) | Change Healthcare Equity Investment | (773 | ) | | — |
| Other | (70 | ) | | (21 | ) | Total liabilities | (4,806 | ) | | (3,947 | ) | Net deferred tax liability | $ | (3,650 | ) | | $ | (2,675 | ) | | | | | Long-term deferred tax asset | 28 |
| | 59 |
| Long-term deferred tax liability | (3,678 | ) | | (2,734 | ) | Net deferred tax liability | $ | (3,650 | ) | | $ | (2,675 | ) |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | March 31, | (In millions) | 2019 | | 2018 | Assets | | | | Receivable allowances | $ | 70 |
| | $ | 58 |
| Compensation and benefit related accruals | 377 |
| | 345 |
| Net operating loss and credit carryforwards | 885 |
| | 811 |
| Long-term contractual obligations | — |
| | 59 |
| Other | 216 |
| | 279 |
| Subtotal | 1,548 |
| | 1,552 |
| Less: valuation allowance | (870 | ) | | (751 | ) | Total assets | 678 |
| | 801 |
| Liabilities | | | | Inventory valuation and other assets | (2,016 | ) | | (1,869 | ) | Fixed assets and systems development costs | (170 | ) | | (158 | ) | Intangibles | (513 | ) | | (644 | ) | Change Healthcare Equity Investment | (885 | ) | | (814 | ) | Other | (34 | ) | | (71 | ) | Total liabilities | (3,618 | ) | | (3,556 | ) | Net deferred tax liability | $ | (2,940 | ) | | $ | (2,755 | ) | | | | | Long-term deferred tax asset | $ | 58 |
| | $ | 49 |
| Long-term deferred tax liability | (2,998 | ) | | (2,804 | ) | Net deferred tax liability | $ | (2,940 | ) | | $ | (2,755 | ) |
We assess the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowance was approximately $503$870 million and $267$751 million in 20172019 and 2016.2018. The increase of $236$119 million in valuation allowances in the current year relaterelates primarily to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. We have federal, state and foreign net operating loss carryforwards of $12692 million, $2,0993,551 million and $1,3672,143 million. Federal and state net operating losses will expire at various dates from 20182019 through 2038.2040. Substantially all of our foreign net operating losses have indefinite lives. In addition, we have foreign capital loss carryforwards of $624$742 million with indefinite lives.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The following table summarizes the activity related to our gross unrecognized tax benefits for the last three years: | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Unrecognized tax benefits at beginning of period | $ | 555 |
| | $ | 616 |
| | $ | 647 |
| $ | 1,183 |
| | $ | 486 |
| | $ | 555 |
| Additions based on tax positions related to prior years | 7 |
| | 116 |
| | 62 |
| 78 |
| | 47 |
| | 7 |
| Reductions based on tax positions related to prior years | (67 | ) | | (62 | ) | | (18 | ) | (234 | ) | | (124 | ) | | (67 | ) | Additions based on tax positions related to current year | 105 |
| | 28 |
| | 27 |
| 68 |
| | 778 |
| | 105 |
| Reductions based on settlements | (113 | ) | | (141 | ) | | (65 | ) | (13 | ) | | (7 | ) | | (113 | ) | Reductions based on the lapse of the applicable statutes of limitations | — |
| | (6 | ) | | (12 | ) | (25 | ) | | — |
| | — |
| Exchange rate fluctuations | (1 | ) | | 4 |
| | (25 | ) | (5 | ) | | 3 |
| | (1 | ) | Unrecognized tax benefits at end of period | $ | 486 |
| | $ | 555 |
| | $ | 616 |
| $ | 1,052 |
| | $ | 1,183 |
| | $ | 486 |
|
As of March 31, 2017,2019, we had $486$1,052 million of unrecognized tax benefits, of which $342$877 million would reduce income tax expense and the effective tax rate, if recognized. The decrease in unrecognized tax benefits in 2019 compared to 2018 is primarily attributable to a $171 million decrease, with a corresponding increase in taxes payable, due to the issuance of new tax regulations. The increase in unrecognized tax benefits in 2018 compared to 2017 is primarily attributable to provisional amounts relating to the application of certain provisions of the 2017 Tax Act, partially offset by a decrease in unrecognized tax benefit due to the resolution of the U.S. Internal Revenue Services (“IRS”) relating to the fiscal years 2010 through 2012. During the next twelve months, we do not expect any material reduction in our unrecognized tax benefits. However, this may change as we continue to have ongoing negotiations with various taxing authorities throughout the year. We report interest and penalties on income taxes as income tax expense. We recognized income tax benefitexpense of $33 million in 2019 and income tax benefits of $1 million and $6 million in 2018 and 2017, income tax expense of $12 million in 2016 and income tax benefit of $24 million in 2015, related torepresenting interest and penalties, in our consolidated statements of operations. The income tax benefit for interest and penalties recognized in 2015 and 2017 was primarily due to the lapses of statutes of limitations. As of March 31, 20172019 and 2016,2018, we had accrued $4568 million and $7737 million cumulatively in interest and penalties on unrecognized tax benefits. We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. The IRS is currently examining our U.S. corporation income tax returns for 2013 through 2015. During the third quarter of 2018, we signed the Revenue Agent’s Report from the U.S. IRS relating to their audit of the fiscal years 2010 through 2012 and recorded a $39 million tax benefit due to the favorable resolution of various uncertain tax positions for those years. During the first quarter of 2017, we reached an agreement with the Internal Revenue Service (“IRS”)IRS to settle all outstanding issues relating to the fiscal years 2007 through 2009. This settlement did not have2009 without a material impact onto our provision for income taxes. We are subject to audit by the IRS for fiscal years 2010 through the current fiscal year. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 20062010 through the current fiscal year. At March 31, 2017 undistributedTax Act
On December 22, 2017, the U.S. government enacted the 2017 Tax Act, which was comprehensive new tax legislation. The SEC Staff issued guidance on income tax accounting for the 2017 Tax Act on December 22, 2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. In accordance with this guidance, we recognized a tax benefit of $1,324 million in 2018 due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate mainly driven by a decrease in our deferred tax liabilities for inventories and investments. During 2019, we have not made any measurement period adjustments to this amount. Our reported income tax expense for 2019 included $81 million of tax benefits primarily related to a change in a tax method for inventory approved by the tax authorities and other elections made on our 2018 tax return filed after enactment of the 2017 Tax Act but prior to the reduction in U.S. tax rates. We recognized tax expense of $457 million in 2018 for the one-time transition tax on certain accumulated earnings and profits of our foreign operations totaling $6,877subsidiaries resulting from the 2017 Tax Act. During 2019, we recognized a discrete tax benefit of $5 million were consideredin measurement period adjustments to be permanently reinvested. No deferredthe one-time transition tax liability has been recognized on the basis difference created by suchcertain accumulated earnings since it is our intention to utilize those earnings to supportand profits of our foreign operations and acquisitions. The determinationsubsidiaries. Our accounting for the impact of the amount2017 Tax Act was completed as of deferred taxes on these earnings depends on judgment regarding withholding taxes, applicable tax laws and factual circumstances in effect at the time of any future distribution. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings.period ending December 31, 2018.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The 2017 Tax Act made broad and complex changes to the U.S. tax code that affected our fiscal year 2019 and 2018 in multiple ways, including but not limited to reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; creating the base erosion anti-abuse tax; creating a new provision designed to tax global intangible low-tax income (“GILTI”); and generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries. We have estimated the impact of these changes in our income tax provision for 2019. The Company is allowed to make an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat the tax effect of GILTI as a current period expense when incurred. Undistributed earnings of our foreign operations totaling $4.9 billion were considered indefinitely reinvested. Following enactment of the 2017 Tax Act, the repatriation of cash to the United States is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the United States could be subject to applicable foreign withholding taxes and state income taxes. We may remit foreign earnings to this United States to the extent it is tax efficient to do so. We do not expect the tax impact from remitting these earnings to be material. | | 11. | Redeemable Noncontrolling Interests and Noncontrolling Interests |
Redeemable Noncontrolling Interests InOur redeemable noncontrolling interests relate to our consolidated subsidiary, McKesson Europe. Under the December 2014 the domination and profit and loss transfer agreement (the “Domination Agreement”) entered into between McKesson and Celesio AG (“Celesio”) became effective upon the registration in the commercial register of Celesio at the local court of Stuttgart. Upon the effectiveness of the Domination Agreement, 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)McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per Celesio share (“Compensation Amount”), (ii)and a one-time guaranteed dividend for Celesio’s fiscalcalendar year ended December 31, 2014 of €0.83 per Celesio share reduced accordingly for any dividend paid by CelesioMcKesson Europe in relation to its fiscal year ended December 31, 2014 (“Guaranteed Dividend”) and (iii) a right to put (“Put Right”) their Celesio shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semiannually, less any Compensation Amount or Guaranteed Dividend already paid in respect of the relevant time period (“Put Amount”). The Domination Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.
Under the Domination Agreement, the noncontrolling shareholders of Celesio ceased to participate in their percentage ownership of Celesio’s profits and losses, but instead became entitled to receive the one-time Guaranteed Dividend in December 2014 and the Compensation Amount from January 2015.that year. As a result, during 2017, 20162019, 2018 and 2015,2017, we recorded a total attribution of net income to the noncontrolling shareholders of CelesioMcKesson Europe of $44$45 million, $44$43 million and $62$44 million. All amounts were recorded in our consolidated statementstatements of operations within the caption, “Net Income Attributable to Noncontrolling Interests,” and the corresponding liability balance was recorded within other accrued liabilities on our consolidated balance sheet.sheets.
Upon the effectiveness ofUnder the Domination Agreement, the noncontrolling interestsshareholders of McKesson Europe have a right to put (“Put Right”) their noncontrolling shares at €22.99 per share increased annually for interest in Celesio becamethe amount of 5 percentage points above a base rate published by the German Bundesbank semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson with respect to the relevant time period (“Put Amount”). The exercise of the Put Right will reduce the balance of redeemable as a resultnoncontrolling interests. During 2019 there were no material exercises of the Put Right. Accordingly,During 2018, we paid $50 million to purchase 1.9 million shares of McKesson Europe through the exercises of the Put Right by the noncontrolling shareholders, which decreased the carrying value of redeemable noncontrolling interests related to Celesio of $1.5 billion was reclassified from “Total Equity” to “Redeemable Noncontrolling Interests” on our consolidated balance sheet during 2015.by $53 million. The balance of redeemable noncontrolling interests is reported atas the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. At March 31, 20172019 and 2016,2018, the carrying value of redeemable noncontrolling interests of $1.33$1.39 billion and $1.41$1.46 billion exceeded the maximum redemption value of $1.21$1.23 billion and $1.28$1.35 billion. At March 31, 20172019 and 2016,2018, we owned approximately 76%77% of Celesio’sMcKesson Europe’s outstanding common shares.
Appraisal Proceedings
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of CelesioMcKesson Europe initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court (the “Court”) to challenge the adequacy of the CompensationPut Amount, the Guaranteed Dividendannual recurring compensation amount, and/or the Put Amount. As long as anyguaranteed dividend. During the pendency of the Appraisal Proceedings, are pending, the Compensation Amount, Guaranteed Dividend and/or Put Amountsuch amount will be paid as specified currently in the Domination Agreement. If any such Appraisal Proceedings resultOn September 19, 2018, the Court ruled that the Put Amount shall be increased by €0.51 resulting in an adjustment to the Compensationadjusted Put Amount Guaranteed Dividendof €23.50. The annual recurring compensation amount and/or Put Amount, Celesiothe guaranteed dividend remain unadjusted. Noncontrolling shareholders of McKesson Europe appealed this decision. McKesson Europe Holdings GmbH & Co. KGaA also appealed the decision. If upon final resolution of the appeal an upwards adjustment is ordered, we would be required to make certain additional payments for any shortfall to all CelesioMcKesson Europe noncontrolling shareholders who previously received the Guaranteed Dividend, Compensation Amount and/or Put Amount. The Put Right specified inamounts under the Domination Agreement may be exercised until two months after the announcement regarding the end of the Appraisal Proceedings (“Time Limitation Period”). In addition, if the Domination Agreement is terminated after the Time Limitation Period, the Put Right may be exercised for a two-month period after the date of termination.
Noncontrolling Interests
In connection with our acquisition of Vantage on April 1, 2016 as described in Financial Note 4, “Business Combinations,” we recognized noncontrolling interests with a fair value of $89 million at the acquisition date. Noncontrolling interests which represent third-party equity interests in our consolidated entities, including Vantage and ClarusOne Sourcing Services LLC, were $178 million and $84 million at March 31, 2017 and 2016. During 2017, 2016 and 2015, we allocated a total of $39 million, $8 million and $5 million of net income to noncontrolling interests.Agreement.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Noncontrolling Interests Noncontrolling interests represent third-party equity interests in our consolidated entities primarily related to ClarusONE and Vantage, which were $193 million and $253 million at March 31, 2019 and 2018 on our consolidated balance sheets. During 2019, 2018 and 2017, we allocated a total of $176 million, $187 million and $39 million of net income to noncontrolling interests.
Changes in redeemable noncontrolling interests and noncontrolling interests for the years ended March 31, 2019 and 2018 were as follows: | | | | | | | | (In millions) |
Noncontrolling Interests | Redeemable Noncontrolling Interests | Balance, March 31, 2017 | $ | 178 |
| $ | 1,327 |
| Net income attributable to noncontrolling interests | 187 |
| 43 |
| Other comprehensive income | — |
| 185 |
| Reclassification of recurring compensation to other accrued liabilities | — |
| (43 | ) | Payments to noncontrolling interests | (98 | ) | — |
| Exercises of Put Right | — |
| (53 | ) | Other | (14 | ) | — |
| Balance, March 31, 2018 | $ | 253 |
| $ | 1,459 |
| Net income attributable to noncontrolling interests | 176 |
| 45 |
| Other comprehensive income | — |
| (66 | ) | Reclassification of recurring compensation to other accrued liabilities | — |
| (45 | ) | Payments to noncontrolling interests | (184 | ) | — |
| Other | (52 | ) | — |
| Balance, March 31, 2019 | $ | 193 |
| $ | 1,393 |
|
There were no material changes in our ownership interests related to redeemable noncontrolling interests during 2019.The effect of changes in our ownership interests related to redeemable noncontrolling interests on our equity of $3 million resulting from exercises of Put Right was recorded as a net increase to McKesson’s stockholders’ paid-in capital during 2018. Net income attributable to McKesson and transfers from redeemable noncontrolling interests were $34 million and $70 million in 2019 and 2018. | | 12. | 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. Diluted earnings per common share are computed similar to basic earnings per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
The computations for basic and diluted earnings per common share are as follows: | | | Years Ended March 31, | Years Ended March 31, | (In millions, except per share amounts) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Income from continuing operations | $ | 5,277 |
| | $ | 2,342 |
| | $ | 1,842 |
| $ | 254 |
| | $ | 292 |
| | $ | 5,277 |
| Net income attributable to noncontrolling interests | (83 | ) | | (52 | ) | | (67 | ) | (221 | ) | | (230 | ) | | (83 | ) | Income from continuing operations attributable to McKesson | 5,194 |
| | 2,290 |
| | 1,775 |
| 33 |
| | 62 |
| | 5,194 |
| Loss from discontinued operations, net of tax | (124 | ) | | (32 | ) | | (299 | ) | | Income (Loss) from discontinued operations, net of tax | | 1 |
| | 5 |
| | (124 | ) | Net income attributable to McKesson | $ | 5,070 |
| | $ | 2,258 |
| | $ | 1,476 |
| $ | 34 |
| | $ | 67 |
| | $ | 5,070 |
| | | | | | | | | | | | Weighted average common shares outstanding: | | | | | | | | | | | Basic | 221 |
| | 230 |
| | 232 |
| 196 |
| | 208 |
| | 221 |
| Effect of dilutive securities: | | | | | | | | | | | Options to purchase common stock | 1 |
| | 1 |
| | 1 |
| — |
| | — |
| | 1 |
| Restricted stock units | 1 |
| | 2 |
| | 2 |
| 1 |
| | 1 |
| | 1 |
| Diluted | 223 |
| | 233 |
| | 235 |
| 197 |
| | 209 |
| | 223 |
| | | | | | | | | | | | Earnings (loss) per common share attributable to McKesson: (1) | | | | | | | Earnings (Loss) per common share attributable to McKesson: (1) | | | | | | | Diluted | | | | | | | | | | | Continuing operations | $ | 23.28 |
| | $ | 9.84 |
| | $ | 7.54 |
| $ | 0.17 |
| | $ | 0.30 |
| | $ | 23.28 |
| Discontinued operations | (0.55 | ) | | (0.14 | ) | | (1.27 | ) | — |
| | 0.02 |
| | (0.55 | ) | Total | $ | 22.73 |
| | $ | 9.70 |
| | $ | 6.27 |
| $ | 0.17 |
| | $ | 0.32 |
| | $ | 22.73 |
| Basic | | | | | | | | | | | Continuing operations | $ | 23.50 |
| | $ | 9.96 |
| | $ | 7.66 |
| $ | 0.17 |
| | $ | 0.30 |
| | $ | 23.50 |
| Discontinued operations | (0.55 | ) | | (0.14 | ) | | (1.29 | ) | — |
| | 0.02 |
| | (0.55 | ) | Total | $ | 22.95 |
| | $ | 9.82 |
| | $ | 6.37 |
| $ | 0.17 |
| | $ | 0.32 |
| | $ | 22.95 |
|
| | (1) | Certain computations may reflect rounding adjustments. |
Potentially dilutive securities include outstanding stock options, restricted stock units and performance-based and other restricted stock units. Approximately 23 million, 2 million and 12 million of potentially dilutive securities for 2019, 2018 and 2017 were excluded from the computations of diluted net earnings per common share, in 2017, 2016 and 2015, as they were anti-dilutive.
| | | March 31, | March 31, | (In millions) | 2017 | | 2016 | 2019 | | 2018 | Customer accounts | $ | 14,602 |
| | $ | 14,519 |
| $ | 14,941 |
| | $ | 14,349 |
| Other | 3,893 |
| | 3,711 |
| 3,584 |
| | 3,578 |
| Total | 18,495 |
| | 18,230 |
| 18,525 |
| | 17,927 |
| Allowances | (280 | ) | | (250 | ) | (279 | ) | | (216 | ) | Net | $ | 18,215 |
| | $ | 17,980 |
| $ | 18,246 |
| | $ | 17,711 |
|
Other receivables primarily include amounts due from suppliers and customer unbilled receivables.suppliers. The allowances are primarily for estimated uncollectible accounts.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
14. Property, Plant and Equipment, Net | | | March 31, | March 31, | (In millions) | 2017 | | 2016 | 2019 | | 2018 | Land | $ | 166 |
| | $ | 228 |
| $ | 172 |
| | $ | 187 |
| Building, machinery, equipment and other (1) | 3,637 |
| | 3,556 |
| 4,154 |
| | 3,746 |
| Total property, plant and equipment | 3,803 |
| | 3,784 |
| 4,326 |
| | 3,933 |
| Accumulated depreciation | (1,511 | ) | | (1,506 | ) | (1,778 | ) | | (1,469 | ) | Property, plant and equipment, net | $ | 2,292 |
| | $ | 2,278 |
| $ | 2,548 |
| | $ | 2,464 |
|
| | (1)
| During the fourth quarter of 2017, we completed a sale-leaseback transaction for our corporate headquarters building in San Francisco, California. Refer to Financial Note 28, "Sale-Leaseback" for more information. |
| | 15. | Goodwill and Intangible Assets, Net |
Changes in the carrying amount of goodwill were as follows: | | (In millions) | Distribution Solutions | | Technology Solutions | | Total | U.S. Pharmaceutical and Specialty Solutions | | European Pharmaceutical Solutions | | Medical-Surgical Solutions | | Other | | Total | Balance, March 31, 2015 | $ | 7,994 |
| | $ | 1,823 |
| | $ | 9,817 |
| | Balance, March 31, 2017 | | $ | 3,391 |
| | $ | 2,789 |
| | $ | 2,069 |
| | $ | 2,337 |
| | $ | 10,586 |
| Goodwill acquired | 21 |
| | — |
| | 21 |
| 657 |
| | 26 |
| | — |
| | 1,024 |
| | 1,707 |
| Acquisition accounting, transfers and other adjustments | 8 |
| | — |
| | 8 |
| 4 |
| | — |
| | 1 |
| | 34 |
| | 39 |
| Goodwill disposed | (59 | ) | | (27 | ) | | (86 | ) | | Goodwill impairment (1) | | — |
| | (1,283 | ) | | — |
| | (455 | ) | | (1,738 | ) | Goodwill disposed (2) | | (37 | ) | | (11 | ) | | — |
| | (124 | ) | | (172 | ) | Amount reclassified to assets held for sale | | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | Foreign currency translation adjustments, net | 23 |
| | 3 |
| | 26 |
| 95 |
| | 331 |
| | — |
| | 78 |
| | 504 |
| Balance, March 31, 2016 | $ | 7,987 |
| | $ | 1,799 |
| | $ | 9,786 |
| | Balance, March 31, 2018 | | 4,110 |
| | 1,850 |
| | 2,070 |
| | 2,894 |
| | 10,924 |
| Goodwill acquired | 2,836 |
| | 22 |
| | 2,858 |
| 17 |
| | 52 |
| | 360 |
| | 13 |
| | 442 |
| Goodwill impairment (1) | | — |
| | (1,776 | ) | | — |
| | (21 | ) | | (1,797 | ) | Acquisition accounting, transfers and other adjustments | (146 | ) | | 1 |
| | (145 | ) | 13 |
| | (5 | ) | | 21 |
| | 6 |
| | 35 |
| Impairment | — |
| | (290 | ) | | (290 | ) | | Amount reclassified to assets held for sale | (165 | ) | | — |
| | (165 | ) | | Goodwill disposed (1) | (30 | ) | | (1,078 | ) | | (1,108 | ) | | Foreign currency translation adjustments, net | (350 | ) | | — |
| | (350 | ) | (62 | ) | | (121 | ) | | — |
| | (63 | ) | | (246 | ) | Balance, March 31, 2017 | $ | 10,132 |
| | $ | 454 |
| | $ | 10,586 |
| | Balance, March 31, 2019 | | $ | 4,078 |
| | $ | — |
| | $ | 2,451 |
| | $ | 2,829 |
| | $ | 9,358 |
|
| | (1) | 2017 Technology Solutions segmentIn 2019 and 2018, goodwill impairment charges from our international businesses were translated at average exchange rates during the corresponding period and accumulated goodwill impairment losses described below were translated at year-end exchange rates. |
| | (2) | 2018 Other amount primarily represents goodwill disposal associated with Healthcare Technology Net Asset Exchange transaction.the sale of our EIS business. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange”6, “Divestitures” for more information. |
As of March 31, 2017 and 2016, the2019, accumulated goodwill impairment losses were $290$2,943 million and $36 million primarily in our TechnologyEuropean Pharmaceutical Solutions segment.segment and $461 million in Other. As of March 31, 2018, accumulated goodwill impairment losses were $1,299 million in our European Pharmaceutical Solutions segment and $456 million in Other. Refer to Financial Note 3,2 “Goodwill Impairment Charges,” for more information on the impairment chargecharges recorded in 2017.2019 and 2018.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Information regarding intangible assets is as follows: | | | March 31, 2017 | | March 31, 2016 | March 31, 2019 | | March 31, 2018 | (Dollars in millions) | Weighted Average Remaining Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Weighted Average Remaining Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Customer relationships | 11 | | $ | 2,893 |
| | $ | (1,295 | ) | | $ | 1,598 |
| | $ | 2,652 |
| | $ | (1,324 | ) | | $ | 1,328 |
| 12 | | $ | 3,818 |
| | $ | (1,801 | ) | | $ | 2,017 |
| | $ | 3,619 |
| | $ | (1,550 | ) | | $ | 2,069 |
| Service agreements | 13 | | 1,009 |
| | (316 | ) | | 693 |
| | 959 |
| | (269 | ) | | 690 |
| 11 | | 1,017 |
| | (430 | ) | | 587 |
| | 1,037 |
| | (386 | ) | | 651 |
| Pharmacy licenses | 25 | | 741 |
| | (150 | ) | | 591 |
| | 857 |
| | (121 | ) | | 736 |
| 26 | | 513 |
| | (209 | ) | | 304 |
| | 684 |
| | (196 | ) | | 488 |
| Trademarks and trade names | 15 | | 845 |
| | (124 | ) | | 721 |
| | 314 |
| | (96 | ) | | 218 |
| 13 | | 887 |
| | (232 | ) | | 655 |
| | 932 |
| | (187 | ) | | 745 |
| Technology | 4 | | 69 |
| | (64 | ) | | 5 |
| | 195 |
| | (182 | ) | | 13 |
| 4 | | 141 |
| | (94 | ) | | 47 |
| | 147 |
| | (84 | ) | | 63 |
| Other | 5 | | 201 |
| | (144 | ) | | 57 |
| | 163 |
| | (127 | ) | | 36 |
| 5 | | 288 |
| | (209 | ) | | 79 |
| | 262 |
| | (176 | ) | | 86 |
| Total | | $ | 5,758 |
| | $ | (2,093 | ) | | $ | 3,665 |
| | $ | 5,140 |
| | $ | (2,119 | ) | | $ | 3,021 |
| | $ | 6,664 |
| | $ | (2,975 | ) | | $ | 3,689 |
| | $ | 6,681 |
| | $ | (2,579 | ) | | $ | 4,102 |
|
Amortization expense of intangible assets was $444$485 million, $431$503 million and $494444 million for 20172019, 20162018 and 20152017. Estimated annual amortization expense of intangible assets is as follows: $385419 million, $370400 million, $355368 million, $341265 million and $309249 million for 20182020 through 2022,2024, and $1,9051,988 million thereafter. All intangible assets were subject to amortization as of March 31, 20172019 and 20162018. | | 16. | Capitalized Software Held for Sale, Net |
ChangesRefer to Financial Note 3, “Restructuring and Asset Impairment Charges,” for more information on intangible asset impairment charges recorded in the carrying amount of capitalized software held for sale, net, which is included in other assets in the consolidated balance sheets, were as follows:2019 and 2018.
| | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | Balance, at beginning of period | $ | 78 |
| | $ | 91 |
| | $ | 103 |
| Amounts capitalized | 16 |
| | 30 |
| | 34 |
| Amortization expense | (21 | ) | | (37 | ) | | (40 | ) | Disposal (1) | (45 | ) | | (5 | ) | | — |
| Foreign currency translations adjustments, net | — |
| | (1 | ) | | (6 | ) | Balance, at end of period | $ | 28 |
| | $ | 78 |
| | $ | 91 |
|
| | (1) | 2017 disposal primarily includes $45 million of capitalized software contributed to Change Healthcare in connection with Healthcare Technology Net Asset Exchange transaction. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for more information. |
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | 17.16. | Debt and Financing Activities |
Long-term debt consisted of the following: | | | March 31, | March 31, | (In millions) | 2017 | | 2016 | 2019 | | 2018 | U.S. Dollar notes (1) (3)(2) | | | | | | | 5.70% Notes due March 1, 2017 | — |
| | 500 |
| | 1.29% Notes Due March 10, 2017 | — |
| | 700 |
| | 1.40% Notes due March 15, 2018 | 500 |
| | 500 |
| | 7.50% Notes due February 15, 2019 | 350 |
| | 350 |
| | 2.28% Notes due March 15, 2019 | 1,100 |
| | 1,100 |
| $ | — |
| | $ | 1,100 |
| 3.65% Notes due November 30, 2020 | | 700 |
| | — |
| 4.75% Notes due March 1, 2021 | 599 |
| | 599 |
| 323 |
| | 323 |
| 2.70% Notes due December 15, 2022 | 400 |
| | 400 |
| 400 |
| | 400 |
| 2.85% Notes due March 15, 2023 | 400 |
| | 400 |
| 400 |
| | 400 |
| 3.80% Notes due March 15, 2024 | 1,100 |
| | 1,100 |
| 1,100 |
| | 1,100 |
| 7.65% Debentures due March 1, 2027 | 175 |
| | 175 |
| 167 |
| | 167 |
| 3.95% Notes due February 16, 2028 | | 600 |
| | 600 |
| 4.75% Notes due May 30, 2029 | | 400 |
| | — |
| 6.00% Notes due March 1, 2041 | 493 |
| | 493 |
| 282 |
| | 282 |
| 4.88% Notes due March 15, 2044 | 800 |
| | 800 |
| 411 |
| | 411 |
| Foreign currency notes (2) (3) | | | | | 4.00% Euro Bonds due October 18, 2016 | — |
| | 403 |
| | 4.50% Euro Bonds due April 26, 2017 | 533 |
| | 583 |
| | Foreign currency notes (1) (3) | | | | | Floating Rate Euro Notes due February 12, 2020 (4) | | 280 |
| | 337 |
| 0.63% Euro Notes due August 17, 2021 | 638 |
| | — |
| 673 |
| | 695 |
| 1.50% Euro Notes due November 17, 2025 | 635 |
| | — |
| 670 |
| | 691 |
| 1.63% Euro Notes due October 30, 2026 | | 560 |
| | 669 |
| 3.13% Sterling Notes due February 17, 2029 | 564 |
| | — |
| 586 |
| | 630 |
| | | | | | | | Lease and other obligations | 75 |
| | 4 |
| 43 |
| | 75 |
| Total debt | 8,362 |
| | 8,107 |
| 7,595 |
| | 7,880 |
| Less: Current portion | 1,057 |
| | 1,610 |
| 330 |
| | 1,129 |
| Total long-term debt | $ | 7,305 |
| | $ | 6,497 |
| $ | 7,265 |
| | $ | 6,751 |
|
| | (1) | These notes are unsecured and unsubordinated obligations of the Company. |
| | (2) | Interest on these notes is payable semiannually each year.semi-annually. |
| | (2)(3) | Interest on these foreign bonds and notes is payable annually, each year.except the 2020 Floating Rate Euro Notes. |
| | (3)(4) | TheseInterest on these notes are unsecured and unsubordinated obligations of the Company.is payable quarterly. |
Long-Term Debt Our long-term debt includes both U.S. dollar and foreign currency denominatedcurrency-denominated borrowings. At March 31, 20172019 and March 31, 2016, $8,3622018, $7,595 million and $8,107$7,880 million of total debt were outstanding, of which $1,057$330 million and $1,610$1,129 million were included under the caption “Current portion of long-term debt” within our consolidated balance sheets. Fiscal 2019
On February 17, 2017,November 30, 2018, we completed a public offering of 0.63% Euro-denominated notes3.65% Notes due August 17, 2021November 30, 2020 (the “2021 Euro“2020 Notes”) in an aggregatea principal amount of €600$700 million 1.50% Euro-denominated notesand 4.75% Notes due November 17, 2025May 30, 2029 (the “2025 Euro“2029 Notes”) in an aggregatea principal amount of €600 million and 3.13% British pound sterling-denominated notes due February 17, 2029 (the “2029 Sterling Notes”) in an aggregate principal amount of £450$400 million. Interest on the 2021 Euro2020 Notes and 2029 Notes is payable semi-annually on August 17May 30th and November 30th of each year, commencing on August 17, 2017. Interest on the 2025 Euro Notes is payable on November 17th of each year, commencing on November 17, 2017. Interest on the 2029 Sterling Notes is payable on February 17th of each year, commencing on February 17, 2018.May 30, 2019. We utilized the net proceeds from these notes of $1.8$1.1 billion, net of discounts and offering expenses, for general corporate purposes including repayments of long-term debt.purposes.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Fiscal 2018 On February 12, 2018, we completed a public offering of Euro-denominated floating rate notes due February 12, 2020 (the “2020 Floating Rate Euro Notes”) in an aggregate principal amount of €250 million and 1.63% Euro-denominated notes due October 30, 2026 (the “2026 Euro Notes”) in an aggregate principal amount of €500 million. On February 16, 2018, we completed a public offering of 3.95% notes due February 16, 2028 (the “2028 USD Notes”) in an aggregate principal amount of $600 million. The 2020 Floating Rate Euro Notes bear an interest at a rate equal to the three-month Euro Interbank Offered Rate plus 0.15%. Interest on the 2020 Floating Rate Euro Notes is payable on February 12, May 12, August 12 and November 12 of each year, commencing on May 12, 2018. Interest on the 2026 Euro Notes is payable on October 30 of each year, commencing on October 30, 2018. Interest on the 2028 USD Notes is payable on February 16 and August 16 of each year, commencing on August 16, 2018. We utilized the net proceeds from these notes of $1.5 billion, net of discounts and offering expenses, to finance the purchase of certain outstanding notes and for working capital and general corporate purposes. Tender Offers and Early Repayments On February 7, 2018, we commenced cash tender offers for a portion of our existing outstanding (i) 7.50% Notes due 2019, (ii) 4.75% Notes due 2021, (iii) 7.65% Debentures due 2027, (iv) 6.00% Notes due 2041 and (v) 4.88% Notes due 2044 (collectively referred to herein as the “Tender Offer Notes”). In connection with the tender offers and an additional repurchase, we paid an aggregate consideration of $1.05 billion to redeem $936 million principal amount of the notes at a redemption price equal to 100% of the principal amount and premiums of $99 million, plus accrued and unpaid interest of $20 million. The redemption of the Tender Offer Notes was accounted for as a debt extinguishment. As a result of the redemption, we incurred a pre-tax loss on debt extinguishment of $109 million ($70 million after-tax), which included premiums of $99 million and the write-off of unamortized debt issuance costs of $10 million. On March 26, 2018, we paid an aggregate consideration of $317 million to redeem $302 million principal amount of the 7.50% Notes due 2019 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest of $2 million, and the applicable redemption premium of $13 million pursuant to the terms of the indentures. As a result of the redemption, we incurred a pre-tax loss on debt extinguishment of $13 million ($8 million after-tax), which primarily represented the premiums. Repayments at maturity In 2019, we repaid at maturity our $1.1 billion 2.28% notes due March 15, 2019. In 2018, we repaid at maturity our €500 million Euro-denominated bond due April 26, 2017 and our $500 million 1.40% notes due March 15, 2018. In 2017, we repaid at maturity our €350 million Euro-denominated bond (or, approximately $385 million) due October 18, 2016, our $500 million 5.70% notes due March 1, 2017 and our $700 million 1.29% notes due March 10, 2017. Each note, which constitutes a “Series”, is an unsecured and unsubordinated obligation of the Company and ranks equally with all of the Company’s existing and, from time-to-time, future unsecured and unsubordinated indebtedness outstanding. Each Series is governed by materially similar indentures and officers’ certificates. Upon at least 15 daysrequired notice to holders of a Series,notes with fixed interest rates, we may redeem that Seriesthose notes at any time prior to maturity, in whole or in part, for cash at redemption prices that may include a make-whole premium plus accrued and unpaid interest, as specified in the indenture and officers’ certificate relating to that Series.prices. In the event of the occurrence of both (1) a change of control of the Company and (2) a downgrade of a Series below an investment grade rating by each of Fitch Ratings,Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, an offer must be made to purchase that Series from the holders at a price equal to 101% of the then outstanding principal amount of that Series, plus accrued and unpaid interest to, but not including, the date of repurchase. The indenture and the related officers’ certificate for each Series, subject to the exceptions and in compliance with the conditions as applicable, specify that we may not consolidate, merge or sell all or substantially all of our assets, incur liens, or enter into sale-leaseback transactions exceeding specific terms, without lenders’ consent. The indentures also contain customary events of default provisions. In 2017, we repaid at maturity our €350 million Euro-denominated bond (or, approximately $385 million) due October 18, 2016, our $500 million 5.70% notes due March 1, 2017 and our $700 million 1.29% due March 10, 2017. In 2016, we repaid at maturity our $400 million floating rate notes due September 10, 2015, our $500 million 0.95% notes due December 4, 2015, our $600 million 3.25% notes due March 1, 2016 and a term loan balance of $93 million.
Other Information Scheduled principal payments of long-term debt are $1,057 million in 2018, of which €500 million Euro-denominated bond (or, approximately $545 million) due April 26, 2017 was repaid at maturity, $1,503 million in 2019, $11$330 million in 2020, $605$1,062 million in 2021, $641$675 million in 2022, $801 million in 2023, $1,099 million in 2024 and $4,545$3,628 million thereafter.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Revolving Credit Facilities During the third quarter of 2016, we entered intoWe have a syndicated $3.5 billion five-year senior unsecured revolving credit facility (the “Global Facility”), which has a $3.15 billion aggregate sublimit of availability in Canadian dollars, British pound sterling and Euros. The Global Facility matures on October 22, 2020. Borrowings under the Global Facility bear interest based upon the London Interbank Offered Rate, Canadian Dealer Offered Rate for credit extensions denominated in Canadian Dollars, a prime rate, or alternative overnight rates as applicable, andplus agreed margins. The Global Facility contains a financial covenant which obligates the Company to maintain a debt to capital ratio of no greater than 65% and other customary investment grade covenants. If we do not comply with these covenants, our ability to use the Global Facility may be suspended and repayment of any outstanding balances under the Global Facility may be required. At March 31, 2017,2019, we were in compliance with all covenants. There were no borrowings outstanding under this facility during 2019, 2018 and 2017, and no borrowings outstanding as of March 31, 20172019 and 2016. As of March 31, 2017 and 2016, the amount available under the Global Facility was $3.5 billion.2018.
We also maintain bilateral credit lines primarily denominated in Euros with a total committed balance of $9 million and an uncommitted balance of $229$195 million as of March 31, 2017.2019. Borrowings and repayments were not material in 2017. During 20162019 and 2015, we borrowed $641 million2018 and $225 million and repaid $635 million and $267 millionamounts outstanding under these credit lines primarily related to short‑term borrowings. These credit lines have interest rates ranging from 0.2% to 6%. Aswere not material as of March 31, 2017, there was nil borrowings outstanding under these credit lines.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Accounts Receivable Facilities
Following the execution of the Global Facility, we also terminated an accounts receivable sales facility (the “AR Facility”) with a committed balance of $1.35 billion during the third quarter of 2016. There were no borrowings under the AR Facility during 20162019 and 2015. The AR Facility contained requirements relating to the performance of the accounts receivable and covenants relating to the Company. If we did not comply with these covenants, our ability to use the AR Facility would have been suspended and repayment of any outstanding balances under the AR Facility would have been required. At March 31, 2016, we were in compliance with all covenants.
We also had accounts receivable factoring facilities (the “Factoring Facilities”) denominated in foreign currencies. Transactions under these facilities are accounted for as secured borrowings and have interest rates ranging from 0.85% to 1.26%. During 2017, 2016 and 2015 we borrowed $7 million, $919 million and $2,875 million and repaid $13 million, $1,055 million and $2,908 million in short-term borrowings under these facilities. At March 31, 2017 and 2016, there were nil and $7 million in secured borrowings outstanding under these facilities. All of the Factoring Facilities expired by April 2016.2018.
Commercial Paper We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, the Company can issue up to $3.5 billion in outstanding commercial paper notes. As ofDuring 2019 and 2018, we borrowed $37,264 million and $20,542 million and repaid $37,264 million and $20,725 million under the program. At March 31, 2017, we had $183 million2019 and 2018, there were no commercial paper notes outstanding with the weighted average interest rate of 1.20%. There were no borrowings outstanding under the commercial paper program as of March 31, 2016.outstanding. | | 18.17. | Variable Interest Entities |
We evaluate our ownership, contractual and other interests in entities to determine if they are variable interest entities (“VIEs”),VIEs, if we have a variable interest in those entities and the nature and extent of those interests. These evaluations are highly complex and involve management judgment and the use of estimates and assumptions based on available historical information, and management’s judgment, among other factors. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs, we consolidate such entities into our financial statements. Consolidated Variable Interest Entities We consolidate VIEsa VIE when we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE and, as a result, are considered the primary beneficiary of the VIE. We consolidate certain single-lessee leasing entities where we, as the lessee, have the majority risk of the leased assets due to our minimum lease payment obligations to these leasing entities. As a result of absorbing this risk, the leases provide us with the power to direct the operations of the leased properties and the obligation to absorb losses or the right to receive benefits of the entity. Consolidated VIEs do not have a material impact on our consolidated statements of operations and cash flows. Total assets and liabilities included in our consolidated balance sheetsheets for these VIEs were $821$896 million and $149$64 million at March 31, 20172019 and $119$819 million and $44$92 million at March 31, 2016.2018. Investments in Unconsolidated Variable Interest Entities We are involved with VIEs which we do not consolidate because we do not have the power to direct the activities that most significantly impact their economic performance and thus are not considered the primary beneficiary of the entities. Our relationships include equity method investments and lending, leasing, contractual or other relationships with the VIEs. Our most significant relationships 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 whom we may provide financing, have equity ownership and/or a supply agreement whereby we supply the vast majority of the pharmacies’ purchases. Our maximum exposure to loss (regardless of probability) as a result of all unconsolidated VIEs was $1.1 billion at March 31, 20172019 and 20162018, which primarily represents the value of intangible assets related to service agreements, equity investments and lease and loan receivables. This amount excludes the customer loan guarantees discussed in Financial Note 24,23, “Financial Guarantees and Warranties.” We believe there is no material loss exposure on these assets or from these relationships.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
We maintain a number of qualified and nonqualified defined benefit pension plans and defined contribution plans for eligible employees. Defined Benefit Pension Plans Eligible U.S. employees who were employed by the Company as of December 31, 1995 are covered under the Company-sponsored defined benefit retirement plan. In 1997, the plan was amended to freeze all plan benefits as of December 31, 1996. Benefits for the defined benefit retirement plan are based primarily on age of employees at date of retirement, years of creditable service and the average of the highest 60 months of pay during the 15 years prior to the plan freeze date. We also have defined benefit pension plans for eligible employees outside of the U.S., as well as an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives. On May 23, 2018, the Company’s Board of Directors approved the termination of our frozen U.S. defined benefit pension plan (“Plan”). The distribution of plan assets pursuant to the termination will not be made until the plan termination satisfies all regulatory requirements, which is expected to be completed by the second half of 2020. Plan participants will receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The plan termination is expected to result in pension settlement expense in 2020, which will be determined based on prevailing market conditions, the actual lump sum distributions and annuity purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate timing nor the final amount of such settlement charges. However, as of March 31, 2019 and 2018, this defined benefit pension plan had an accumulated comprehensive loss of approximately $121 million and $120 million. Our non-U.S. defined benefit pension plans cover eligible employees located predominantly in Norway, United Kingdom, Germany, and Canada. Benefits for these plans are based primarily on each employee’s final salary, with annual adjustments for inflation. The obligations in Norway are largely related to the state-regulated pension plan which is managed by the Norwegian Public Service Pension Fund (“SPK”). According to the terms of the SPK, the plan assets of state regulated plans in Norway must correspond very closely to the pension obligation calculated using the principles codified in Norwegian law. The shortfall may not exceed 1% of the obligation. If the shortfall exceeds this threshold, it must be remedied within two years. In the United Kingdom, we have subsidiaries that participate in a joint pension plan. This plan is largely funded by contractual trust arrangements that hold Company assets that may only be used to pay pension obligations. The Trustee Board decides on the minimum contribution to the plan in association with selected employees of the entity. A valuation is performed at regular intervals in order to determine the amount of the contribution and to ensure that the minimum contribution is made. The pension obligation in Germany is unfunded with the exception of the contractual trust arrangement used to fund pensions of Celesio’sMcKesson Europe’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 is as follows: | | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | Years Ended March 31, | | Years Ended March 31, | Years Ended March 31, | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | Service cost - benefits earned during the year | $ | 5 |
| | $ | 4 |
| | $ | 1 |
| | $ | 15 |
| | $ | 20 |
| | $ | 16 |
| $ | — |
| | $ | 3 |
| | $ | 5 |
| | $ | 15 |
| | $ | 15 |
| | $ | 15 |
| Interest cost on projected benefit obligation | 13 |
| | 18 |
| | 19 |
| | 23 |
| | 24 |
| | 34 |
| 14 |
| | 14 |
| | 13 |
| | 21 |
| | 22 |
| | 23 |
| Expected return on assets | (15 | ) | | (19 | ) | | (21 | ) | | (26 | ) | | (30 | ) | | (30 | ) | (16 | ) | | (19 | ) | | (15 | ) | | (23 | ) | | (26 | ) | | (26 | ) | Amortization of unrecognized actuarial loss and prior service costs | 11 |
| | 42 |
| | 19 |
| | 4 |
| | 3 |
| | 3 |
| 5 |
| | 6 |
| | 11 |
| | 4 |
| | 5 |
| | 4 |
| Curtailment/settlement loss (gain) | — |
| | 2 |
| | — |
| | (2 | ) | | — |
| | 6 |
| 4 |
| | 2 |
| | — |
| | 1 |
| | 1 |
| | (2 | ) | Net periodic pension expense | $ | 14 |
| | $ | 47 |
| | $ | 18 |
| | $ | 14 |
| | $ | 17 |
| | $ | 29 |
| $ | 7 |
| | $ | 6 |
| | $ | 14 |
| | $ | 18 |
| | $ | 17 |
| | $ | 14 |
|
The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for the pension plans. Unrecognized actuarial losses exceeding 10% of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods.period of active employees.
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 | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | Years Ended March 31, | | Years Ended March 31, | Years Ended March 31, | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 | Change in benefit obligations | | | | | | | | | | | | | | | Benefit obligation at beginning of period (1) | $ | 535 |
| | $ | 583 |
| | $ | 899 |
| | $ | 963 |
| $ | 485 |
| | $ | 513 |
| | $ | 1,035 |
| | $ | 943 |
| Service cost | 5 |
| | 4 |
| | 15 |
| | 20 |
| — |
| | 3 |
| | 15 |
| | 15 |
| Interest cost | 13 |
| | 18 |
| | 23 |
| | 24 |
| 14 |
| | 14 |
| | 21 |
| | 22 |
| Actuarial loss (gain) | (11 | ) | | (13 | ) | | 98 |
| | (64 | ) | 4 |
| | 1 |
| | 35 |
| | (15 | ) | Benefits paid | (26 | ) | | (54 | ) | | (34 | ) | | (35 | ) | (64 | ) | | (44 | ) | | (36 | ) | | (42 | ) | Expenses paid | (3 | ) | | (3 | ) | | (1 | ) | | — |
| — |
| | (2 | ) | | (1 | ) | | (1 | ) | Amendments | — |
| | — |
| | — |
| | (2 | ) | — |
| | — |
| | — |
| | (2 | ) | Acquisitions | — |
| | — |
| | 37 |
| | — |
| — |
| | — |
| | 1 |
| | — |
| Foreign exchange impact and other | — |
| | — |
| | (94 | ) | | (7 | ) | — |
| | — |
| | (80 | ) | | 115 |
| Benefit obligation at end of period (1) | $ | 513 |
| | $ | 535 |
| | $ | 943 |
| | $ | 899 |
| $ | 439 |
| | $ | 485 |
| | $ | 990 |
| | $ | 1,035 |
| | | | | | | | | | | | | | | | Change in plan assets | | | | | | | | | | | | | | | Fair value of plan assets at beginning of period | $ | 262 |
| | $ | 298 |
| | $ | 607 |
| | $ | 612 |
| $ | 335 |
| | $ | 293 |
| | $ | 687 |
| | $ | 623 |
| Actual return on plan assets | 22 |
| | (3 | ) | | 76 |
| | 2 |
| 12 |
| | 35 |
| | 18 |
| | 21 |
| Employer and participant contributions | 38 |
| | 24 |
| | 16 |
| | 44 |
| 39 |
| | 53 |
| | 23 |
| | 17 |
| Benefits paid | (26 | ) | | (54 | ) | | (34 | ) | | (35 | ) | (64 | ) | | (44 | ) | | (36 | ) | | (42 | ) | Expenses paid | (3 | ) | | (3 | ) | | (1 | ) | | — |
| — |
| | (2 | ) | | (1 | ) | | (1 | ) | Acquisitions | — |
| | — |
| | 35 |
| | — |
| — |
| | — |
| | — |
| | — |
| Foreign exchange impact and other | — |
| | — |
| | (76 | ) | | (16 | ) | — |
| | — |
| | (49 | ) | | 69 |
| Fair value of plan assets at end of period | $ | 293 |
| | $ | 262 |
| | $ | 623 |
| | $ | 607 |
| $ | 322 |
| | $ | 335 |
| | $ | 642 |
| | $ | 687 |
| | | | | | | | | | | | | | | | Funded status at end of period | $ | (220 | ) | | $ | (273 | ) | | $ | (320 | ) | | $ | (292 | ) | $ | (117 | ) | | $ | (150 | ) | | $ | (348 | ) | | $ | (348 | ) | | | | | | | | | | | | | | | | Amounts recognized on the balance sheet | | | | | | | | | | | | | | | Assets | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 21 |
| $ | 7 |
| | $ | 10 |
| | $ | 20 |
| | $ | 19 |
| Current liabilities | (17 | ) | | (2 | ) | | (7 | ) | | (11 | ) | (115 | ) | | (39 | ) | | (13 | ) | | (7 | ) | Long-term liabilities | (203 | ) | | (271 | ) | | (317 | ) | | (302 | ) | (9 | ) | | (121 | ) | | (355 | ) | | (360 | ) | Total | $ | (220 | ) | | $ | (273 | ) | | $ | (320 | ) | | $ | (292 | ) | $ | (117 | ) | | $ | (150 | ) | | $ | (348 | ) | | $ | (348 | ) |
| | (1) | The benefit obligation is the projected benefit obligation. |
The following table provides the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all our pension plans, with anincluding accumulated benefit obligation in excess of plan assets. | | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | March 31, | | March 31, | March 31, | | March 31, | (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 | Projected benefit obligation | $ | 513 |
| | $ | 535 |
| | $ | 943 |
| | $ | 899 |
| $ | 439 |
| | $ | 485 |
| | $ | 990 |
| | $ | 1,035 |
| Accumulated benefit obligation | 513 |
| | 535 |
| | 902 |
| | 855 |
| 439 |
| | 485 |
| | 949 |
| | 990 |
| Fair value of plan assets | 293 |
| | 262 |
| | 623 |
| | 607 |
| 322 |
| | 335 |
| | 642 |
| | 687 |
|
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Amounts recognized in accumulated other comprehensive income (pre-tax) consist of: | | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | March 31, | | March 31, | March 31, | | March 31, | (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 | Net actuarial loss | $ | 157 |
| | $ | 185 |
| | $ | 160 |
| | $ | 133 |
| $ | 133 |
| | $ | 134 |
| | $ | 186 |
| | $ | 162 |
| Prior service credit | — |
| | — |
| | (3 | ) | | (11 | ) | — |
| | — |
| | (4 | ) | | (5 | ) | Total | $ | 157 |
| | $ | 185 |
| | $ | 157 |
| | $ | 122 |
| $ | 133 |
| | $ | 134 |
| | $ | 182 |
| | $ | 157 |
|
Other changes in accumulated other comprehensive income (pre-tax) were as follows: | | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | Years Ended March 31, | | Years Ended March 31, | Years Ended March 31, | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | Net actuarial loss (gain) | $ | (17 | ) | | $ | 9 |
| | $ | 58 |
| | $ | 47 |
| | $ | (38 | ) | | $ | 117 |
| $ | 8 |
| | $ | (15 | ) | | $ | (17 | ) | | $ | 42 |
| | $ | (11 | ) | | $ | 47 |
| Prior service credit | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (8 | ) | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| Amortization of: | | | | | | | | | | | | | | | | | | | | | | | Net actuarial loss | (11 | ) | | (44 | ) | | (27 | ) | | (4 | ) | | (5 | ) | | (5 | ) | (9 | ) | | (8 | ) | | (11 | ) | | (5 | ) | | (6 | ) | | (4 | ) | Prior service credit (cost) | — |
| | — |
| | 8 |
| | 2 |
| | 2 |
| | 2 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| Foreign exchange impact and other | — |
| | — |
| | — |
| | (10 | ) | | (1 | ) | | (8 | ) | — |
| | — |
| | — |
| | (12 | ) | | 19 |
| | (10 | ) | Total recognized in other comprehensive loss (income) | $ | (28 | ) | | $ | (35 | ) | | $ | 39 |
| | $ | 35 |
| | $ | (47 | ) | | $ | 98 |
| $ | (1 | ) | | $ | (23 | ) | | $ | (28 | ) | | $ | 25 |
| | $ | — |
| | $ | 35 |
|
We expect to amortize $11 million of actuarial loss for the pension plans from stockholders’ equity to pension expense in 2018.2020. The comparable 20172019 amount was $15$14 million of actuarial loss. In addition, we expect to recognize $132 million in actuarial losses for the pension plans to stockholders’ equity in 2020 as a result of $121 million from the termination of the U.S. defined benefit pension plan and $11 million from the settlement from the executive benefit retirement plan for a recently retired executive. Projected benefit obligations related to our unfunded U.S. plans were $176$124 million and $175$160 million at March 31, 20172019 and 20162018. Pension obligations for our unfunded plans are based on the recommendations of independent actuaries. Projected benefit obligations relating to our unfunded non-U.S. plans were $276$293 million and $272$297 million at March 31, 20172019 and 2016.2018. Funding obligations for our non-U.S. plans vary based on the laws of each non-U.S. jurisdiction. Expected benefit payments, including assumed executive lump sum payments, for our pension plans are as follows: $73$180 million, $206$64 million, $61$64 million, $62 million and $64$62 million for 20182020 to 20222024 and $307$327 million for 20232025 through 2027.2029. Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. Expected contributions to be made for our pension plans are $30$146 million for 2018.2020.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Weighted-average assumptions used to estimate the net periodic pension expense and the actuarial present value of benefit obligations were as follows: | | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | Years Ended March 31, | | Years Ended March 31, | Years Ended March 31, | | Years Ended March 31, | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | Net periodic pension expense | | | | | | | | | | | | | | | | | | | | | | | Discount rates | 3.40 | % | | 3.36 | % | | 3.74 | % | | 2.72 | % | | 2.36 | % | | 3.85 | % | 3.83 | % | | 3.55 | % | | 3.40 | % | | 2.35 | % | | 2.34 | % | | 2.72 | % | Rate of increase in compensation | 4.00 |
| | 4.00 |
| | 4.00 |
| | 2.76 |
| | 2.80 |
| | 3.11 |
| N/A (1) |
| | 4.00 |
| | 4.00 |
| | 3.13 |
| | 2.72 |
| | 2.76 |
| Expected long-term rate of return on plan assets | 6.25 |
| | 6.75 |
| | 7.25 |
| | 4.51 |
| | 4.87 |
| | 5.39 |
| 5.25 |
| | 6.25 |
| | 6.25 |
| | 3.71 |
| | 4.03 |
| | 4.51 |
| Benefit obligation | | | | | | | | | | | | | | | | | | | | | | | Discount rates | 3.39 | % | | 3.27 | % | | 3.18 | % | | 2.35 | % | | 2.84 | % | | 2.50 | % | 3.65 | % | | 3.69 | % | | 3.39 | % | | 2.13 | % | | 2.35 | % | | 2.35 | % | Rate of increase in compensation | 4.00 |
| | 4.00 |
| | 4.00 |
| | 3.18 |
| | 2.98 |
| | 3.24 |
| N/A (1) |
| | N/A (1) |
| | 4.00 |
| | 3.18 |
| | 2.59 |
| | 3.18 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | (1) | This assumption is no longer needed in actuarial valuations as U.S. plans are frozen or have fixed benefits for the remaining active participants. |
Our defined benefit pension plan liabilities are valued using a discount rate based on a yield curve developed from a portfolio of high quality corporate bonds rated AA or better whose maturities are aligned with the expected benefit payments of our plans. For March 31, 20172019, our U.S. defined benefit liabilities are valued using a weighted average discount rate of 3.39%3.65%, which represents an increasea decrease of 124 basis points from our 20162018 weighted-average discount rate of 3.27%3.69%. Our non-U.Snon-U.S. defined benefit pension plan liabilities are valued using a weighted-average discount rate of 2.35%2.13%, which represents a decrease of 4922 basis points from our 2016 weighted-average2018 weighted average discount rate of 2.84%2.35%. Plan Assets Investment Strategy: The overall objective for U. S. pension plan assets ishas been to generate long-term investment returns consistent with capital preservation and prudent investment practices, with a diversification of asset types and investment strategies. Periodic adjustments arewere made to provide liquidity for benefit payments and to rebalance plan assets to their target allocations. In September 2018, a new investment allocation strategy was put in place to protect the funded status of the U.S. plan assets subsequent to Board approval of U.S. pension plan termination. The target allocation for U.S. plan assets at March 31, 2019 is 100% fixed income investments including cash and cash equivalents. The target allocations for U.S. plan assets at March 31, 2018 were 2017 and 2016 are 50%26% equity investments, 45%70% fixed income investments including cash and cash equivalents and 5%4% real estate. Equity investments include common stock, preferred stock, and equity commingled funds. Fixed income investments include corporate bonds, government securities, mortgage-backed securities, asset-backed securities, other directly held fixed income investments, and fixed income commingled funds. The real estate investment isinvestments are in a commingled real estate fund. For both U.S. and non-U.S. plan assets, the investment strategies are subject to local regulations and the asset/liability profiles of the plans in each individual country. Plan assets of the non-U.S. plans are broadly 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 properly diversified to avoid excessive reliance on any particular asset, issuer or group of undertakings so as to avoid accumulations of risk in the portfolio as a whole. We develop the expected long-term rate of return assumption based on the projected performance of the asset classes in which plan assets are invested. The target asset allocation was determined based on the liability and risk tolerance characteristics of the plans and at times may be adjusted to achieve overall investment objectives. Fair Value Measurements: The following tables represent our pension plan assets as of March 31, 20172019 and 20162018, using the fair value hierarchy by asset class. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on unadjusted quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Plans | | Non-U.S. Plans | | March 31, 2019 | | March 31, 2019 | (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | Cash and cash equivalents | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
| Equity securities: | | | | | | | | | | | | | | | | Common and preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Equity commingled funds | — |
| | — |
| | — |
| | — |
| | 62 |
| | 82 |
| | — |
| | 144 |
| Fixed income securities: | | | | | | | | | | | | | | | | Government securities | — |
| | 33 |
| | — |
| | 33 |
| | 4 |
| | 135 |
| | — |
| | 139 |
| Corporate bonds | — |
| | 273 |
| | — |
| | 273 |
| | 8 |
| | 18 |
| | — |
| | 26 |
| Mortgage-backed securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Asset-backed securities and other | — |
| | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | 125 |
| | 110 |
| | 6 |
| | 241 |
| Other: | | | | | | | | | | | | | | | | Real estate funds | — |
| | — |
| | — |
| | — |
| | 2 |
| | 3 |
| | — |
| | 5 |
| Other | — |
| | — |
| | — |
| | — |
| | 21 |
| | — |
| | 3 |
| | 24 |
| Total | $ | 11 |
| | $ | 311 |
| | $ | — |
| | $ | 322 |
| | $ | 228 |
| | $ | 348 |
| | $ | 9 |
| | $ | 585 |
| Assets held at NAV practical expedient (1) | | | | | | | | | | | | | | | | Equity commingled funds | | | | | | | — |
| | | | | | | | 8 |
| Fixed income commingled funds | | | | | | | — |
| | | | | | | | — |
| Real estate funds | | | | | | | — |
| | | | | | | | — |
| Other | | | | | | | — |
| | | | | | | | 49 |
| Total plan assets |
|
| |
|
| |
|
| | $ | 322 |
| |
|
| |
|
| |
|
| | $ | 642 |
|
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Plans | | Non-U.S. Plans | | March 31, 2017 | | March 31, 2017 | (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | Cash and cash equivalents | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| Equity securities: | | | | | | | | | | | | | | | | Common and preferred stock | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | — |
| | — |
| Equity commingled funds | — |
| | — |
| | — |
| | — |
| | 13 |
| | 40 |
| | — |
| | 53 |
| Fixed income securities: | | | | | | | | | | | | | | | | Government securities | — |
| | 27 |
| | — |
| | 27 |
| | 24 |
| | 68 |
| | — |
| | 92 |
| Corporate bonds | — |
| | 12 |
| | — |
| | 12 |
| | 69 |
| | 120 |
| | 10 |
| | 199 |
| Mortgage-backed securities | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| Asset-backed securities and other | — |
| | 19 |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | 20 |
| | 29 |
| | — |
| | 49 |
| Other: | | | | | | | | | | | | | | | | Real estate funds | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 6 |
| | 8 |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Total | $ | 25 |
| | $ | 68 |
| | $ | — |
| | $ | 93 |
| | $ | 130 |
| | $ | 257 |
| | $ | 16 |
| | $ | 403 |
| Assets held at NAV practical expedient (1) | | | | | | | | | | | | | | | | Equity commingled funds | | | | | | | 131 |
| | | | | | | | 94 |
| Fixed income commingled funds | | | | | | | 59 |
| | | | | | | | 53 |
| Real estate funds | | | | | | | 10 |
| | | | | | | | 13 |
| Other | | | | | | | — |
| | | | | | | | 60 |
| Total plan assets |
|
| |
|
| |
|
| | $ | 293 |
| |
|
| |
|
| |
|
| | $ | 623 |
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | March 31, 2016 | | March 31, 2016 | March 31, 2018 | | March 31, 2018 | (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | Cash and cash equivalents | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
| $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 39 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common and preferred stock | 16 |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | — |
| 7 |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| Equity commingled funds | — |
| | — |
| | — |
| | — |
| | 6 |
| | 59 |
| | — |
| | 65 |
| — |
| | — |
| | — |
| | — |
| | 41 |
| | 94 |
| | — |
| | 135 |
| Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Government securities | — |
| | 12 |
| | — |
| | 12 |
| | 22 |
| | 68 |
| | — |
| | 90 |
| — |
| | 85 |
| | — |
| | 85 |
| | 5 |
| | 113 |
| | — |
| | 118 |
| Corporate bonds | — |
| | 12 |
| | — |
| | 12 |
| | 1 |
| | 14 |
| | — |
| | 15 |
| — |
| | 58 |
| | — |
| | 58 |
| | 114 |
| | 136 |
| | — |
| | 250 |
| Mortgage-backed securities | — |
| | 14 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | — |
| — |
| | 7 |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| Asset-backed securities and other | — |
| | 22 |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| — |
| | 21 |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| Fixed income commingled funds | — |
| | — |
| | — |
| | — |
| | 67 |
| | 64 |
| | — |
| | 131 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 64 |
| | — |
| | 64 |
| Other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | 8 |
| — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| Other | — |
| | — |
| | — |
| | — |
| | 21 |
| | 95 |
| | — |
| | 116 |
| — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | 4 |
| | 26 |
| Total | $ | 20 |
| | $ | 60 |
| | $ | — |
| | $ | 80 |
| | $ | 121 |
| | $ | 300 |
| | $ | 8 |
| | $ | 429 |
| $ | 46 |
| | $ | 171 |
| | $ | — |
| | $ | 217 |
| | $ | 187 |
| | $ | 407 |
| | $ | 4 |
| | $ | 598 |
| Assets held at NAV practical expedient (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity commingled funds | | | | | | | 165 |
| | | | | | | | 91 |
| | | | | | | 54 |
| | | | | | | | 27 |
| Fixed income commingled funds | | | | | | | — |
| | | | | | | | 56 |
| | | | | | | 53 |
| | | | | | | | — |
| Real estate funds | | | | | | | 17 |
| | | | | | | | 16 |
| | | | | | | 11 |
| | | | | | | | — |
| Other | | | | | | | — |
| | | | | | | | 15 |
| | | | | | | — |
| | | | | | | | 62 |
| Total plan assets |
|
| |
|
| |
|
| | $ | 262 |
| |
|
| |
|
| |
|
| | $ | 607 |
|
|
| |
|
| |
|
| | $ | 335 |
| |
|
| |
|
| |
|
| | $ | 687 |
|
| | (1) | Equity commingled funds, fixed income commingled funds, real estate funds and other investments for which fair value is measured using the NAV per share as a practical expedient are not leveled within the fair value hierarchy and are included as a reconciling item to total investments. |
Cash and cash equivalents - Cash and cash equivalents include short-term investment funds that maintain daily liquidity and aim to have constant unit values of $1.00. The funds invest in short-term fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and high credit quality. Directly held cash and cash equivalents are classified as Level 1 investments. Cash and cash equivalents include money market funds and other commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 1 investments. Common and preferred stock - This investment class consists of common and preferred shares issued by U.S. and non-U.S. 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. Equity commingled funds - Some equity investments are held in commingled funds, which have daily net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 1 or Level 2 investments. Fixed income securities - Government securities consist of bonds and debentures issued by central governments or federal agencies; corporate bonds consist of bonds and debentures issued by corporations; mortgage-backed securities consist of debt obligations secured by a mortgage or pool of mortgages; and asset-backed securities primarily consist of debt obligations secured by an asset or pool of assets other than mortgages. Inputs to the valuation methodology include quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Multiple prices and price types are obtained from pricing vendors whenever possible, enabling cross-provider price validations. Fixed income securities are generally classified as Level 1 or Level 2 investments.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Fixed income commingled funds - Some fixed income investments are held in exchange traded or commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 1, 2 or 23 investments. Real estate funds - The value of the real estate funds is reported by the fund manager and is based on a valuation of the underlying properties. Inputs used in the valuation include items such as cost, discounted future cash flows, independent appraisals and market based comparable data. The real estate funds are classified as Level 1, 2, or 3 investments. Other - At March 31, 20172019 and 2016,2018, this includes $37$35 million and $40$38 million of plan asset value relating to the SPK. In principle, the SPK is organized as a pay-as-you-go system guaranteed by the Norwegian government as it holds no Company-owned assets to back the pension liabilities. The Company pays a pension premium used to fund the plan, which is paid directly to the Norwegian government who establishes an account for each participating employer to keep track of the financial status of the plan, including managing the contributions and the payments. Further, the investment return credited to this account is determined annually by the SPK based on the performance of long-term government bonds. The activity attributable to Level 3 plan assets was insignificant in the years ended March 31, 20172019 and 2016.2018. Multiemployer Plans The Company contributes to a number of multiemployer pension plans under the terms of collective-bargaining agreements that cover union-represented employees in the U.S. In 2017, we also contributed to the Pensjonsordningen for Apoteketaten (“POA”), a mandatory multiemployer pension scheme for our pharmacy employees in Norway, managed by the association of Norwegian Pharmacies. The risks of participating in these multiemployer plans are different from single-employer pension plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Actions taken by other participating employers may lead to adverse changes in the financial condition of a multiemployer benefit plan and our withdrawal liability and contributions may increase. Contributions and amounts accrued for U.S. Plans were not material for the years ended March 31, 2017, 2016,2019, 2018, and 2015.2017. Contributions to the POA for non-U.S. Plans exceeding 5% of total plan contributions were $1827 million, $23$16 million and $24$18 million in 2017, 20162019, 2018 and 2015.2017. Based on actuarial calculations, we estimate the funded status for our non-U.S. Plans to be approximately 75% as of March 31, 2017.2019. No amounts were accrued for liability associated with the POA as we have no intention to withdraw from the plan. Defined Contribution Plans We have a contributory profit sharing investmentretirement savings plan (“PSIP”RSP”) for U.S. eligible employees. Eligible employees may contribute to the PSIPRSP up to 75% of their eligible compensation on a pre-tax or post-tax basis not to exceed IRS limits. The Company makes matching contributions in an amount equal to 100% of the employee’s first 3% of pay contributed and 50% for the next 2% of pay contributed. The Company also may make an additional annual matching contribution for each plan year to enable participants to receive a full match based on their annual contribution. The Company also contributed to non-U.S. plans that are available in certain countries. Contribution expenses for the PSIPRSP and non-U.S. plans were $98$92 million, $9982 million and $10398 million for the years ended March 31, 20172019, 20162018, and 20152017.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | 20.19. | Postretirement Benefits |
We maintain a number of postretirement benefits, primarily consisting of healthcare and life insurance (“welfare”) benefits, for certain eligible U.S. employees. Eligible employees consist of those who retired before March 31, 1999 and those who retired after March 31, 1999, but were an active employee as of that date, after meeting other age-related criteria. We also provide postretirement benefits for certain U.S. executives. Defined benefit plan obligations are measured as of the Company’s fiscal year-end. The net periodic (credit) expense for our postretirement welfare benefits is as follows: | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 | Service cost - benefits earned during the year | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| $ | 1 |
| | $ | 1 |
| | $ | 1 |
| Interest cost on accumulated benefit obligation | 2 |
| | 4 |
| | 5 |
| 2 |
| | 2 |
| | 2 |
| Amortization of unrecognized actuarial gain and prior service credit | (1 | ) | | — |
| | (4 | ) | (5 | ) | | (6 | ) | | (1 | ) | Net periodic postretirement expense | $ | 2 |
| | $ | 5 |
| | $ | 2 |
| | Net periodic postretirement (credit) expense | | $ | (2 | ) | | $ | (3 | ) | | $ | 2 |
|
Information regarding the changes in benefit obligations for our postretirement welfare plans is as follows: | | | Years Ended March 31, | Years Ended March 31, | (In millions) | 2017 | | 2016 | 2019 | | 2018 | Benefit obligation at beginning of period | $ | 98 |
| | $ | 118 |
| $ | 78 |
| | $ | 82 |
| Service cost | 1 |
| | 1 |
| 1 |
| | 1 |
| Interest cost | 2 |
| | 4 |
| 2 |
| | 2 |
| Plan amendments | — |
| | (16 | ) | | Actuarial (gain) / loss | (13 | ) | | 3 |
| | Actuarial gain | | (3 | ) | | (1 | ) | Benefit payments | (6 | ) | | (11 | ) | (5 | ) | | (6 | ) | Curtailment gain | — |
| | (1 | ) | | Benefit obligation at end of period | $ | 82 |
| | $ | 98 |
| $ | 73 |
| | $ | 78 |
|
The components of the amount recognized in accumulated other comprehensive income for the Company’s other postretirement benefits at March 31, 20172019 and 20162018 were net actuarial gains of $11$7 million and net actuarial losses of $48 million and net prior service credits of $14$9 million and $1611 million. Other changes in benefit obligations recognized in other comprehensive income were net actuarial gains of $14$1 million in 2017 and net actuarial losses of $3 million in 20162019 and 2018 and net prior service credits of $2 million and $3 million in 2019 and $16 million in 2017 and 2016.2018. We estimate that the amortization of the actuarial income from stockholders’ equity to other postretirement gain in 20182020 will be $45 million. Comparable 20172019 amount was an expensea benefit of $15 million. Other postretirement benefits are funded as claims are paid. Expected benefit payments for our postretirement welfare benefit plans are as follows: $87 million, $7 million, $7 million, $7 million and $7$6 million for 20182020 to 20222024 and $3026 million cumulatively for 20232025 through 2027.2029. Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. Expected contributions to be made for our postretirement welfare benefit plans are $87 million for 2018.2020. Weighted-average discount rates used to estimate postretirement welfare benefit expenses were 3.68%3.79%, 3.59%3.83% and 4.07%3.68% for 20172019, 20162018 and 20152017. Weighted-average discount rates for the actuarial present value of benefit obligations were 3.82%3.92%, 3.68%3.92% and 3.61%3.82% for 20172019, 20162018 and 20152017. Actuarial gain or loss for the postretirement welfare benefit plan is amortized to income or expense over a three-year period. The assumed healthcare cost trends used in measuring the accumulated postretirement benefit obligation were 3.00% andfor 6.50% for prescription drugs, 3.00/3.00%2019 and 7.00/6.50% for ages pre-65/post-65 medical and 3.00% and 5.00% for dental in 2017 and 20162018. For 20172019, 20162018 and 20152017, 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.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Pursuant to various collective bargaining agreements, we contribute to multiemployer health and welfare plans that cover union-represented employees. Our liability is limited to the contractual dollar obligations set forth by the collective bargaining agreements. Contributions to the plans and amounts accrued were not material for the years ended March 31, 20172019, 20162018, and 20152017. In the normal course of business, we are exposed to interest rate and foreign currency exchange rate fluctuations. At times, we limit these risks through the use of derivatives such as interest ratecross-currency swaps, cross currency swaps and foreign currency forward contracts.contracts and interest rate swaps. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes. Foreign currency exchange risk We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We have certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross currencycross-currency swaps. These forward contracts and cross currencycross-currency swaps are generally used to offset the potential income statement effects from intercompany loans denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign currency exchange rate risk. At March 31, 2017,2019 and 2018, we had €1.2€1.95 billion Euro-denominated notes and £450 million British pound sterling-denominated notes designated as non-derivative net investment hedges which hedge portions of our net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar (“Net Investment Hedges”).dollar. For all notes that are designated as net investment hedges and meet effectiveness requirements, the changes in carrying value of the notes attributable to the change in spot rates are recorded in foreign currency translation adjustments within Accumulated Other Comprehensive Income in the consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments. We did not have any foreign denominated notes designated as a net investment hedge as of March 31, 2016. To the extent foreign currency denominated notes designated as net investment hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. Losses from net investment hedgesGains of $259 million in 2019 and losses of $268 million and $13 million in 2018 and 2017 were recorded in other comprehensive income were $13 millionfor net investment hedges. There was no ineffectiveness in our net investment hedges for the yearyears ended March 31, 2017. We did not have any ineffective portion of the net investment hedge as of March 31, 2017.2019 and 2018. Derivatives Designated as Hedges In March 2019, we entered into cross-currency swap contracts with total gross notional amounts of $499 million Canadian dollars, which are designated as net investment hedges. In March 2018, we entered into cross-currency swap contracts with total gross notional amounts of £432 million British pound sterling, which are designated as net investment hedges. In November 2018, we entered into cross-currency swap contracts with total gross notional amounts of £500 million British pound sterling and $1 billion Canadian dollars, which are designated as net investment hedges. Under the terms of the cross-currency swap contracts, we agree with third parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and to exchange principal in one currency for principal in another currency, calculated by reference to agreed-upon notional amounts. These swaps are utilized to hedge portions of our net investments denominated in British pound sterling and Canadian dollars against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The changes in the fair value of these derivatives attributable to the changes in spot currency exchange rates and differences between spot and forward interest rates are recorded in accumulated other comprehensive income in the consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments denominated in British pound sterling and Canadian dollars. To the extent foreign currency denominated notes designated as hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. Gains of $53 million in 2019 and losses of $7 million in 2018 were recorded in other comprehensive income for net investment hedges. There was no ineffectiveness in our hedges for the years ended March 31, 2019 and 2018. These cross-currency swaps will mature between November 2020 and November 2024. At March 31, 20172019 and 2016,2018, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional amounts of $243$81 million and $323$162 million, which were designated as cash flow hedges. These contractsThe remaining contract will mature betweenin March 2018 and March 2020.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
From time to time, we also enter into cross currencycross-currency swaps to hedge intercompany loans denominated in non-functional currencies. For our cross currencycross-currency swap transactions, we agree with another partythird parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and to exchange principal in one currency for principal in another currency, at a fixed exchange rate, generally set at inception, calculated by reference to agreed uponagreed-upon notional amounts. These cross currencycross-currency swaps are designed to reduce the income statement effects arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges. At March 31, 20172019 and March 31, 2016,2018, we had cross currencycross-currency swaps with total gross notional amounts of approximately $2,663$2,908 million and $546$3,412 million, which are designated as cash flow hedges. These swaps will mature between February 2018April 2020 and January 2024.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
For forward contracts and cross currencycross-currency swaps that are designated as cash flow hedges, the effective portion of changes in the fair value of the hedges is recorded intoin Accumulated Other Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings. Gains or losses on thesefrom cash flow hedges recorded in other comprehensive income were $28 million in 2019 and earningslosses of $30 million and $19 million in 2018 and 2017. Gains or losses reclassified from Accumulated Other Comprehensive Income and recorded in operating expenses in the consolidated statements of operations were not material in 2017, 20162019, 2018 and 2015.2017. There was no ineffectiveness in our cash flow hedges for the years ended March 31, 2019, 2018 and 2017. Derivatives Not Designated as Hedges At March 31, 2017, we had a forward contract to primarily hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional amounts of $173 million. This contract matured in April 2017 and wasDerivative instruments not designated for hedge accounting. Gains or losses from this contract were not material foras hedges are marked-to-market at the year ended March 31, 2017.end of each accounting period with the change in value included in earnings.
We also have a number of forward contracts to hedge the Euro against cash flows denominated primarily in British pound sterling and other European currencies. At March 31, 20172019 and 2016,2018, the total gross notional amounts of these contracts were $62$28 million and $876$29 million. These contracts will mature through December 2017October 2020 and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not designated as hedges are recorded directly into earnings and accordingly, net gains of $5 million and $60 million in 2017 and 2016, and net losses of $189 million in 2015, were recorded within operating expenses.expenses and were not material in 2019, 2018 and 2017. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Information regarding the fair value of derivatives on a gross basis is as follows: | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet Caption | March 31, 2017 | | March 31, 2016 | | Fair Value of Derivative | U.S. Dollar Notional | | Fair Value of Derivative | U.S. Dollar Notional | (In millions) | Asset | Liability | | Asset | Liability | Derivatives designated for hedge accounting | | | | | | | | | Foreign exchange contracts (current) | Prepaid expenses and other | $ | 17 |
| $ | — |
| $ | 81 |
| | $ | 16 |
| $ | — |
| $ | 80 |
| Foreign exchange contracts (non-current) | Other Noncurrent Assets | 32 |
| — |
| 162 |
| | 46 |
| — |
| 243 |
| Cross currency swaps (current) | Prepaid expenses and other | 17 |
| — |
| 174 |
| | — |
| — |
| — |
| Cross currency swaps (non-current) | Other Noncurrent Assets/Liabilities | 90 |
| — |
| 2,489 |
| | — |
| 8 |
| 546 |
| Total | | $ | 156 |
| $ | — |
|
| | $ | 62 |
| $ | 8 |
|
| Derivatives not designated for hedge accounting | | | | | | | | | Foreign exchange contracts (current) | Prepaid expenses and other | $ | 1 |
| $ | — |
| $ | 198 |
| | $ | 23 |
| $ | — |
| $ | 680 |
| Foreign exchange contracts (current) | Other accrued liabilities | — |
| — |
| 37 |
| | — |
| — |
| 196 |
| Total | | $ | 1 |
| $ | — |
|
| | $ | 23 |
| $ | — |
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | | | | | | | | | | | | | | | | | | | | | | Balance Sheet Caption | March 31, 2019 | | March 31, 2018 | | Fair Value of Derivative | U.S. Dollar Notional | | Fair Value of Derivative | U.S. Dollar Notional | (In millions) | Asset | Liability | | Asset | Liability | Derivatives designated for hedge accounting | | | | | | | | | Foreign exchange contracts (current) | Prepaid expenses and other | $ | 17 |
| $ | — |
| $ | 81 |
| | $ | 15 |
| $ | — |
| $ | 81 |
| Foreign exchange contracts (non-current) | Other Noncurrent Assets | — |
| — |
| — |
| | 14 |
| — |
| 81 |
| Cross-currency swaps (current) | Prepaid expenses and other/Other Accrued Liabilities | — |
| 18 |
| — |
| | — |
| 7 |
| 504 |
| Cross-currency swaps (non-current) | Other Noncurrent Assets/Liabilities | 91 |
| 33 |
| 5,283 |
| | — |
| 222 |
| 3,508 |
| Total | | $ | 108 |
| $ | 51 |
|
| | $ | 29 |
| $ | 229 |
|
| Derivatives not designated for hedge accounting | | | | | | | | | Foreign exchange contracts (current) | Prepaid expenses and other | $ | — |
| $ | — |
| $ | 14 |
| | $ | — |
| $ | — |
| $ | 13 |
| Foreign exchange contracts (current) | Other accrued liabilities | — |
| — |
| 14 |
| | — |
| — |
| 16 |
| Total | | $ | — |
| $ | — |
|
| | $ | — |
| $ | — |
|
|
Refer to Financial Note 22,21, “Fair Value Measurements,” for more information on these recurring fair value measurements. | | 22.21. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the 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 in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data. Level 3 - Valuations based on inputs that are both significant to the fair value measurement and unobservable. At March 31, 20172019 and 2016,2018, 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 values because of the short maturity of these financial instruments. The fair value of our commercial paper was determined using quoted prices in active markets for identical liabilities, which are considered to be Level 1 inputs. Our long-term debt is carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were $8.4$7.6 billion and $8.7$7.9 billion at March 31, 20172019 and $8.1$7.9 billion and $8.6$8.1 billion at March 31, 2016.2018. The estimated fair value of our long-term debt was determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Assets Measured at Fair Value on a Recurring Basis Our financial assets measured at fair value on a recurring basis primarily representCash and cash equivalents included investments in money market funds with the amounts of $478$1,205 million and $2,413$799 million at March 31, 20172019 and 2016.2018. The fair value of the money market funds was determined by using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature. Fair values for our marketable securities were not material at March 31, 20172019 and 2016.2018.
Fair values of our forward foreign currency contracts were determined using observable inputs from available market information. Fair values of our cross currencycross-currency swaps were determined using quoted foreign currency exchange rates and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note 21,20, “Hedging Activities,” for fair value and other information on our foreign currency derivatives including forward foreign currency contracts and cross currencycross-currency swaps. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended March 31, 20172019 and 20162018. Assets Measured at Fair Value on a Nonrecurring Basis At March 31, 2019, assets measured at fair value on a nonrecurring basis primarily consisted of goodwill and long-lived assets for our European Pharmaceutical Solutions segment. At March 31, 2018, assets measured at fair value on a nonrecurring basis consisted of goodwill, intangibles and other long-lived assets for our European Pharmaceutical Solutions segment and our Rexall Health business in Other. Goodwill
Fair value assessments of the reporting unit and the reporting unit's net assets, which are performed for goodwill impairment tests, are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. We considered a market approach as well as an income approach using the DCF model to determine the fair value of the reporting unit.
Refer to Financial Note 2, “Goodwill Impairment Charges,” for more information regarding goodwill impairment charges recorded for certain reporting units during 2019, 2018 and 2017.
Long-lived Assets
We utilized multiple approaches including the DCF model and market approaches for estimating the fair value of intangible assets. The future cash flows used in the analysis are based on internal cash flow projections based on our long-range plans and include significant assumptions by management. Accordingly, the fair value assessment of the long-lived assets is considered a Level 3 fair value measurement. We measure certain intangible and other long-lived assets and goodwill at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. If the cost of an investment exceeds its fair value, we evaluate, among other factors, our intent to hold the investment, general market conditions, the duration and extent to which the fair value is less than cost and the financial outlook for the industry and location. An impairment charge is recorded when the cost of the asset exceeds its fair value and this condition is determined to be other-than-temporary. As discussed in Financial Note 3, “Restructuring and Asset Impairment Charges,” we recorded non-cash pre-tax charges of $245 million ($207 million after-tax) during 2019 and $479 million ($443 million after-tax) during 2018 to impair the carrying values of certain long-lived assets including intangible assets and capitalized software assets.
McKESSON CORPORATION
FINANCIAL NOTES (Continued) Liabilities Measured at Fair Value on a Nonrecurring Basis
At March 31, 2017, assets measured2018, we remeasured the contingent consideration liability related to our acquisition of CMM at fair value on a nonrecurring basis primarily consisted of our equity method investment in Change Healthcare (Referbasis. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,4, “Business Combinations,”) and goodwill for a reporting unit within our Technology Solutions segment, as further discussed below.more information on the fair value of the contingent consideration liability. There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2017.2019. There were no assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2016.
Goodwill104 As discussed in Financial Note 3, "Goodwill Impairment," in 2017, we recorded a non-cash pre-tax charge of $290 million ($282 million after-tax) to impair the carrying value of goodwill related to our EIS business, which is a reporting unit within our Technology Solutions segment. The impairment primarily resulted from a decline in estimated cash flows. The goodwill impairment test requires us to compare the fair value of the reporting unit to the fair value of the reporting unit's net assets, excluding goodwill but including any unrecognized intangible assets, to determine the implied fair value of goodwill. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess.
Fair value assessment of the reporting unit and the reporting unit's net assets are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. We considered the market approach as well as income approach using a discount cash flow (“DCF”) model to determine the fair value of the reporting unit. The DCF method was used to determine the fair value of intangible assets.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
We lease facilities and equipment almost solely under operating leases. At March 31, 20172019, future minimum lease payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year for years ending March 31 are: | | (In millions) | Noncancelable Operating Leases | Noncancelable Operating Leases | 2018 | $ | 477 |
| | 2019 | 414 |
| | 2020 | 315 |
| $ | 454 |
| 2021 | 264 |
| 397 |
| 2022 | 231 |
| 343 |
| 2023 | | 290 |
| 2024 | | 236 |
| Thereafter | 932 |
| 936 |
| Total minimum lease payments (1) | $ | 2,633 |
| | Total minimum lease payments (1) (2) | | $ | 2,656 |
|
| | (1) | Amount includes future minimum lease payments for the sale-leaseback transaction of $45$49 million. Minimum |
| | (2) | Total minimum lease payments have not been reduced by minimum sublease rentalsincome of $51133 million due under future noncancelable subleases. |
RentalRent expense under operating leases was $474576 million, $433568 million and $440474 million in 20172019, 20162018 and 20152017. 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 fourteenfifteen years, while remaining terms for equipment leases range from one to eightsix years. Most real property leases contain renewal options (generally for five-yearfive-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 20172019, 20162018 and 20152017.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
| | 24.23. | Financial Guarantees and Warranties |
Financial Guarantees We have agreements with certain of our customers’ financial institutions, mainly in Canada and Europe, 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 agreements, among other requirements, inventories must be in resalable condition and any repurchase would be at a discount. The inventory repurchase agreements mostly relate to certain Canadian customers and generally range from one to two years. Customers’ debt guarantees range from one to twelveten years and are primarily provided to facilitate financing for certain customers. The majority of our customers’ debt guarantees are secured by certain assets of the customer. At March 31, 20172019, the maximum amounts of inventory repurchase guarantees and customers’ debt guarantees were $226251 million and $98115 million, of which we have not accrued any material amounts. The expirations of these financial guarantees are as follows: $190195 million, $1422 million, $109 million, $715 million and $1135 million from 20182020 through 20222024 and $92$90 million thereafter. At March 31, 20172019, our banks and insurance companies have issued $255165 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.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
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 material payments as a result of these indemnification provisions. Warranties In the normal course of business, we provide certain warranties and indemnification protection for our products and services. For example, we provide warranties that the pharmaceutical and medical-surgical products we distribute are in compliance with the U.S. Food, Drug and Cosmetic Act and other applicable laws and regulations. We have received the same warranties from our suppliers, which customarily are the manufacturers of the products. In addition, we have indemnity obligations to our customers for these products, which have also been provided to us from our suppliers, either through express agreement or by operation of law. We also provide warranties regarding the performance of software and products we sell. Our liability under these warranties is to bring the product into compliance with previously agreed upon specifications. For software products, this may result in additional project costs, which are reflected in our estimates used for the percentage-of-completion method of accounting for software installation services within these contracts. 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 expense when claims become estimable. Accrued warranty costs were not material to the consolidated balance sheets. | | 25.24. | Commitments and Contingent Liabilities |
In addition to commitments and obligations incurred in the ordinary course ofour business, we are subject to variousa variety of claims incidental to the normal conduct of our business, including claims withfrom customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulationsinvestigations, and other matters arising out of the normal conduct of our business. As described below, many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
When a lossmatters. The Company is considered probable and reasonably estimable, we record a liabilityvigorously defending itself against claims 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 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 estimates.
We are party to the legal proceedings described below. Unless otherwise stated,If we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any oneunsuccessful in defending, or a combination of more than one of these proceedings be successful, or shouldif we determine to settle, any or a combination of these matters, we may be required to pay substantial sums, becomebe subject to the entry of an injunction or be forced to change the manner in whichhow we operate our business, which could have a material adverse impact on our financial position or results of operations.
Unless otherwise stated, we are unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for us determine that a loss is probable for a claim, or to reasonably estimate the amount of loss or a range of loss, because of the limited information available and the potential effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the claim. Many of the matters described below are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for claims to be resolved over many years. We review loss contingencies at least quarterly, to determine whether the loss probability has changed and whether we can make a reasonable estimate of the possible loss or range of loss. When we determine that a loss from a claim is probable and reasonably estimable, we record a liability in the amount of our estimate for the ultimate loss. We also provide disclosure when it is reasonably possible that a loss may be incurred or when it is reasonably possible that the amount of a loss will exceed our recorded liability.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
I. Litigation and Claims Involving Distribution of Controlled Substances The Company is a defendant in many cases asserting claims related to distribution of controlled substances to pharmacies. We often are named as defendants along with other pharmaceutical wholesale distributors, pharmaceutical manufacturers and retail pharmacy chains. The plaintiffs in these actions include state attorneys general, county and municipal governments, hospitals, Indian tribes, pension funds, third-party payors and individuals. These actions have been filed in state and federal courts throughout the United States, and in Puerto Rico and Canada. They contain a variety of causes of action, including negligence, public nuisance, unjust enrichment, civil conspiracy, as well as alleging violations of the Racketeer Influenced and Corrupt Organizations Act, state and federal controlled substances laws and other statutes. Since December 5, 2017, nearly all such cases pending in federal district courts have been transferred for consolidated pre-trial proceeding to a multi-district litigation (“MDL”) in the United States District Court for the Northern District of Ohio captioned In re: National Prescription Opiate Litigation, Case No. 17-md-28-04. At present, there are approximately 1,700 cases under the jurisdiction of the MDL court. On December 19, 2018, the court dismissed the City of Akron’s public nuisance claim and denied dismissal of all other claims challenged in defendants’ motions to dismiss. The court has set a trial date of October 21, 2019 for the claims brought by Cuyahoga County, Ohio and Summit County, Ohio. The Company is also named in more than 240 similar state court cases in 37 states plus Puerto Rico. These include actions filed by sixteen state attorneys general, and some by or on behalf of individuals, including wrongful death lawsuits and putative class action lawsuits brought on behalf of children with Neonatal Abstinence Syndrome due to alleged exposure to opioids in utero. Some of the state courts have ruled on defendants’ motions to dismiss. In the Connecticut coordinated actions, the court granted defendants’ motion to dismiss on January 8, 2019 and dismissed all claims filed by 21 municipalities; plaintiffs appealed this decision on January 22, 2019. In the New York coordinated actions, the court denied the distributors’ motion to dismiss on July 17, 2018; the distributor defendants appealed this decision on August 3, 2018. In the action filed by the Commonwealth of Puerto Rico, the court, on December 12, 2018, dismissed plaintiff’s unjust enrichment claim and declined to dismiss the remaining claims; the distributor defendants filed a motion for reconsideration on December 27, 2018. On December 29, 2018, the court denied the distributors’ motion to dismiss in a case filed by eight West Virginia counties in Marshall County, West Virginia. On March 8, 2019, the distributors filed a petition for writ of prohibition seeking discretionary review of this denial by the West Virginia Supreme Court. In the case file by the Delaware Attorney General, on February 4, 2019, the court dismissed all the causes of action except the claims for negligence and consumer fraud. On February 27, 2019, the court in the action brought by Clark County, Nevada denied the defendants’ motions to dismiss; the defendants have filed a motion for reconsideration of this decision. In the suit filed against the Company by the Attorney General of West Virginia in January 2016, on May 1, 2019, the parties reached a settlement of all claims in the suit against McKesson. State of West Virginia ex rel. Patrick Morrisey v. McKesson Corp., Circuit Court of Boone County, West Virginia, Case No. 16-C-1. On May 2, 2019, the court entered an order dismissing the State’s complaint as part of the parties’ settlement. Under the settlement agreement, McKesson paid $14.5 million on May 3, 2019, and will pay five additional installments of $4.5 million over the next five years. The agreement provides that funds from the settlement will be used in support of state initiatives to combat the opioid epidemic. The settlement does not include any admission of liability, and McKesson expressly denies wrongdoing. On April 3, 2017, Eli Inzlicht, a purported shareholder, filed a shareholder derivative complaint in the United States District Court for the Northern District of California against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the Drug Enforcement Administration (“DEA”) and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts, Inzlicht v. McKesson Corporation, et.al., No. 5:17-cv-01850. On July 26, 2017, Vladimir Gusinsky, as trustee for the Vladimir Gusinsky Living Trust, a purported shareholder, filed a shareholder derivative complaint in the same court based on similar allegations, Vladimir Gusinsky, as Trustee for the Vladimir Gusinsky Living Trust v. McKesson Corporation, et.al., No. 5:17-cv-4248. On October 9, 2017, the court consolidated the two matters, In re McKesson Corporation Derivative Litigation, No. 4:17-cv-1850. On January 5, 2018, the defendants moved to dismiss the consolidated suit. On May 14, 2018, the court denied in part and granted in part the motions to dismiss. On September 17, 2018, a Special Litigation Committee established by the Board of Directors of the Company moved to stay the entire litigation while the Special Litigation Committee conducts an independent investigation concerning the plaintiffs’ allegations. On November 13, 2018, the court granted the motion to stay as to deposition discovery only.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
On October 17, 2017, Chaile Steinberg, a purported shareholder, filed a shareholder derivative complaint in the Delaware Court of Chancery against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking damages and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts, Steinberg v. McKesson Corporation, et.al., No. 2017-0736. Three similar suits were thereafter filed by purported shareholders in the Court of Chancery of the State of Delaware, including Police & Fire Ret. Sys. of the City of Detroit v. McKesson Corporation, et al., No. 2017-0803, Amalgamated Bank v. McKesson Corporation, et al., No. 2017-0881, and Greene v. McKesson Corporation, et al., No. 2018-0042. The court ordered that all four actions be consolidated, and the plaintiffs designated the complaint in the Steinberg action as the operative complaint. The consolidated matter is captioned In re McKesson Corporation Stockholder Derivative Litigation, No. 2017-0736. The defendants filed a motion to dismiss the complaint on January 18, 2018. On May 25, 2018, the court stayed further proceedings in this matter in favor of the In re McKesson Corporation Derivative Litigation action referenced above. On August 8, 2018, the Company was served with a qui tam complaint pending in the United States District Court for the District of Massachusetts alleging that the Company violated the False Claims Act and various state false claims acts due to the alleged failure of the Company and other defendants to report providers who were engaged in diversion. United States ex rel. Manchester v. Purdue Pharma, L.P., et al., Case No. 1-16-cv-10947. On August 22, 2018, the United States filed a motion to dismiss. The relator recently died, and on February 25, 2019 the court entered an order staying the matter until a proper party can be substituted, and providing that if no party is substituted within 90 days of February 25, 2019, the case will be dismissed. On April 3, 2019, the widow of the relator filed a motion to substitute their daughter as the relator; on April 12, 2019, the United States filed its opposition to this substitution request. II. Other Litigation and Claims On September 7, 2007, McKesson Specialty Arizona Inc.May 17, 2013, the Company was served with a complaint filed in the New York SupremeUnited States District Court New York Countyfor the Northern District of California by PSKW, LLC,True Health Chiropractic Inc., alleging that McKesson Specialty Arizona misappropriated trade secrets and confidential informationsent unsolicited marketing faxes in launching its LoyaltyScript® program, violation of the Telephone Consumer Protection Act of 1991 (“TCPA”), as amended by the Junk Fax Protection Act of 2005 or JFPA,PSKW, LLC True Health Chiropractic Inc., et al. v. McKesson Specialty Arizona Inc.Corporation, et al., Index No. 602921/07 CV-13-02219 (HG). PSKWTrue Health Chiropractic later amended its complaint, twiceadding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. Both plaintiffs alleged that the Company violated the TCPA because it sent faxes that did not contain notices regarding how to add additional, but related claims.opt out of receiving the faxes. On July 16, 2015, plaintiffs filed a motion for class certification and on August 22, 2016, the court denied this motion, based, in part, on the grounds that identifying solicited faxes would require individualized inquiries as to consent. Plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. In March 2017, however, the United States Court of Appeals for the District of Columbia Circuit held, in an unrelated matter, that the FCC’s rule requiring opt-out notices does not apply to solicited fax advertisements (i.e. those sent with consent.) On July 27, 2018, the Ninth Circuit affirmed in part and reversed in part the district court’s denial of class certification and remanded the case to the district court for further proceedings. Plaintiffs filed a renewed motion for class certification on December 4, 2018. On January 25, 2019, the Company filed a petition for writ of certiorari in the Supreme Court of the United States, asking the court to review the ruling by the Ninth Circuit. On April 17, 2019, the court denied the Company’s motion to stay the action pending the decision by the Supreme Court on the Company’s petition for writ of certiorari. On December 29, 2017, two investment funds holding shares in Celesio AG filed a complaint against McKesson Europe Holdings (formerly known as “Dragonfly GmbH & Co KGaA”), a subsidiary of the Company, in a German court in Stuttgart, Germany, Polygon European Equity Opportunity Master Fund et al. v. McKesson Europe Holdings GmbH & Co. KGaA, No. 18 O 455/17. The complaint alleges that the public tender offer document published by McKesson Europe in its acquisition of Celesio AG incorrectly stated that McKesson Europe’s acquisition of convertible bonds would not be treated as a relevant acquisition of shares for the purposes of triggering minimum pricing considerations under Section 4 of the German Takeover Offer Ordinance. On May 11, 2018, the court dismissed the claims against McKesson Europe. Plaintiffs appealed this ruling and, on December 19, 2018, the Higher Regional Court (Oberlandesgericht) of Stuttgart confirmed the full dismissal of this matter. On March 9,13, 2019, the Higher Regional Court issued an order dismissing Plaintiffs’ application to amend the factual part of the Court’s December 2018 opinion. On February 4, 2019, Plaintiffs filed a complaint against denial of leave to appeal with the Federal Supreme Civil Court (Bundesgerichtshof).
McKESSON CORPORATION FINANCIAL NOTES (Continued)
On December 30, 2017, four additional investment funds, which allegedly entered into swap transactions regarding shares in Celesio AG that would have enabled them to decide whether to accept the takeover offer described above, filed a claim, Davidson Kempner International (BVI) Ltd. et al. v. McKesson Europe Holdings GmbH & Co. KGaA, No.16 O 475/17, that is similar to the Polygon matter. On March 15, 2019, the lower court entered judgment after trialdismissed the case; plaintiffs filed an appeal with the Higher Regional Court (Oberlandesgericht) of Stuttgart on April 15, 2019. On March 5, 2018, the Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads), was served with a qui tam complaint filed in McKesson Specialty Arizona’s favorJuly 2017 in the United States District Court for the Southern District of Illinois by a relator against RxC Acquisition Company, among others, alleging that UCB, Inc., provided illegal “kickbacks” to providers, including nurse educator services and reimbursement assistance services provided through RxC Acquisition Company, in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes. United States ex rel. CIMZNHCA, LLC v. UCB, Inc., et al., No. 17-cv-00765. The complaint seeks treble damages, civil penalties, and further relief, all in unspecified amounts. The United States and the states named in the complaint have declined to intervene in the suit. On December 17, 2018, the Department of Justice filed a motion to dismiss the complaint in its entirety; this motion was denied on all claims.April 15, 2019. On April 6, 2017, PSKW29, 2019, the Department of Justice filed a noticemotion for reconsideration of appeal.this denial. The court has set a trial date of April 5, 2021. On April 16, 2013, the Company’s wholly-owned subsidiary, U.S. Oncology, Inc. (“USON”), was served with a third amendedqui tam complaint filed in the United States District Court for the Eastern District of New York by two relators, purportedly on behalf of the United States, 21 states and the District of Columbia, against USON and five other defendants, alleging that USON solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts,United States ex rel. Piacentile v. Amgen Inc., et al., CV 04-3983 (SJ). Previously, the United States declined to intervene in the case as to all allegations and defendants except for Amgen. On February 5, 2013, the United States filed a motion to dismiss the claims pled against Amgen. On September 30, 2013, the court granted the United States’ motion to dismiss.dismiss the claims pled against Amgen. On April 4, 2014, USON filed aSeptember 17, 2018, the court granted USON’s motion to dismiss the claims pled against it. The court has not yet ruled on USON’s motion. On May 17, 2013, the Company was servedit, with a complaint filed in the United States District Court for the Northern District of California by True Health Chiropractic Inc., alleging that McKesson sent unsolicited marketing faxes in violation of the Telephone Consumer Protection Act of 1991 (“TCPA”), as amended by the Junk Fax Protection Act of 2005 or JFPA, True Health Chiropractic Inc., et al. v. McKesson Corporation, et al., CV-13-02219 (HG). True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. On August 22, 2016, the court denied plaintiffs’ motion for class certification.leave to amend. On November 18, 2016, plaintiffs were granted leave to appeal that ruling to16, 2018, the United States Court of Appeals for the Ninth Circuit. Separately, in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), certain third parties challenged the Federal Communications Commission’s (“FCC”) authority to require opt-out language on solicited faxes. Simultaneously, other third parties challenged the FCC’s authority to grant waivers, like those granted to the Company, of opt-out language requirements on solicited faxes.relators filed a fourth amended complaint. On March 31, 2017, the D.C. Circuit vacated the FCC order requiring opt-out language on solicited faxes and dismissed as moot the challenge relating to waivers.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 21, 2014, four hedge funds managed by Magnetar Capital29, 2019, USON filed a complaint against Celesio Holdings (formerly known as “Dragonfly GmbH & Co KGaA”), a wholly-owned subsidiary of the Company, in a German court in Frankfurt, Germany, allegingmotion to dismiss that Celesio Holdings violated German takeover 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 dismissed Magnetar’s lawsuit. Magnetar subsequently appealed that ruling. On January 19, 2016, the Appellate Court reversed the lower court’s ruling and entered judgment against Celesio Holdings. On February 22, 2016, Celesio Holdings filed a notice of appeal. Written statements have been submitted to the court. A hearing has not yet been set.amended complaint.
On June 17, 2014, U.S. Oncology Specialty, LP (“USOS”) was served with a fifth amendedqui tam complaint filed in July 2008 in the United States District Court for the Eastern District of New York by a relator against USOS, among others, alleging that USOS solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts,United States ex rel. Hanks v. Amgen, Inc., et al., CV-08-03096 (SJ). These claims are based on the same grounds as the Piacentile action referenced above. Previously, the United States declined to intervene in the case as to all allegations and defendants except for Amgen. On August 1, 2014, USOS filed aSeptember 17, 2018, the court granted USOS’s motion to dismiss and gave the claims pled against itrelator leave to file another action after the Piacentile action is no longer pending. The relator appealed this order to the United States Court of Appeals for the Second Circuit, and on December 11, 2018 the hearing occurred on October 7, 2014. The court has not yet ruled on USOS’s motion.defendants moved to dismiss the appeal. On January 28, 2016,November 27, 2018, the Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads) was served with aqui tam complaint filed in the United States District Court for the SouthernEastern District of Texas by a relator, purportedly on behalfPennsylvania alleging that EMD Serono, Inc. and Pfizer, Inc. provided illegal “kickbacks” to providers, including services provided through RxC Acquisition Company and others, in violation of the United States, 29 states and the District of Columbia, against the Company and two other defendants, alleging that the defendants reported materially inaccurate data to manufacturers, which caused manufacturers to submit inaccurate Average Manufacturer Prices (“AMPs”) to the Centers for Medicare and Medicaid Services from January 1, 2004 to the present, in violation ofAnti-Kickback statute, the False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees, interest and costs of suit, statutes.United States ex rel. GreenHarris et al. v. AmerisourceBergen,EMD Serono, Inc. et al., 4:15-CV-00379.No. 16-5594. The United States and the named states declined to intervene in the case as to all allegations and defendants.case. On April 18, 2016,December 17, 2018, the Company, along with the other defendants,Department of Justice filed a joint motion to dismiss the claims pled against them.complaint in its entirety. On March 31, 2017,December 28, 2018, relators filed a second amended complaint, and on January 7, 2019, relators and defendants jointly moved for a stay of the defendants’ response deadline until after the Department of Justice’s motion to dismiss has been resolved. On April 3, 2019, the court granted defendants’ jointthe motion to dismiss the lawsuit in its entirety without leave to amend. dismiss. On January 26, 2016,24, 2019, the Company was served with an amendeda qui tam complaint filedthat had previously been unsealed in the Circuit Court of Boone County, West Virginia, by the State of West Virginia, including the Attorney General of West Virginia, alleging that since 2007, the Company has oversupplied controlled substances to West Virginia and failed to report suspicious orders of controlled substances in violation of the West Virginia Controlled Substances Act, the West Virginia Consumer and Protection Act, as well as common law claims for negligence, public nuisance and unjust enrichment, and seeking injunctive relief, monetary damages and civil penalties, all in unspecified amounts. State of West Virginia ex rel. Morrisey v. McKesson Corporation, Civil Action No.: 16-C-1. Following removal to the United States District Court for the SouthernEastern District of West Virginia (Civil Action No.: 2:16-cv-01772), the court remanded the matter to state court in January 2017 without ruling on the pending motion for judgment on the pleadings. Since December 27, 2016, the Company has been served with nine complaints filed in state and federal courts in West Virginia againstTexas, alleging that the Company and other defendants, alleging substantially similar claims to the West Virginia Attorney General action, including negligence,its subsidiary, U.S. Oncology, Inc., among others, received payments for unnecessary medical services in violation of the West Virginia Controlled SubstancesFalse Claims Act and unjust enrichment, and seeking injunctive relief and compensatory and punitive damages, all in unspecified amounts. These lawsuits are the Texas Medicaid Fraud Prevention Act.McDowell County United States ex rel. Nguyen v. McKesson Corporation, et al., McDowell County, West Virginia Circuit Court, Civil Action No.: 16-C-137M, removed to the United States District Court for the Southern District of West Virginia, Civil Action No.:1:17-cv-00946; The City of Huntington v. Amerisourcebergen Drug Corporation, et al., Cabell County, West Virginia Circuit Court, Civil Action No. 17-C-38, removed to the United States District Court for the Southern District of West Virginia, Civil Action 3:17-1362; Kanawha County Commission v. Rite Aid of Maryland, Inc.Corp., et al., No. 4:15-00814. Previously, the United States District Courtand Texas declined to intervene in the case. On March 19, 2019, the court granted relator’s motion to stay proceedings for the Southern District of West Virginia, Action No. 2:17-cv-01666; Cabell County Commission v. Amerisourcebergen Drug Corporation, et al., United States District Court for the Southern District of West Virginia, Civil Action No. 3:17-cv-01665; Fayette County Commission v. Cardinal Health, Inc., et al., United States District Court for the Southern District of West Virginia, Civil Action No. 2:17-cv-01957; Wayne County Commission v. Rite Aid of Maryland, Inc., et al., United States District Court for the Southern District of West Virginia, Civil Action No. 3:17-cv-01962; Boone County Commission v. Amerisourcebergen Drug Corporation, et al., United States District Court for the Southern District of West Virginia, Civil Action No. 2:17-cv-02028; Wyoming County Commission v. Amerisourcebergen Drug Corporation, et al., United States District Court for the Southern District of West Virginia, Civil Action No. 5:17-cv-02311; and Logan County Commission v. Cardinal Health, Inc., et al., United States District Court for the Southern District of West Virginia, Civil Action No. 2:17-cv-02296. McKesson filed motions to dismiss in all cases in which responses were due.ninety days.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
On May 2, 2017,April 3, 2018, a second amended qui tam complaint was filed in the United States District Court for the Eastern District of New York by a relator, purportedly on behalf of the United States, 30 states, the District of Columbia, and two cities against McKesson Corporation, McKesson Specialty Care Distribution Corporation, McKesson Specialty Distribution LLC, McKesson Specialty Care Distribution Joint Venture, L.P., Oncology Therapeutics Network Corporation, Oncology Therapeutics Network Joint Venture, L.P., US Oncology, Inc. and US Oncology Specialty, L.P., alleging that from 2001 through 2010 the defendants repackaged and sold single-dose syringes of oncology medications in a manner that violated the federal False Claims Act and various state and local false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts, United States ex rel. Omni Healthcare Inc. v. McKesson Corporation, et al. , 12-CV-06440 (NG). The United States and the named states have declined to intervene in the case. On October 15, 2018, the Company filed a motion to dismiss the complaint as to all named defendants. On February 3, 2019, the court granted the motion to dismiss in part and denied it in part, leaving the Company and Oncology Therapeutics Network Corporation as the only remaining defendants in the case. On February 19, 2019, the relator filed a motion for reconsideration of the court’s dismissal of Oncology Therapeutics Network Joint Venture. The Company is a defendant in an amended complaint filed on June 15, 2018 in a case pending in the United States District Court for the Southern District of Illinois alleging that the Company’s subsidiary, McKesson Medical-Surgical Inc., among others, violated the Sherman Act by restraining trade in the sale of safety and conventional syringes and safety IV catheters. Marion Diagnostic Center, LLC v. Becton, Dickinson, et al., No. 18:1059. The action is filed on behalf of a purported class of purchasers, and seeks treble damages and further relief, all in unspecified amounts. On July 20, 2018, the defendants filed a motion to dismiss. On November 30, 2018, the district court granted the motion to dismiss, and dismissed the complaint with prejudice. On December 27, 2018, plaintiffs appealed the order to the United States Court of Appeals for the Seventh Circuit. On September 25, 2018, plaintiffs filed a complaint in the United States District Court for the Eastern District of Pennsylvania alleging that the Company and its subsidiary, McKesson Medical-Surgical Inc., among others, violated the Sherman Act by restraining trade in the sale of generic drugs. Marion Diagnostic Center, LLC v. McKesson Corporation, et al., No. 2:18-cv-4137. A motion to dismiss was filed on February 21, 2019 and the plaintiffs have agreed to a discovery stay until the motion is resolved. On December 12, 2018, the Company was served with a complaint filed in the District Court of the Cherokee Nation by the Cherokee Nation against the Company and five other defendants, alleging that the defendants oversupplied controlled substances to the Cherokee Nation in violation of the Cherokee National Unfair and Deceptive Practices Act, as well as common law claims for nuisance, negligence, unjust enrichment and civil conspiracy, and seeking injunctive relief, civil penalties, compensatory damages, restitution, punitive damages, and attorneys’ fees and costs, all in unspecified amounts, Cherokee Nation v. AmerisourceBergen, et al., CV-2017-203. The Company has not yet responded to the complaint. On January 31, 2017, Steve Silverman, a purported shareholder, filed a shareholder derivativeclass action complaint in the United States District Court for the Northern District of California, alleging that McKesson and two of its officers, CEO John Hammergren and former CFO James Beer, violated the Securities Exchange Act of 1934 by reporting profits and revenues from 2013 until early 2017 that were false and misleading, due to an alleged conspiracy to fix the prices of generic drugs. Evanston Police Pension Fund v. McKesson Corporation, No. 3:18-06525. On February 8, 2019, the court appointed the Pension Trust Fund for Operating Engineers as the lead plaintiff. On April 10, 2019, the lead plaintiff filed an amended complaint that added insider trading allegations against certain officers and directorsdefendant Hammergren.
The Great Atlantic & Pacific Tea Company (“A&P”), a former customer of the Company, and the Company as a nominal defendant, alleging violations of fiduciary duties and unjust enrichment relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts, Silverman v. McKesson Corporation, et al., No. 3:17-cv-00494. On April 3, 2017, the Company filed a motion to dismiss. On April 3, 2017, Eli Inzlicht, a purported shareholder, filed a shareholder derivative complaintChapter 11 in the United States DistrictBankruptcy Court for the NorthernSouthern District of California against certain officers and directorsNew York in July 2015. In re The Great Atlantic & Pacific Tea Company, Inc., et al., Case No. 15-23007. The Company has been sued in a lawsuit in this bankruptcy case which seeks to recover approximately $68 million in allegedly preferential transfers. The Official Committee of Unsecured Creditors on behalf of the bankruptcy estate of The Great Atlantic & Pacific Tea Company, and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, all in unspecified amounts, InzlichtInc., et al. v. McKesson Corporation et.al.d/b/a McKesson Drug Co.,Adv. Proc. No. 5:17-cv-01850.17-08264.
II.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
III. Government Subpoenas and Investigations From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. For example, in May 2017, the Company was served with a Civil Investigative Demand by the U.S. Attorney’s Office for the Eastern District of New York relating to the certification it obtained for a software product under the U.S. Department of Health and Human Services’ Electronic Health Record Incentive Program. The Company is currently responding to this request. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the health care industry, as well as to settlements. As an example of the type of subpoenas or requests the Company receives from time to time, in August 2015, the Company was served with a Civil Investigative Demand by the U.S. Attorney’s Office for the Southern District of New York relating to certain business analytics tools offered to its customers. In May 2017 and August 2018, respectively, the Company was served with two separate Civil Investigative Demands by the U.S. Attorney’s Office for the Eastern District of New York relating to the certification the Company obtained for two software products under the U.S. Department of Health and Human Services’ Electronic Health Record Incentive Program. In September 2017, the Company received a request for information and documents from a group of approximately 40 state attorneys general related to an investigation into the factors contributing to the increasing number of opioid-related hospitalizations and deaths in the United States. The Company has also received civil investigative demands, subpoenas or requests for information from several other state attorneys general on the same issues. In January 2019, the Company was served with a subpoena by the U.S. Department of Health and Human Services, Office of Inspector General, related to the Company’s participation in the Medicaid Drug Rebate Program. The Company is currently responding to these requests. In 2015, the Company recorded a pre-tax charge of $150 million relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances. In January 2017, the Company finalized the settlements and paid $150 million in cash. III.New York Opioid Statute
Legislative, regulatory or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that we may not be able to predict. For example, in April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the creation of an aggregate $100 million annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids in New York. The initial surcharge payment would have been due on January 1, 2019 for opioids sold or distributed during calendar year 2017. On December 19, 2018, the United States District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing the State of New York from enforcing the law. On January 17, 2019, the State filed a notice of appeal. The State of New York has subsequently adopted a tax on sales of opioids in the State. The excise tax would apply only to the first sale occurring in New York, and thus may not apply to sales from the Company’s distribution centers in New York to pharmacy customers. In addition, other states are considering legislation that could require us to pay taxes, licensing fees, or assessments on the distribution of opioid medications in those states. These proposed bills vary in the amounts and the means of calculation. Liabilities for taxes or assessments under any such laws will likely have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted. IV. Environmental Matters Primarily as a result of the operation of the Company’s former chemical businesses, which were fully divested by 1987, the Company is involved in various matters pursuant to environmental laws and regulations. The Company has received claims and demands from governmental agencies relating to investigative and remedial actions purportedly required to address environmental conditions alleged to exist at five sites where it, or entities acquired by it, formerly conducted operations and the Company, by administrative order or otherwise, has agreed to take certain actions at those sites, including soil and groundwater remediation. Based on a determination by the Company’s environmental staff, in consultation with outside environmental specialists and counsel, the current estimate of the Company’s probable loss associated with the remediation costs for these five sites is $10.4$10 million, net of amounts anticipated from third parties. The $10.4$10 million is expected to be paid out between April 20172019 and March 2047.2049. The Company’s estimated probable loss for these environmental matters has been entirely accrued for in the accompanying consolidated balance sheets.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
In addition, the Company has been designated as a Potentially Responsible Party (“PRP”) under the Superfund law for environmental assessment and cleanup costs as the result of its alleged disposal of hazardous substances at 1314 sites. With respect to these sites, numerous other PRPs have similarly been designated and while the current state of the law potentially imposes joint and several liabilityliabilities upon PRPs, as a practical matter, costs of these sites are typically shared with other PRPs. At one of these sites, the United States Environmental Protection Agency has selected a preferred remedy with an estimated cost of approximately $1.38 billion. It is not certain at this point in time what proportion of this estimated liability will be borne by the Company or by the numerous other PRPs. Accordingly, the Company’s estimated probable loss at those 1314 sites is approximately $24.3$23.1 million, which has been entirely accrued for in the accompanying consolidated balance sheets. However, it is possible that the ultimate costs of these matters may exceed or be less than the reserves. IV.V. Value Added Tax Assessments
We operate in various countries outside the United States which collect value added taxes (“VAT”). The determination of the manner in which a VAT applies to our foreign operations is subject to varying interpretations arising from the complex nature of the tax laws. We have received assessments for VAT which are in various stages of appeal. We disagree with these assessments and believe that we have strong legal arguments to defend our tax positions. Certain VAT assessments relate to years covered by an indemnification agreement. Due to the complex nature of the tax laws, it is not possible to estimate the outcome of these matters. However, based on the currently available information, we believe the ultimate outcome of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. V.VI. Other Matters
The Company is involved in various other litigation, governmental proceedings and claims, not described above, that arise in the normal course of business. While it is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, the Company believes, based on current knowledge and the advice of counsel, that such litigation, proceedings and claims will not have a material impact on the Company’s financial position or results of operations. | | 26.25. | Stockholders’ Equity |
Each share of the Company’s outstanding common stock is permitted one vote on proposals presented to stockholders and is entitled to share equally in any dividends declared by the Company’s Board of Directors (the “Board”). In July 2015,2018, the Company’s quarterly dividend was raised from $0.240.34 to $0.280.39 per common share for dividends declared on or after such date until further action by the Board. Dividends were $1.51 per share in 2019, $1.30 per share in 2018 and $1.12 per share in 2017, $1.08 per share in 2016 and $0.96 per share in 2015.2017. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount 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 transactions, through accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Information regarding the share repurchase activity over the last three years is as follows: | | | Share Repurchases (1) | Share Repurchases (1) | (In millions, except price per share data) | | Total Number of Shares Purchased (2) (3) | | Average Price Paid Per Share | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | | Total Number of Shares Purchased (2) (3) | | Average Price Paid Per Share | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | Balance, March 31, 2014 | | | | $ | 340 |
| | Shares repurchased | | 1.5 | | $ | 226.55 |
| | (340 | ) | | Balance, March 31, 2015 | | | | $ | — |
| | Shares repurchase plans authorized | | | | | | May 2015 | | | | 500 |
| | October 2015 | | | | 2,000 |
| | Shares repurchased | | 8.7 | | $ | 173.64 |
| | (1,504 | ) | | Balance, March 31, 2016 | | | | $ | 996 |
| | | | $ | 996 |
| Shares repurchase plans authorized | | | | | | | | | October 2016 | | | | 4,000 |
| | | | 4,000 |
| Shares repurchased | | 15.5 | | $ | 141.16 |
| | (2,250 | ) | | 15.5 | | $ | 141.16 |
| | (2,250 | ) | Balance, March 31, 2017 | | | | $ | 2,746 |
| | | | $ | 2,746 |
| Shares repurchased | | | 10.5 | | $ | 151.06 |
| | (1,650 | ) | Balance, March 31, 2018 | | | | | $ | 1,096 |
| Shares repurchase plans authorized | | | | | | May 2018 | | | | | 4,000 |
| Shares repurchased | | | 13.5 | | $ | 130.72 |
| | (1,627 | ) | Balance, March 31, 2019 | | | | | $ | 3,469 |
|
| | (1) | This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards. |
| | (2) | All of the shares purchased were part of the publicly announced programs. |
| | (3) | The number of shares purchased reflects rounding adjustments. |
During the last three years, our share repurchases were transacted through both open market transactions and ASR programs with third party financial institutions. In May and October 2015, the Board authorized the repurchase of up to $500 million and $2 billion of the Company’s common stock. In 2016, we repurchased 4.5 million of the Company’s shares for $854 million through open market transactions at an average price per share of $192.27. In February 2016, we entered into an ASR program with a third-party financial institution to repurchase $650 million of the Company’s common stock. The ASR program was completed during the fourth quarter of 2016 and we repurchased 4.2 million shares at an average price per share of $154.04. During 2016, we completed the May 2015 share repurchase authorization. At March 31, 2016, $1.0 billion remained available for future authorized repurchases of the Company’s common stock under the October 2015 authorization.
In October 2016, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock.
In 2017, we repurchased 14.1 million of the Company’s shares for $2$2.0 billion through open market transactions at an average price per share of $140.96. In March 2017, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. As of March 31, 2017, we had received 1.4 million shares under this program. This ASR program was completed in April 2017 and we received 0.3 million additional shares. The total number of shares repurchased under this ASR program was 1.7 million shares at an average price per share of $143.19. During 2017, we completed the October 2015 share repurchase authorization. The total authorization outstanding for repurchases of the Company’s common stock was $2.7 billion at March 31, 2017. In 2016,2018, we repurchased 3.5 million of the Company’s shares for $500 million through open market transactions at an average price per share of $144.43. In June 2017, August 2017 and March 2018, we entered into three separate ASR programs with third-party financial institutions to repurchase $250 million, $400 million and $500 million of the Company’s common stock. As of March 31, 2018, we completed and received a total of 1.5 million shares under the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. In addition, we received 2.5 million shares representing the initial number of shares due in March 2018 and an additional 1.0 million shares in the first quarter of 2019. The March 2018 ASR program was completed at an average price per share of $143.66 during the first quarter of 2019. The total authorization outstanding for repurchase of the Company’s common stock was $1.1 billion at March 31, 2018. In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock. The total authorization outstanding for repurchases of the Company’s common stock was increased to $5.1 billion.
During 2019, we repurchased 10.4 million of the Company’s shares for $1.4 billion through open market transactions at an average price per share of $132.14.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
In December 2018, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. The total number of shares repurchased under this ASR program was 2.1 million shares at an average price per share of $117.98. The total authorization outstanding for repurchase of the Company’s common stock was $3.5 billion at March 31, 2019.
In 2019, we retired 115.55.0 million or $7.8 billion$542 million of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $6.4 billion$472 million and $1.5 billion$70 million during 2016.2019.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Other Comprehensive Income (Loss) Information regarding other comprehensive income (loss) including noncontrolling interests and redeemable noncontrolling interests, net of tax, by component is as follows: | | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | Foreign currency translation adjustments(1) | | | | | | Foreign currency translation adjustments arising during period, net of income tax expense (benefit) of ($1), ($23) and nil (2) (3) | $ | (644 | ) | | $ | 113 |
| | $ | (1,845 | ) | Reclassified to income statement, net of income tax expense of nil, nil and nil4) | 20 |
| | — |
| | (10 | ) | | (624 | ) | | 113 |
| | (1,855 | ) | Unrealized gains (losses) on net investment hedges (5) | | | | | | Unrealized gains (losses) on net investment hedges arising during period, net of income tax benefit of $5, nil and nil | (8 | ) | | — |
| | — |
| Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| Unrealized gains (losses) on cash flow hedges | | | | | | Unrealized gains (losses) on cash flow hedges arising during period, net of income tax benefit of nil, nil and nil | (19 | ) | | 6 |
| | (13 | ) | Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | 3 |
| | 3 |
| | (19 | ) | | 9 |
| | (10 | ) | Changes in retirement-related benefit plans | | | | | | Net actuarial gain (loss) and prior service credit (cost) arising during period, net of income tax expense (benefit) of $4, $13 and ($66) (6) | (20 | ) | | 23 |
| | (140 | ) | Amortization of actuarial gain (loss), prior service cost and transition obligation, net of income tax expense (benefit) of $4, $18 and $6 (7) | 9 |
| | 30 |
| | 11 |
| Foreign currency translation adjustments and other, net of income tax expense of nil, nil and nil | 3 |
| | (3 | ) | | 4 |
| Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | 1 |
| | (8 | ) | | 50 |
| | (124 | ) | |
|
| |
| |
| Other Comprehensive Income (Loss), net of tax | $ | (659 | ) | | $ | 172 |
| | $ | (1,989 | ) |
| | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2019 | | 2018 | | 2017 | Foreign currency translation adjustments:(1) | | | | | | Foreign currency translation adjustments arising during period, net of income tax (expense) benefit of nil, nil and $1 (2) (3) | $ | (431 | ) | | $ | 804 |
| | $ | (644 | ) | Reclassified to income statement, net of income tax expense of nil, nil and nil (4) | — |
| | — |
| | 20 |
| | (431 | ) | | 804 |
| | (624 | ) | Unrealized gains (losses) on net investment hedges (5) | | | | | | Unrealized gains (losses) on net investment hedges arising during period, net of income tax (expense) benefit of ($71), $95 and $5 | 241 |
| | (180 | ) | | (8 | ) | Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | — |
| | 241 |
| | (180 | ) | | (8 | ) | Unrealized gains (losses) on cash flow hedges: | | | | | | Unrealized gains (losses) on cash flow hedges arising during period, net of income tax (expense) benefit of ($4), $9 and nil | 24 |
| | (30 | ) | | (19 | ) | Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | — |
| | 24 |
| | (30 | ) | | (19 | ) | Changes in retirement-related benefit plans: | | | | | | Net actuarial gain (loss) and prior service credit (cost) arising during the period, net of income tax (expense) benefit of $5, ($2) and ($4) (6) | (51 | ) | | 25 |
| | (20 | ) | Amortization of actuarial loss, prior service cost and transition obligation, net of income tax (expense) of nil, ($2) and ($4) (7) | 9 |
| | 5 |
| | 9 |
| Foreign currency translation adjustments and other, net of income tax expense of nil, nil and nil | 10 |
| | (15 | ) | | 3 |
| Reclassified to income statement, net of income tax expense of nil, nil and nil | — |
| | — |
| | — |
| | (32 | ) | | 15 |
| | (8 | ) | |
|
| |
| |
| Other Comprehensive Income (Loss), net of tax | $ | (198 | ) | | $ | 609 |
| | $ | (659 | ) |
| | (1) | Foreign currency translation adjustments over the last three years primarily resultedresult from the conversion of non-U.S. dollar financial statements of our foreign subsidiary, Celesio,subsidiaries McKesson Europe, into the Company’s reporting currency, U.S. dollars. |
| | (2) | The 2019 net foreign currency translation losses of $431 million were primarily due to the weakening of the Euro, British pound sterling and Canadian dollar against the U.S. dollar from April 1, 2018 to March 31, 2019. The 2018 net foreign currency translation gains of $804 million were primarily due to the strengthening of the Euro, British pound sterling and Canadian dollar against the U.S. dollar from April 1, 2017 to March 31, 2018. The 2017 net foreign currency translation losses of $644 million were primarily due to the weakening of the Euro and British pound sterling against the U.S. dollar from April 1, 2016 to March 31, 2017. The 2016 net foreign currency translation gains of $113 million were primarily due to the recovery of the Euro against the U.S. dollar, partly offset by the weakening of the Canadian dollar and British pound sterling against the U.S. dollar during the period between April 1, 2015 and March 31, 2016. |
| | (3) | 20172019 includes net foreign currency translation losses of $74$61 million and 20162018 includes net foreign currency translation gains of $16$189 million attributable to noncontrolling and redeemable noncontrolling interests. |
| | (4) | These net foreign currency losses were reclassified from accumulated other comprehensive income (loss) to discontinued operations within our consolidated statement of operations due to the Healthcare Technology Net Asset Exchange in 2017 and the sale of a business in 2015.our Brazilian pharmaceutical distribution business. |
| | (5) | 2019, 2018 and 2017 includesinclude foreign currency gains of $259 million and losses of $268 million and $13 million on the net investment hedges from the €1.2 billion Euro-denominated notesEuro and £450 million British pound sterling-denominated notes. 2019 and 2018 also include foreign currency gains of $53 million and losses of $7 million on the net investment hedges from the cross-currency swaps. |
| | (6) | The net actuarial losses of $5 million and net gains of $4 million were attributable to noncontrolling and redeemable noncontrolling interests in 20172019 and 2016.2018. |
| | (7) | Pre-tax amount was reclassified into cost of sales and operating expenses in the consolidated statements of operations. The related tax expense was reclassified into income tax expense in the consolidated statements of operations. |
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Accumulated Other Comprehensive Income (Loss) Information regarding changes in our accumulated other comprehensive income (loss) by component are as follows: | | | | | | | | | | | | | | | | | | | | | Foreign Currency Translation Adjustments | | | | | | | (In millions) | Foreign Currency Translation Adjustments, Net of Tax | | Unrealized Losses on Net Investment Hedges, Net of Tax | | Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax | | Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax | | Total Accumulated Other Comprehensive Income (Loss) | Foreign Currency Translation Adjustments, Net of Tax | | Unrealized Losses on Net Investment Hedges, Net of Tax | | Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax | | Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax | | Total Accumulated Other Comprehensive Income (Loss) | Balance at March 31, 2015 | $ | (1,420 | ) | | $ | — |
| | $ | (21 | ) | | $ | (272 | ) | | $ | (1,713 | ) | | Balance at March 31, 2017 | | $ | (1,873 | ) | | $ | (8 | ) | | $ | (31 | ) | | $ | (229 | ) | | $ | (2,141 | ) | Other comprehensive income (loss) before reclassifications | 113 |
| | — |
| | 6 |
| | 23 |
| | 142 |
| 804 |
| | (180 | ) | | (30 | ) | | 10 |
| | 604 |
| Amounts reclassified to earnings | — |
| | — |
| | 3 |
| | 27 |
| | 30 |
| — |
| | — |
| | — |
| | 5 |
| | 5 |
| Other comprehensive income (loss) | $ | 113 |
| | $ | — |
| | $ | 9 |
| | $ | 50 |
| | $ | 172 |
| $ | 804 |
| | $ | (180 | ) | | $ | (30 | ) | | $ | 15 |
| | $ | 609 |
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | 16 |
| | — |
| | — |
| | 4 |
| | 20 |
| 189 |
| | — |
| | — |
| | (4 | ) | | 185 |
| Other comprehensive income (loss) attributable to McKesson | $ | 97 |
| | $ | — |
| | $ | 9 |
| | $ | 46 |
| | $ | 152 |
| $ | 615 |
| | $ | (180 | ) | | $ | (30 | ) | | $ | 19 |
| | $ | 424 |
| Balance at March 31, 2016 | $ | (1,323 | ) | | $ | — |
| | $ | (12 | ) | | $ | (226 | ) | | $ | (1,561 | ) | | Balance at March 31, 2018 | | $ | (1,258 | ) | | $ | (188 | ) | | $ | (61 | ) | | $ | (210 | ) | | $ | (1,717 | ) | Other comprehensive income (loss) before reclassifications | (644 | ) | | (8 | ) | | (19 | ) | | (17 | ) | | (688 | ) | (431 | ) | | 241 |
| | 24 |
| | (41 | ) | | (207 | ) | Amounts reclassified to earnings and other | 20 |
| | — |
| | — |
| | 9 |
| | 29 |
| — |
| | — |
| | — |
| | 9 |
| | 9 |
| Other comprehensive income (loss) | $ | (624 | ) | | $ | (8 | ) | | $ | (19 | ) | | $ | (8 | ) | | $ | (659 | ) | $ | (431 | ) | | $ | 241 |
| | $ | 24 |
| | $ | (32 | ) | | $ | (198 | ) | Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | (74 | ) | | — |
| | — |
| | (5 | ) | | (79 | ) | (61 | ) | | — |
| | — |
| | (5 | ) | | (66 | ) | Other comprehensive income (loss) attributable to McKesson | $ | (550 | ) | | $ | (8 | ) | | $ | (19 | ) | | $ | (3 | ) | | $ | (580 | ) | $ | (370 | ) | | $ | 241 |
| | $ | 24 |
| | $ | (27 | ) | | $ | (132 | ) | Balance at March 31, 2017 | $ | (1,873 | ) | | $ | (8 | ) | | $ | (31 | ) | | $ | (229 | ) | | $ | (2,141 | ) | | Balance at March 31, 2019 | | $ | (1,628 | ) | | $ | 53 |
| | $ | (37 | ) | | $ | (237 | ) | | $ | (1,849 | ) |
| | 27.26. | Related Party Balances and Transactions |
CelesioDuring the fourth quarter of 2018, a public benefit California foundation (“Foundation”) was established to provide opioid education to patients, caregivers, and providers, address policy issues, and increase patient access to life-saving treatments. Certain officers of the Company also serve as directors and officers of the Foundation. In March 2018, we made a pledge to the Foundation and incurred a pre-tax charitable contribution expense of $100 million ($64 million after-tax) for 2018, which was recorded under the caption, “Selling, distribution and administrative expenses,” in the accompanying consolidated statement of operations. The Company had a pledge payable balance of $100 million to the Foundation as of March 31, 2018, which was included under the caption, “Other accrued liabilities,” in our consolidated balance sheet. The pledge was fully paid in 2019.
McKesson Europe has investments in pharmacies located across Europe that are accounted for under the equity-method. Celesioequity method. McKesson Europe maintains distribution arrangements with these pharmacies for the sale of related goods and services under which revenues of $112$137 million, $112$154 million, and $114$112 million are included in our consolidated statementstatements of operations for the years ended March 31, 2017, 20162019, 2018 and 20152017 and receivables of $12$13 million and $8$15 million are included in our consolidated balance sheetsheets as of March 31, 20172019 and 2016.2018. Refer to Financial Note 2,5, “Healthcare Technology Net Asset Exchange,” for the information regarding related party balances and transactions with Change Healthcare.
McKESSON CORPORATION FINANCIAL NOTES (Continued)
During the fourth quarter ofIn 2017, we completed a sale-leaseback transaction for our corporate headquarters building in San Francisco, California. The transaction resulted in net cash proceeds of $223 million and a pre-tax gain of $15 million, which represents the amount of total gain in excess of the present value of the minimum lease payments. Additionally, we initially deferred a pre-tax gain of $48 million; such gain will bewas being amortized on a straight-line basis over the lease term as a reduction to selling, distribution, and administrative expense in the accompanying consolidated statements of operations. Upon the adoption of the amended lease guidance in the first quarter of 2020, the existing deferred gain on this sale-leaseback transaction will be derecognized from the consolidated balance sheet and recognized to opening retained earnings. Refer to Financial Note 23,1, “Significant Accounting Policies,” for more information. Refer to Financial Note 22, “Lease Obligations,” for the future minimum lease payments associated with this sale-leaseback.
| | 29.28. | Segments of Business |
WeCommencing in the first quarter of 2019, a new segment reporting structure was implemented, and we report our operationsfinancial results in two operating segments: McKesson Distributionthree reportable segments on a retrospective basis: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and McKesson TechnologyMedical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other also on a retrospective basis. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes and results from discontinued operations.taxes. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.
Our DistributionU.S. Pharmaceutical and Specialty Solutions segment distributes branded and generic pharmaceutical drugs and other healthcare-related products internationallyand also provides pharmaceutical solutions to pharmaceutical manufacturers in the United States. Our European Pharmaceutical Solutions segment provides distribution and services to wholesale, institutional and retail customers and serves patients and consumers in 13 European countries through our own pharmacies and participating pharmacies that operate under brand partnership and franchise arrangements. Our Medical-Surgical Solutions segment distributes medical-surgical supplies and provides practice management, technology, clinical support and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers including offering multiple distribution channels and clinical trial access to our network of oncology physicians. It also provides medical-surgical supply distribution, logistics and other services to healthcare providers withinin the United States. Additionally, this segment Other primarily consists of the following: McKesson Canada which distributes pharmaceutical and medical products and operates Rexall Health retail pharmacy chains in Europe and Canada, and supports independent pharmacy networks within North America and Europe. It also supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies.pharmacies; On March 1, 2017, upon the closing of Healthcare Technology Net Asset Exchange, we contributed the majority of our McKesson Prescription Technology Solutions businesses to the newly formedwhich provides innovative technologies that support retail pharmacies; and
Our 70% equity ownership interest in a joint venture, Change Healthcare. We retained our RelayHealth Pharmacy and EIS businesses. Accordingly, beginning March 31, 2017, Technology Solutions segment provides clinical, financial and supply chain management solutions to healthcare organizations and includes ourHealthcare, which is accounted for by us using the equity investment method investment in Change Healthcare. Prior to March 1, 2017, this segment also delivered enterprise-wide clinical, patient care and strategic management technology solutions, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for additional information about Change Healthcare.of accounting. Corporate includes expenses associated with Corporate functions and projects, and the results of certain investments. Corporate expenses are allocated to operating segments to the extent that these items are directly attributable.
114
McKESSON CORPORATION FINANCIAL NOTES (Continued)
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals is as follows: | | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2017 | | 2016 | | 2015 | Revenues | | | | | | Distribution Solutions (1) | | | | | | North America pharmaceutical distribution and services | $ | 164,832 |
| | $ | 158,469 |
| | $ | 143,711 |
| International pharmaceutical distribution and services | 24,847 |
| | 23,497 |
| | 26,358 |
| Medical-Surgical distribution and services | 6,244 |
| | 6,033 |
| | 5,907 |
| Total Distribution Solutions | 195,923 |
| | 187,999 |
| | 175,976 |
| | | | | | | Technology Solutions - products and services | 2,610 |
| | 2,885 |
| | 3,069 |
| Total Revenues | $ | 198,533 |
| | $ | 190,884 |
| | $ | 179,045 |
| | | | | | | Operating profit | | | | | | Distribution Solutions (2) (5) | $ | 3,361 |
| | $ | 3,553 |
| | $ | 3,047 |
| Technology Solutions (3) (4) (5) | 4,215 |
| | $ | 519 |
| | $ | 438 |
| Total | 7,576 |
| | 4,072 |
| | 3,485 |
| Corporate Expenses, Net (5) | (377 | ) | | $ | (469 | ) | | $ | (454 | ) | Interest Expense | (308 | ) | | $ | (353 | ) | | $ | (374 | ) | Income From Continuing Operations Before Income Taxes | $ | 6,891 |
| | $ | 3,250 |
| | $ | 2,657 |
| | | | | | | Depreciation and amortization (6) | | | | | | Distribution Solutions | $ | 735 |
| | $ | 669 |
| | $ | 750 |
| Technology Solutions | 65 |
| | 107 |
| | 156 |
| Corporate | 110 |
| | 109 |
| | 111 |
| Total | $ | 910 |
| | $ | 885 |
| | $ | 1,017 |
| | | | | | | Expenditures for long-lived assets (7) | | | | | | Distribution Solutions | $ | 276 |
| | $ | 306 |
| | $ | 301 |
| Technology Solutions | 30 |
| | 15 |
| | 27 |
| Corporate | 98 |
| | 167 |
| | 48 |
| Total | $ | 404 |
| | $ | 488 |
| | $ | 376 |
| | | | | | | Revenues, net by geographic area (8) | | | | | | United States | $ | 164,428 |
| | $ | 158,255 |
| | $ | 142,810 |
| Foreign | 34,105 |
| | 32,629 |
| | 36,235 |
| Total | $ | 198,533 |
| | $ | 190,884 |
| | $ | 179,045 |
|
| | | | | | | | | | | | | | Years Ended March 31, | (In millions) | 2019 | | 2018 | | 2017 | Revenues | | | | | | U.S. Pharmaceutical and Specialty Solutions (1) | $ | 167,763 |
| | $ | 162,587 |
| | $ | 155,236 |
| European Pharmaceutical Solutions (1) | 27,242 |
| | 27,320 |
| | 24,847 |
| Medical-Surgical Solutions (1) | 7,618 |
| | 6,611 |
| | 6,244 |
| Other | 11,696 |
| | 11,839 |
| | 12,206 |
| Total Revenues | $ | 214,319 |
| | $ | 208,357 |
| | $ | 198,533 |
| | | | | | | Operating profit (2) | | | | | | U.S. Pharmaceutical and Specialty Solutions (3) | $ | 2,697 |
| | $ | 2,535 |
| | $ | 2,488 |
| European Pharmaceutical Solutions (4) | (1,978 | ) | | (1,681 | ) | | 173 |
| Medical-Surgical Solutions | 455 |
| | 461 |
| | 401 |
| Other (5) (6) (7) | 394 |
| | (107 | ) | | 4,514 |
| Total | 1,568 |
| | 1,208 |
| | 7,576 |
| Corporate Expenses, Net (8) | (694 | ) | | (564 | ) | | (377 | ) | Loss on Debt Extinguishment | — |
| | (122 | ) | | — |
| Interest Expense | (264 | ) | | (283 | ) | | (308 | ) | Income from Continuing Operations Before Income Taxes | $ | 610 |
| | $ | 239 |
| | $ | 6,891 |
| | | | | | | Depreciation and amortization (9) | | | | | | U.S. Pharmaceutical and Specialty Solutions | $ | 238 |
| | $ | 210 |
| | $ | 235 |
| European Pharmaceutical Solutions | 257 |
| | 296 |
| | 315 |
| Medical-Surgical Solutions | 118 |
| | 97 |
| | 101 |
| Other | 214 |
| | 237 |
| | 149 |
| Corporate | 122 |
| | 111 |
| | 110 |
| Total | $ | 949 |
| | $ | 951 |
| | $ | 910 |
| | | | | | | Expenditures for long-lived assets (10) | | | | | | U.S. Pharmaceutical and Specialty Solutions | $ | 88 |
| | $ | 126 |
| | $ | 109 |
| European Pharmaceutical Solutions | 85 |
| | 104 |
| | 125 |
| Medical-Surgical Solutions | 110 |
| | 34 |
| | 9 |
| Other | 68 |
| | 42 |
| | 63 |
| Corporate | 75 |
| | 99 |
| | 98 |
| Total | $ | 426 |
| | $ | 405 |
| | $ | 404 |
| | | | | | | Revenues, net by geographic area |
|
| |
|
| |
|
| United States | $ | 176,296 |
| | $ | 169,943 |
| | $ | 164,428 |
| Foreign | 38,023 |
| | 38,414 |
| | 34,105 |
| Total Revenues | $ | 214,319 |
| | $ | 208,357 |
| | $ | 198,533 |
|
| | (1) | Revenues derived from services represent less than 2%1% of thisour U.S. Pharmaceutical and Specialty Solutions segment’s total revenues, less than 10% of our European Pharmaceutical Solutions segment’s total revenues and less than 1% of our Medical-Surgical Solutions segment’s total revenues. |
| | (2) | DistributionSegment operating profit includes gross profit, net of operating expenses, as well as other income, net, for our operating segments. |
| | (3) | Our U.S. Pharmaceutical and Specialty Solutions segmentsegment’s operating profit for 20162019, 2018 and 2017 includes a pre-tax gaincredits of $52$210 million recognized from, $99 million and $7 million related to our LIFO method of accounting for inventories. LIFO credits were higher in 2019 and 2018 compared to the salecomparable prior year periods primarily due to higher net effect of our ZEE Medical business.price declines. Operating profit for 2019 and 2017 and 2016 includes $144$202 million and $76$144 million of net cash proceeds representing our share of net settlements of antitrust class action lawsuits. In addition, operating profit for 2018 includes a pre-tax gain of $43 million recognized from the sale of an equity investment. |
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | (4) | European Pharmaceutical Solutions segment’s operating profit for 2019 and 2018 include non-cash pre-tax goodwill impairment charges of $1,776 million and $1,283 million. This segment’s operating profit for 2019 and 2018 also includes non-cash pre-tax long-lived asset impairment charges of $210 million and $446 million. |
| | (3)(5) | Technology Solutions segmentOperating profit for Other for 2019 and 2018 includes non-cash pre-tax goodwill and long-lived asset impairment charges of $35 million and $488 million recognized for our Rexall Health retail business. 2019 operating profit for Other also includes a pre-tax gain from escrow settlement of $97 million representing certain indemnity and other claims related to our 2017 acquisition of Rexall Health. In addition, operating profit for 2019 include pre-tax restructuring and asset impairment charges of $91 million, primarily associated with the lease and other exit-related costs and a pre-tax gain of $56 million recognized from the sale of an equity investment. |
| | (6) | Operating profit for Other for 2019 includes a pre-tax credit of $90 million representing the derecognition of the TRA liability payable to the shareholders of Change. Operating profit for Other also includes our proportionate share of loss from Change Healthcare of $194 million and $248 million for 2019 and 2018. |
| | (7) | Operating profit for Other for 2018 includes a pre-tax gain of $109 million from the sale of our EIS business and a pre-tax credit of $46 million representing a reduction in our TRA liability. Additionally, operating profit for 2017 includes a pre-tax gain of $3,947 million recognized from the Healthcare Technology Net Asset Exchange, net of transaction and related expenses. |
| | (4) | Technology Solutions segment operating profit for 2017 includesexpenses, and a non-cash pre-tax charge of $290 million for goodwill impairment related to the EIS reporting unit. Operating profit for 2016 includes a pre-tax gain of $51 million recognized from the sale of our nurse triage business.
|
| | (5)(8) | In 2016, the Company implemented the Cost Alignment Plan to reduce its operatingCorporate expenses, and recordednet, for 2019 include pre-tax restructuring and asset impairment charges of $229$94 million in 2016. Pre-tax charges for 2016 were recorded as follows: $161 million, $51 millionprimarily associated with employee severance and $17 million within our Distribution Solutions segment, Technology Solutions segment and Corporate. other exit-related costs. |
| | (6)(9) | 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. |
| | (7)(10) | Long-lived assets consist of property, plant and equipment. |
Segment assets and property, plant and equipment, net by geographic areas were as follows: | | | | | | | | | | March 31, | (In millions) | 2019 | | 2018 | Segment assets | | | | U.S. Pharmaceutical and Specialty Solutions | $ | 32,310 |
| | $ | 31,431 |
| European Pharmaceutical Solutions | 7,829 |
| | 10,467 |
| Medical-Surgical Solutions | 5,260 |
| | 4,243 |
| Other | 11,006 |
| | 11,509 |
| Corporate | 3,267 |
| | 2,731 |
| Total | $ | 59,672 |
| | $ | 60,381 |
| | | | | Property, plant and equipment, net |
|
| |
|
| United States | $ | 1,698 |
| | $ | 1,529 |
| Foreign | 850 |
| | 935 |
| Total | $ | 2,548 |
| | $ | 2,464 |
|
McKESSON CORPORATION FINANCIAL NOTES (Continued)
| | (8) | Net revenues were attributed to geographic areas based on the customers’ shipment locations. |
Segment assets and property, plant and equipment, net by geographic areas were as follows:
| | | | | | | | | | March 31, | (In millions) | 2017 | | 2016 | Segment assets | | | | Distribution Solutions | $ | 52,322 |
| | $ | 47,088 |
| Technology Solutions | 4,995 |
| | 3,072 |
| Corporate | 3,652 |
| | 6,363 |
| Total | $ | 60,969 |
| | $ | 56,523 |
| | | | | Property, plant and equipment, net |
|
| |
|
| United States | $ | 1,383 |
| | $ | 1,500 |
| Foreign | 909 |
| | 778 |
| Total | $ | 2,292 |
| | $ | 2,278 |
|
Assets by operating segment are not reviewed by management for purpose of assessing performance or allocating resources.
| | 30.29. | Quarterly Financial Information (Unaudited) |
The quarterly results of operations are not necessarily indicative of the results that may be expected for the entire year. Selected quarterly financial information for the last two years is as follows: | | (In millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | Fiscal 2017 | | | | | | | | | Fiscal 2019 | | | | | | | | | Revenues | $ | 49,733 |
| | $ | 49,957 |
| | $ | 50,130 |
| | $ | 48,713 |
| $ | 52,607 |
| | $ | 53,075 |
| | $ | 56,208 |
| | $ | 52,429 |
| Gross profit (1) (2) | 2,907 |
| | 2,756 |
| | 2,812 |
| | 2,796 |
| 2,779 |
| | 2,804 |
| | 2,970 |
| | 3,201 |
| Income (loss) after income taxes: | | | | | | | | | Continuing operations (1) (2) (3) (4) | $ | 673 |
| | $ | 325 |
| | $ | 649 |
| | $ | 3,630 |
| | Income (Loss) after income taxes: | | | | | | | | | Continuing operations (1) (2) (3) (4) (5) (6) (7) | | $ | (81 | ) | | $ | 552 |
| | $ | 527 |
| | $ | (744 | ) | Discontinued operations | (113 | ) | | (1 | ) | | (3 | ) | | (7 | ) | 1 |
| | 1 |
| | (1 | ) | | — |
| Net income | $ | 560 |
| | $ | 324 |
| | $ | 646 |
| | $ | 3,623 |
| | Net income attributable to McKesson | $ | 542 |
| | $ | 307 |
| | $ | 633 |
| | $ | 3,588 |
| | Net income (loss) | | $ | (80 | ) | | $ | 553 |
| | $ | 526 |
| | $ | (744 | ) | Net income (loss) attributable to McKesson | | $ | (138 | ) | | $ | 499 |
| | $ | 469 |
| | $ | (796 | ) | Earnings (loss) per common share attributable to McKesson (5)(8) | | | | | | | | | | | | | | | Diluted(9) | | | | | | | | | | | | | | | Continuing operations | $ | 2.88 |
| | $ | 1.35 |
| | $ | 2.86 |
| | $ | 16.79 |
| $ | (0.69 | ) | | $ | 2.51 |
| | $ | 2.41 |
| | $ | (4.17 | ) | Discontinued operations | (0.50 | ) | | (0.01 | ) | | (0.01 | ) | | (0.03 | ) | 0.01 |
| | — |
| | (0.01 | ) | | — |
| Total | $ | 2.38 |
| | $ | 1.34 |
| | $ | 2.85 |
| | $ | 16.76 |
| $ | (0.68 | ) | | $ | 2.51 |
| | $ | 2.40 |
| | $ | (4.17 | ) | Basic | | | | | | | | | | | | | | | Continuing operations | $ | 2.91 |
| | $ | 1.36 |
| | $ | 2.89 |
| | $ | 16.95 |
| $ | (0.69 | ) | | $ | 2.52 |
| | $ | 2.42 |
| | $ | (4.17 | ) | Discontinued operations | (0.50 | ) | | — |
| | (0.02 | ) | | (0.03 | ) | 0.01 |
| | — |
| | (0.01 | ) | | — |
| Total | $ | 2.41 |
| | $ | 1.36 |
| | $ | 2.87 |
| | $ | 16.92 |
| $ | (0.68 | ) | | $ | 2.52 |
| | $ | 2.41 |
| | $ | (4.17 | ) |
| | (1) | Gross profit for the first, second, third and fourth quarters of 20172019 includes pre-tax charge of $47 million, pre-tax credits of $43$21 million, $22 million, $21 million and $155 million and pre-tax charge of $144$146 million related to our last-in-first-out (“LIFO”)LIFO method of accounting for inventories. |
| | (2) | Gross profit for the first, third and thirdfourth quarters of 20172019 includes $142$35 million, $104 million, and $2$63 million of cash proceeds representing our share of net settlements of antitrust class action lawsuits. |
| | (3) | Financial results for the first and fourth quarter of 20172019 include anon-cash pre-tax gaingoodwill impairment charges of $3,947$570 million ($3,018and $1,206 million after-tax) recognized fromwithin our two reporting units within the Healthcare Technology Net Asset Exchange, net of transaction and related expenses.European Pharmaceutical Solutions segment. |
| | (4) | Financial results for the secondfirst and fourth quarters of 2019 include non-cash pre-tax asset impairment charges of $20 million and $190 million primarily for our U.K. retail business. Financial results for the third quarter of 20172019 include a non-cash pre-tax chargeasset impairment charges of $290$35 million for goodwill impairment related to the EIS reporting unit within our Technology Solutions segment.Rexall Health retail business. |
| | (5) | Financial results for the first, second, third and fourth quarters of 2019 include our proportionate share of loss from Change Healthcare of $56 million, $56 million, $50 million and $32 million. |
| | (6) | Financial results for the first quarter of 2019 include a pre-tax gain from escrow settlement of $97 million representing certain indemnity and other claims related to our 2017 acquisition of Rexall Health. |
| | (7) | Financial results for the second quarter of 2019 include a pre-tax credit of $90 million representing the derecognition of the TRA liability payable to the shareholders of Change. |
| | (8) | Certain computations may reflect rounding adjustments. |
| | (9) | As a result of our reported net loss for the first and fourth quarters of 2019, potentially dilutive securities were excluded from the per share computations for those quarters due to their antidilutive effect. |
McKESSON CORPORATION FINANCIAL NOTES (Concluded)
| | (In millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | Fiscal 2016 | | | | | | | | | Fiscal 2018 | | | | | | | | | Revenues | $ | 47,546 |
| | $ | 48,761 |
| | $ | 47,899 |
| | $ | 46,678 |
| $ | 51,051 |
| | $ | 52,061 |
| | $ | 53,617 |
| | $ | 51,628 |
| Gross profit (1) (2) (3) | 2,848 |
| | 2,844 |
| | 2,872 |
| | 2,852 |
| | Gross profit (1) | | 2,560 |
| | 2,834 |
| | 2,715 |
| | 3,075 |
| Income (loss) after income taxes: | | | | | | | | | | | | | | | Continuing operations (1) (2) (3) (4) | $ | 599 |
| | $ | 636 |
| | $ | 642 |
| | $ | 465 |
| | Continuing operations (1) (2) (3) (4) (5) | | $ | 363 |
| | $ | 56 |
| | $ | 960 |
| | $ | (1,087 | ) | Discontinued operations | (10 | ) | | (6 | ) | | 5 |
| | (21 | ) | 2 |
| | — |
| | 1 |
| | 2 |
| Net income | $ | 589 |
| | $ | 630 |
| | $ | 647 |
| | $ | 444 |
| | Net income attributable to McKesson | $ | 576 |
| | $ | 617 |
| | $ | 634 |
| | $ | 431 |
| | Net income (loss) | | $ | 365 |
| | $ | 56 |
| | $ | 961 |
| | $ | (1,085 | ) | Net income (loss) attributable to McKesson | | $ | 309 |
| | $ | 1 |
| | $ | 903 |
| | $ | (1,146 | ) | Earnings (loss) per common share attributable to McKesson (5)(6) | | | | | | | | | | | | | | | Diluted(7) | | | | | | | | | | | | | | | Continuing operations | $ | 2.50 |
| | $ | 2.65 |
| | $ | 2.71 |
| | $ | 1.97 |
| $ | 1.44 |
| | $ | 0.01 |
| | $ | 4.32 |
| | $ | (5.58 | ) | Discontinued operations | (0.05 | ) | | (0.02 | ) | | 0.02 |
| | (0.09 | ) | 0.01 |
| | — |
| | 0.01 |
| | — |
| Total | $ | 2.45 |
| | $ | 2.63 |
| | $ | 2.73 |
| | $ | 1.88 |
| $ | 1.45 |
| | $ | 0.01 |
| | $ | 4.33 |
| | $ | (5.58 | ) | Basic | | | | | | | | | | | | | | | Continuing operations | $ | 2.53 |
| | $ | 2.68 |
| | $ | 2.74 |
| | $ | 1.99 |
| $ | 1.46 |
| | $ | 0.01 |
| | $ | 4.34 |
| | $ | (5.58 | ) | Discontinued operations | (0.04 | ) | | (0.02 | ) | | 0.02 |
| | (0.09 | ) | — |
| | — |
| | 0.01 |
| | — |
| Total | $ | 2.49 |
| | $ | 2.66 |
| | $ | 2.76 |
| | $ | 1.90 |
| $ | 1.46 |
| | $ | 0.01 |
| | $ | 4.35 |
| | $ | (5.58 | ) |
| | (1) | Gross profit for the first, second, third and fourth quarters of 20162018 includes pre-tax chargescharge of $26 million, pre-tax credits of $29 million, $2 million and $94 million related to our last-in-first-out (“LIFO”)LIFO method of accounting for inventories of $91 million, $91 million, $33 million and $29 million.inventories. |
| | (2) | Gross profitFinancial results for the firstsecond and third quartersfourth quarter of 2016 includes $592018 include non-cash pre-tax goodwill impairment charges of $350 million and $17$933 million for our former McKesson Europe reporting unit in European Pharmaceutical Solutions segment. In addition, financial results for the fourth quarter of cash proceeds representing2018 include a non-cash pre-tax goodwill impairment charge of $455 million for our share of net settlements of antitrust class action lawsuits.Rexall Health reporting unit in Other. |
| | (3) | In the fourth quarter of 2016, the Company approved a restructuring plan to reduce its operating expenses. Financial results for the second and fourth quarter of 20162018 include non-cash pre-tax restructuringasset impairment charges of $229$189 million withinand $257 million for our continuing operations. Charges were recorded as follows: $26 million in cost of sales and $203 million in operating expenses.McKesson Europe business. |
| | (4) | Financial results for the firstthird quarter of 20162018 include an after-taxa pre-tax gain of $38$109 millionfrom 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 MedicalEIS business. |
| | (5) | Financial results for the first, second, third and fourth quarters of 2018 include our proportionate share of loss from Change Healthcare of $120 million, $61 million, $90 million and income of $23 million. |
| | (6) | Certain computations may reflect rounding adjustments. |
| | (7) | As a result of our reported net loss for the fourth quarter of 2018, potentially dilutive securities were excluded from the 2018 fourth quarter per share computations due to their antidilutive effect. |
| | Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None. | | Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report and have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Internal Control over Financial Reporting Management’s report on 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 on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference. Changes in Internal Controls There werewas no changeschange in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our fourth quarter of 20172019 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting. | | Item 9B. | Other Information. |
None.
PART III | | Item 10. | Directors, Executive Officers and Corporate Governance. |
Information about our Directors is incorporated by reference from the discussion under Item 1 of our Proxy Statement for the 20172019 Annual Meeting of Stockholders (the “Proxy Statement”) under the heading “Election of Directors.” Information about compliance with Section 16(a) of the Exchange Actour Executive Officers is incorporated by reference from the discussion in Part I of this report under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in“Information about our Proxy Statement.Executive Officers.” Information about our Audit Committee, including the members of the committee and our Audit Committee Financial Expert, is incorporated by reference from the discussion under the headings “Audit Committee,” “Audit Committee Financial Expert” 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 for the Audit, Compensation and Governance Committees can also be found on our website under the same caption. The Company intends to post on its website required information regarding any amendment to, or waiver from, the Code of Conduct that applies to our Chief Executive Officer, Chief Financial Officer, Controller and persons performing similar functions within four business days after any such amendment or waiver. | | Item 11. | Executive Compensation. |
Information with respect to this item is incorporated by reference from the discussion under the heading “Executive Compensation” in our Proxy Statement. | | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Principal Shareholders” in our Proxy Statement. The following table sets forth information as of March 31, 20172019 with respect to the plans under which the Company’s common stock is authorized for issuance: | | Plan Category (In millions, except per share amounts) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights (1) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights (1) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | Equity compensation plans approved by security holders | 5.4 (2) | | $ | 145.76 |
| | 31.5 (3) |
| 4.3 (2) | | $ | 166.72 |
| | 28.3 (3) |
| Equity compensation plans not approved by security holders | — | | $ | — |
| | — |
| — | | $ | — |
| | — |
|
| | (1) | The weighted-average exercise price set forth in this column is calculated excluding outstanding restricted stock unit (“RSU”) awards, since recipients are not required to pay an exercise price to receive the shares subject to these awards. |
| | (2) | Represents option and RSU awards outstanding under the following plans: (i) 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan; (ii) the 2005 Stock Plan; and (iii) the 2013 Stock Plan. |
| | (3) | Represents 3,841,8663,053,377 shares available for purchase under the 2000 Employee Stock Purchase Plan and 27,681,79425,205,160 shares available for grant under the 2013 Stock Plan. |
The following are descriptions of equity plans that have been approved by the Company’s stockholders. The plans are administered by the Compensation Committee of the Board of Directors, except for the portion of the 2013 Stock Plan and 2005 Stock Plan related to non-employee directors, which is administered by the Board of Directors or its Governance Committee.
2013 Stock Plan: The 2013 Stock Plan was adopted by the Board of Directors on May 22, 2013 and approved by the Company’s stockholders on July 31, 2013. The 2013 Stock Plan permits the grant of awards in the form of stock options, stock appreciation rights, restricted stock (“RS”), restricted stock units (“RSUs”), performance-based restricted stock units (“PeRSUs”), performance shares and other share-based awards. The number of shares reserved for issuance under the 2013 Stock Plan equals the sum of (i) 30,000,000 shares, (ii) the number of shares reserved but unissued under the 2005 Stock Plan as of the effective date of the 2013 Stock Plan, and (iii) the number of shares that become available for reuse under the 2005 Stock Plan following the effective date of the 2013 Stock Plan. For any one share of common stock issued in connection with an RS, RSU, performance share or other full share award, three and one-half shares shall be deducted from the shares available for future grants. Shares of common stock not issued or delivered as a result of the net exercise of a stock option, including in respect of the payment of applicable taxes, or shares repurchased on the open market with proceeds from the exercise of options shall not be returned to the reserve of shares available for issuance under the 2013 Stock Plan. Shares withheld to satisfy tax obligations relating to the vesting of a full-share award shall be returned to the reserve of shares available for issuance under the 2013 Stock Plan. Stock options are granted at no less than fair market value and those options granted under the 2013 Stock Plan generally have a contractual term of seven years. Options generally become exercisable in four equal annual installments beginning one year after the grant date. The vesting of RS or RSUs is determined by the Compensation Committee at the time of grant. RS and RSUs generally vest over four years. PeRSUs vest three years following the end of the performance period. Beginning in May 2014, the Company’s executive officers are annually granted performance awards currently called Total Shareholder Return Unitsperformance-based stock units (“TSRUs”PSUs”), which have a three-year performance period and are payable in shares without an additional vesting period. Non-employee directors may be granted an award on the date of each annual meeting of the stockholders for up to 5,000 RSUs, as determined by the Board. Such non-employee director award is fully vested on the date of the grant. 2005 Stock Plan: The 2005 Stock Plan was adopted by the Board of Directors on May 25, 2005 and approved by the Company’s stockholders on July 27, 2005. The 2005 Stock Plan permits the granting of up to 42.5 million shares in the form of stock options, RS, RSUs, PeRSUs, performance shares and other share-based awards. For any one share of common stock issued in connection with an RS, RSU, performance share or other full-share award, two shares shall be deducted from the shares available for future grants. Shares of common stock not issued or delivered as a result of the net exercise of a stock option, shares withheld to satisfy tax obligations relating to the vesting of a full-share award or shares repurchased on the open market with proceeds from the exercise of options shall not be returned to the reserve of shares available for issuance under the 2005 Stock Plan. Following the effectiveness of the 2013 Stock Plan, no further shares were made subject to award under the 2005 Stock Plan. Shares reserved but unissued under the 2005 Stock Plan as of the effective date of the 2013 Stock Plan, and shares that become available for reuse under the 2005 Stock Plan following the effectiveness of the 2013 Stock Plan, will be available for awards under the 2013 Stock Plan. Stock options are granted at no less than fair market value and those options granted under the 2005 Stock Plan generally have a contractual term of seven years. Options generally become exercisable in four equal annual installments beginning one year after the grant date. The vesting of RS or RSUs is determined by the Compensation Committee at the time of grant. RS and RSUs generally vest over four years. PeRSUs vest three years following the end of the performance period. Non-employee directors may be granted an award on the date of each annual meeting of the stockholders for up to 5,000 RSUs, as determined by the Board. Such non-employee director award is fully vested on the date of the grant.
1997 Non-Employee Directors’ Equity Compensation and Deferral Plan: The 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan was approved by the Company’s stockholders on July 30, 1997; however, stockholder approval of the 2005 Stock Plan on July 27, 2005 had the effect of terminating the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan such that no new awards would be granted under the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan. 2000 Employee Stock Purchase Plan (the “ESPP”): The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. In March 2002, the Board amended the ESPP to allow for participation in the plan by employees of certain of the Company’s international and other subsidiaries. As to those employees, the ESPP does not qualify under Section 423 of the Internal Revenue Code. Currently, 21.1 million shares have been approved by stockholders for issuance under the ESPP.
The ESPP is implemented through a continuous series of three-month purchase periods (“Purchase Periods”) during which contributions can be made toward the purchase of common stock under the plan. Each eligible employee may elect to authorize regular payroll deductions during the next succeeding Purchase Period, the amount of which may not exceed 15% of a participant’s compensation. At the end of each Purchase Period, the funds withheld by each participant will be used to purchase shares of the Company’s common stock. The purchase price of each share of the Company’s common stock is 85% of the fair market value of each share on the last day of the applicable Purchase Period. In general, the maximum number of shares of common stock that may be purchased by a participant for each calendar year is determined by dividing $25,000 by the fair market value of one share of common stock on the offering date. There currently are no equity awards outstanding that were granted under equity plans that were not submitted for approval by the Company’s stockholders. | | Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information with respect to certain transactions with directors and management is incorporated by reference from the Proxy Statement under the heading “Certain Relationships and Related Transactions.” Information regarding Director independence is incorporated by reference from the Proxy Statement under the heading “Director Independence.” Additional information regarding certain related party balances and transactions is included in the Financial Review section of this Annual Report on Form 10-Kreport and Financial Note 27,26, “Related Party Balances and Transactions,” to the consolidated financial statements appearing in this Annual Report on Form 10‑K.report. | | Item 14. | Principal Accounting Fees and Services. |
Information regarding principal accountingaccountant fees and services is set forth under the heading “Ratification of Appointment of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for Fiscal 20182020” in our Proxy Statement and all such information is incorporated herein by reference.
PART IV | | Item 15. | Exhibits and Financial Statement Schedule. |
| | | | Page | (a)(1) Consolidated Financial Statements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (a)(2) Financial Statement Schedule | | | | | | | | All other schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. | | | | | | | |
| | Item 16. | Form 10-K Summary |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | MCKESSON CORPORATION
| | | | | Date: May 22, 2017 | | /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 behalf of the Registrant and in the capacities and on the date indicated:
| | | | * | | * | John H. Hammergren
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
| | M. Christine Jacobs, Director
| | | | * | | * | James A. Beer
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
| | Donald R. Knauss, Director
| | | | * | | * | Erin M. Lampert
Senior Vice President and Controller
(Principal Accounting Officer)
| | Marie L. Knowles, Director
| | | | * | | * | Andy D. Bryant, Director
| | Edward A. Mueller, Director
| | | | * | | * | Wayne A. Budd, Director
| | Susan R. Salka, Director
| | | | * | | /s/ Lori A. Schechter
| N. Anthony Coles, M.D., Director | | Lori A. Schechter
*Attorney-in-Fact
| | | | | | | Date: May 22, 2017 | | |
SCHEDULE II SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 20172019, 20162018 and 20152017 (In millions)
| | | | | Additions | | | | | | | Additions | | | | | Description | Balance at Beginning of Year | | Charged to Costs and Expenses | | Charged to Other Accounts (3) | | Deductions From Allowance Accounts (1) | | Balance at End of Year (2) | Balance at Beginning of Year | | Charged to Costs and Expenses | | Charged to Other Accounts (3) | | Deductions From Allowance Accounts (1) | | Balance at End of Year (2) | Year Ended March 31, 2019 | | | | | | | | | | | Allowances for doubtful accounts | | $ | 187 |
| | $ | 132 |
| | $ | (1 | ) | | $ | (45 | ) | | $ | 273 |
| Other allowances | | 39 |
| | — |
| | (15 | ) | | — |
| | 24 |
| | | $ | 226 |
| | $ | 132 |
| | $ | (16 | ) | | $ | (45 | ) | | $ | 297 |
| | | | | | | | | | | | Year Ended March 31, 2018 | | | | | | | | | | | Allowances for doubtful accounts | | $ | 243 |
| | $ | 44 |
| | $ | 13 |
| | $ | (113 | ) | | $ | 187 |
| Other allowances | | 42 |
| | — |
| | (3 | ) | | — |
| | 39 |
| | | $ | 285 |
| | $ | 44 |
| | $ | 10 |
| | $ | (113 | ) | | $ | 226 |
| | | | | | | | | | | | Year Ended March 31, 2017 | | | | | | | | | | | | | | | | | | | Allowances for doubtful accounts | $ | 212 |
| | $ | 93 |
| | $ | 7 |
| | $ | (69 | ) | | $ | 243 |
| $ | 212 |
| | $ | 93 |
| | $ | 7 |
| | $ | (69 | ) | | $ | 243 |
| Other allowances | 41 |
| | — |
| | 2 |
| | (1 | ) | | 42 |
| 41 |
| | — |
| | 2 |
| | (1 | ) | | 42 |
| | $ | 253 |
| | $ | 93 |
| | $ | 9 |
| | $ | (70 | ) | | $ | 285 |
| $ | 253 |
| | $ | 93 |
| | $ | 9 |
| | $ | (70 | ) | | $ | 285 |
| | | | | | | | | | | | | | | | | | | | Year Ended March 31, 2016 | | | | | | | | | | | Allowances for doubtful accounts | $ | 141 |
| | $ | 113 |
| | $ | 2 |
| | $ | (44 | ) | | $ | 212 |
| | Other allowances | 33 |
| | — |
| | (3 | ) | | 11 |
| | 41 |
| | | $ | 174 |
| | $ | 113 |
| | $ | (1 | ) | | $ | (33 | ) | | $ | 253 |
| | | | | | | | | | | | | Year Ended March 31, 2015 | | | | | | | | | | | Allowances for doubtful accounts | $ | 112 |
| | $ | 67 |
| | $ | — |
| | $ | (38 | ) | | $ | 141 |
| | Other allowances | 22 |
| | 8 |
| | — |
| | 3 |
| | 33 |
| | | $ | 134 |
| | $ | 75 |
| | $ | — |
| | $ | (35 | ) | | $ | 174 |
| | | | | | | | | | | | |
| | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | (1) | Deductions: | | | | | | | Deductions: | | | | | | | | Written off | | $ | (70 | ) | | $ | (33 | ) | | $ | (34 | ) | Written off | | $ | (45 | ) | | $ | (113 | ) | | $ | (70 | ) | | Credited to other accounts | | — |
| | — |
| | (1 | ) | Credited to other accounts | | — |
| | — |
| | — |
| | Total | | $ | (70 | ) | | $ | (33 | ) | | $ | (35 | ) | Total | | $ | (45 | ) | | $ | (113 | ) | | $ | (70 | ) | | | | | | | | | | | | | | (2) | Amounts shown as deductions from current and non-current receivables | | $ | 285 |
| | $ | 253 |
| | $ | 174 |
| Amounts shown as deductions from current and non-current receivables | | $ | 297 |
| | $ | 226 |
| | $ | 285 |
| | | | | | | | | | | | | | (3) | Primarily represents reclassifications from other balance sheet accounts. | | | | | | | Primarily represents reclassifications from other balance sheet accounts. | | | | | | |
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 representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other parties to the applicable agreement, and; should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Exhibits identified under “Incorporated by Reference” in the table below are on file with the Commission and are incorporated by reference as exhibits hereto. | | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 2.1 | Agreement of Contribution and Sale, dated as of June 28, 2016, by and among McKesson Corporation, PF2 NewCo LLC, PF2 NewCo Intermediate Holdings, LLC, PF2 NewCo Holdings, LLC, HCIT Holdings, Inc., Change Healthcare, Inc., Change Aggregator L.P. and H&F Echo Holdings, L.P. | 8-K | 1-13252 | 2.1 | July 5, 2016 | 2.2 | Amendment No. 1 to Agreement Contribution and Sale, dated as of March 1, 2017, by and among by and among Change Healthcare LLC, Change Healthcare Intermediate Holdings, LLC, Change Healthcare Holdings, LLC, HCIT Holdings, Inc., Change Healthcare, Inc., a Delaware corporation, for itself and in its capacity as Echo Representative, certain affiliates of The Blackstone Group, L.P., certain affiliates of Hellman & Friedman LLC, and McKesson Corporation, a Delaware corporation. | 8-K | 1-13252 | 2.1 | March 7, 2017 | 3.1 | Amended and Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on July 27, 2011. | 8-K | 1-13252 | 3.1 | August 2, 2011 | 3.2 | Amended and Restated By-Laws of the Company, as amended July 29, 2015. | 8-K | 1-13252 | 3.1 | July 31, 2015 | 4.1 | Indenture, dated as of March 11, 1997, by and between the Company, as issuer, and The First National Bank of Chicago, as trustee. | 10-K | 1-13252 | 4.4 | June 19, 1997 | 4.2 | Officers’ Certificate, dated as of March 11, 1997, and related Form of 2027 Note. | S-4 | 333-30899 | 4.2 | July 8, 1997 | 4.3 | Indenture, dated as of March 5, 2007, by and between the Company, as issuer, and The Bank of New York Trust Company, N.A., as trustee. | 8-K | 1-13252 | 4.1 | March 5, 2007 | 4.4 | Officers’ Certificate, dated as of March 5, 2007, and related Form of 2017 Note. | 8-K | 1-13252 | 4.2 | March 5, 2007 | 4.5 | Officers’ Certificate, dated as of February 12, 2009, and related Form of 2014 Note and Form of 2019 Note. | 8-K | 1-13252 | 4.2 | February 12, 2009 |
| | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 2.1 | Agreement of Contribution and Sale, dated as of June 28, 2016, by and among McKesson Corporation, PF2 NewCo LLC, PF2 NewCo Intermediate Holdings, LLC, PF2 NewCo Holdings, LLC, HCIT Holdings, Inc., Change Healthcare, Inc., Change Aggregator L.P. and H&F Echo Holdings, L.P. | 8-K | 1-13252 | 2.1 | July 5, 2016 | 2.2 | Amendment No. 1 to Agreement Contribution and Sale, dated as of March 1, 2017, by and among by and among Change Healthcare LLC, Change Healthcare Intermediate Holdings, LLC, Change Healthcare Holdings, LLC, HCIT Holdings, Inc., Change Healthcare, Inc., a Delaware corporation, for itself and in its capacity as Echo Representative, certain affiliates of The Blackstone Group, L.P., certain affiliates of Hellman & Friedman LLC, and McKesson Corporation, a Delaware corporation. | 8-K | 1-13252 | 2.1 | March 7, 2017 | 3.1 | | 8-K | 1-13252 | 3.1 | August 2, 2011 | 3.2 | | 8-K | 1-13252 | 3.1 | February 5, 2019 | 4.1 | | 10-K | 1-13252 | 4.4 | June 19, 1997 | 4.2 | | S-4 | 333-30899 | 4.2 | July 8, 1997 | 4.3 | | 8-K | 1-13252 | 4.1 | March 5, 2007 | 4.4 | | 8-K | 1-13252 | 4.2 | March 5, 2007 | 4.5 | | 8-K | 1-13252 | 4.2 | February 12, 2009 |
| | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 4.6 | First Supplemental Indenture, dated as of February 28, 2011, to the Indenture, dated as of March 5, 2007, among the Company, as issuer, the Bank of New York Mellon Trust Company, N.A. (formerly known as The Bank of New York Trust Company, N.A.), and Wells Fargo Bank, National Association, as trustee, and related Form of 2016 Note, Form of 2021 Note and Form of 2041 Note. | 8-K | 1-13252 | 4.2 | February 28, 2011 | 4.7 | Indenture, dated as of December 4, 2012, by and between the Company, as issuer, and Wells Fargo Bank, National Association, as trustee. | 8-K | 1-13252 | 4.1 | December 4, 2012 | 4.8 | Officers’ Certificate, dated as of December 4, 2012, and related Form of 2015 Note and Form of 2022 Note. | 8-K | 1-13252 | 4.2 | December 4, 2012 | 4.9 | Officers’ Certificate, dated as of March 8, 2013, and related Form of 2018 Note and Form of 2023 Note. | 8-K | 1-13252 | 4.2 | March 8, 2013 | 4.10 | Officers’ Certificate, dated as of March 10, 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. | 8-K | 1-13252 | 4.2 | March 10, 2014 | 4.11 | Officer’s Certificate, dated as of February 17, 2017, with respect to the Notes, and related Form of 2021 Euro Note, Form of 2025 Euro Note, and Form of 2029 Sterling Note. | 8-K | 1-13252 | 4.1 | February 17, 2017 | 10.1* | McKesson Corporation 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, as amended through January 29, 2003. | 10-K | 1-13252 | 10.4 | June 10, 2004 | 10.2* | McKesson Corporation Supplemental Profit Sharing Investment Plan, as amended and restated on January 29, 2003. | 10-K | 1-13252 | 10.6 | June 6, 2003 | 10.3* | McKesson Corporation Supplemental Profit Sharing Investment Plan II, as amended and restated on July 29, 2014. | 10-Q | 1-13252 | 10.1 | October 28, 2014 | 10.4* | McKesson Corporation Deferred Compensation Administration Plan, as amended and restated as of October 28, 2004. | 10-K | 1-13252 | 10.6 | May 13, 2005 | 10.5* | McKesson Corporation Deferred Compensation Administration Plan II, as amended and restated as of October 28, 2004, and Amendment No. 1 thereto effective July 25, 2007. | 10-K | 1-13252 | 10.7 | May 7, 2008 | 10.6* | McKesson Corporation Deferred Compensation Administration Plan III, as amended and restated July 29, 2014. | 10-Q | 1-13252 | 10.2 | October 28, 2014 | 10.7* | McKesson Corporation Executive Benefit Retirement Plan, as amended and restated on October 24, 2008. | 10-Q | 1-13252 | 10.3 | October 29, 2008 | 10.8* | McKesson Corporation Executive Survivor Benefits Plan, as amended and restated as of January 20, 2010. | 8-K | 1-13252 | 10.1 | January 25, 2010 | 10.9* | McKesson Corporation Severance Policy for Executive Employees, as amended and restated as of April 23, 2013. | 10-K | 1-13252 | 10.11 | May 7, 2013 | 10.10* | McKesson Corporation Change in Control Policy for Selected Executive Employees, as amended and restated on October 26, 2010. | 10-Q | 1-13252 | 10.2 | February 1, 2011 | 10.11* | McKesson Corporation Management Incentive Plan, effective July 29, 2015. | 8-K | 1-13252 | 10.1 | July 31, 2015 | 10.12* | Form of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation Management Incentive Plan, effective May 26, 2015. | 10-Q | 1-13252 | 10.1 | July 29, 2015 | 10.13* | McKesson Corporation Long-Term Incentive Plan, as amended and restated, effective May 26, 2015. | 10-Q | 1-13252 | 10.2 | July 29, 2015 | 10.14* | Forms of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation Long-Term Incentive Plan, effective May 24, 2016. | 10-K | 1-13252 | 10.14 | May 5, 2016 |
| | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 4.6 | First Supplemental Indenture, dated as of February 28, 2011, to the Indenture, dated as of March 5, 2007, among the Company, as issuer, the Bank of New York Mellon Trust Company, N.A. (formerly known as The Bank of New York Trust Company, N.A.), and Wells Fargo Bank, National Association, as trustee, and related Form of 2016 Note, Form of 2021 Note and Form of 2041 Note. | 8-K | 1-13252 | 4.2 | February 28, 2011 | 4.7 | | 8-K | 1-13252 | 4.1 | December 4, 2012 | 4.8 | | 8-K | 1-13252 | 4.2 | December 4, 2012 | 4.9 | | 8-K | 1-13252 | 4.2 | March 8, 2013 | 4.10 | | 8-K | 1-13252 | 4.2 | March 10, 2014 | 4.11 | | 8-K | 1-13252 | 4.1 | February 17, 2017 | 4.12 | | 8-K | 1-13252 | 4.1 | February 13, 2018 | 4.13 | | 8-K | 1-13252 | 4.1 | February 21, 2018 | 4.14 | | 8-K | 1-13252 | 4.1 | November 30, 2018 | 4.15† | | — | — | — | — | 10.1* | | 10-K | 1-13252 | 10.4 | June 10, 2004 | 10.2* | | 10-K | 1-13252 | 10.6 | June 6, 2003 | 10.3* | | 10-Q | 1-13252 | 10.1 | October 28, 2014 | 10.4* | | 10-K | 1-13252 | 10.7 | May 7, 2008 | 10.5* | | 10-Q | 1-13252 | 10.2 | October 28, 2014 | 10.6* | | 8-K | 1-13252 | 10.1 | January 25, 2010 | 10.7* | | 10-K | 1-13252 | 10.11 | May 7, 2013 | 10.8* | | 10-Q | 1-13252 | 10.2 | February 1, 2011 | 10.9* | | 8-K | 1-13252 | 10.1 | July 31, 2015 | 10.10* | | 10-Q | 1-13252 | 10.1 | July 29, 2015 |
| | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 10.15* | McKesson Corporation 2005 Stock Plan, as amended and restated on July 28, 2010. | 10-Q | 1-13252 | 10.4 | July 30, 2010 | 10.16* | Forms of (i) Statement of Terms and Conditions, (ii) Stock Option Grant Notice and (iii), Restricted Stock Unit Agreement, each as applicable to Awards under the McKesson Corporation 2005 Stock Plan. | 10-Q | 1-13252 | 10.2 | July 26, 2012 | 10.17* | McKesson Corporation 2013 Stock Plan, as adopted on May 22, 2013. | 8-K | 1-13252 | 10.1 | August 2, 2013 | 10.18* | Forms of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation 2013 Stock Plan. | 10-K | 1-13252 | 10.18 | May 5, 2016 | 10.19 | Third Amended and Restated Limited Liability Company Agreement of Change Healthcare LLC, dated as of March 1, 2017. | 8-K | 1-13252 | 10.1 | March 7, 2017 | 10.20 | Form of Commercial Paper Dealer Agreement between McKesson Corporation, as Issuer, and the Dealer | 10-K | 1-13252 | 10.19 | May 5, 2016 | 10.21 | 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. (acting through its Canada Branch), Citibank, N.A. and Barclays Bank PLC, as Swing Line Lenders, Wells Fargo Bank, National Association as L/C Issuer, Barclays Bank PLC, Citibank N.A., Wells Fargo Bank, National Association as Co-Syndication Agents, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd. as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Citigroup Global Markets Inc., Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, The Bank of TokyoMitsubishi UFJ, Ltd. and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Book Runners.
| 8-K | 1-13252 | 10.1 | October 23, 2015 | 10.22 | Amendment No. 2, dated January 30, 2014, and Amendment No. 1, dated November 15, 2013, to the Credit Agreement and the Credit Agreement dated as of September 23, 2011, among the Company and McKesson Canada Corporation, collectively, the Borrowers, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as Co-Syndication Agents, Wells Fargo Bank, National Association as L/C Issuer, The Bank of Tokyo-Mitsubishi UFJ, LTD., The Bank of Nova Scotia and U.S. Bank National Association as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Sole Lead Arranger and Sole Book Manager. | 8-K | 1-3252 | 10.1 | February 5, 2014 | 10.23* | Amended and Restated Employment Agreement, effective as of November 1, 2008, by and between the Company and its Chairman, President and Chief Executive Officer. | 10-Q | 1-13252 | 10.10 | October 29, 2008 | 10.24* | Letter dated March 27, 2012 relinquishing certain rights provided in the Amended and Restated Employment Agreement by and between the Company and its Chairman, President and Chief Executive Officer. | 8-K | 1-13252 | 10.1 | April 2, 2012 | 10.25* | 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. | 8-K | 1-13252 | 10.1 | February 28, 2014 |
| | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 10.11* | | 10-Q | 1-13252 | 10.1 | October 25, 2018 | 10.12* | | 10-K | 1-13252 | 10.14 | May 5, 2016 | 10.13* | | 10-Q | 1-13252 | 10.4 | July 30, 2010 | 10.14* | | 10-Q | 1-13252 | 10.2 | July 26, 2012 | 10.15* | | 8-K | 1-13252 | 10.1 | August 2, 2013 | 10.16* | | 10-Q | 1-13252 | 10.1 | January 31, 2019 | 10.17 | | 8-K | 1-13252 | 10.1 | March 7, 2017 | 10.18 | | 10-K | 1-13252 | 10.19 | May 5, 2016 | 10.19 | 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. (acting through its Canada Branch), Citibank, N.A. and Barclays Bank PLC, as Swing Line Lenders, Wells Fargo Bank, National Association as L/C Issuer, Barclays Bank PLC, Citibank N.A., Wells Fargo Bank, National Association as Co-Syndication Agents, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd. as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Citigroup Global Markets Inc., Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, The Bank of TokyoMitsubishi UFJ, Ltd. and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Book Runners. | 8-K | 1-13252 | 10.1 | October 23, 2015 | 10.20 | Amendment No. 2, dated January 30, 2014, and Amendment No. 1, dated November 15, 2013, to the Credit Agreement and the Credit Agreement dated as of September 23, 2011, among the Company and McKesson Canada Corporation, collectively, the Borrowers, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as Co-Syndication Agents, Wells Fargo Bank, National Association as L/C Issuer, The Bank of Tokyo-Mitsubishi UFJ, LTD., The Bank of Nova Scotia and U.S. Bank National Association as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Sole Lead Arranger and Sole Book Manager. | 8-K | 1-3252 | 10.1 | February 5, 2014 | 10.21* | | 10-Q | 1-13252 | 10.10 | October 29, 2008 | 10.22* | | 8-K | 1-13252 | 99.1 | April 2, 2012 |
| | | | | | | | | Incorporated by Reference | Exhibit Number | Description | Form | File Number | Exhibit | Filing Date | 10.26*10.23* | Amended and Restated Employment Agreement, effective as of November 1, 2008, | 10-Q8-K | 1-13252 | 10.1210.1 | October 29, 2008February 28, 2014 | 10.27*10.24* | | 8-K | 1-13252 | 10.1 | March 19, 2019 | 10.25* | | 10-K | 1-13252 | 10.27 | May 4, 2010 | 12† | Computation of Ratio of Earnings to Fixed Charges. | — | — | — | — | 21† | | — | — | — | — | 23† | | — | — | — | — | 24† | | — | — | — | — | 31.1† | | — | — | — | — | 31.2† | | — | — | — | — | 32†† | | — | — | — | — | 101† | The following materials from the McKesson Corporation Annual Report on Form 10-K for the fiscal year ended March 31, 2017,2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Financial Notes. | — | — | — | — |
________________ | | * | Management contract or compensation plan or arrangement in which directors and/or executive officers are eligible to participate. |
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 not exceed 10% of the total assets of the registrant.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | MCKESSON CORPORATION | | | | | Date: May 15, 2019 | | /s/ Britt J. Vitalone | | | | Britt J. Vitalone | | | | 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 behalf of the Registrant and in the capacities and on the date indicated: | | | | * | | * | Brian S. Tyler Chief Executive Officer and Director (Principal Executive Officer) | | Donald R. Knauss, Director
| | | | * | | * | Britt J. Vitalone Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | Marie L. Knowles, Director
| | | | * | | * | Sundeep G. Reddy Senior Vice President and Controller (Principal Accounting Officer)
| | Bradley E. Lerman, Director | | | | * | | * | Dominic J. Caruso, Director
| | Edward A. Mueller, Director
| | | | * | | * | N. Anthony Coles, M.D., Director
| | Susan R. Salka, Director
| | | | * | | /s/ Lori A. Schechter | M. Christine Jacobs, Director | | Lori A. Schechter *Attorney-in-Fact
| | | | | | | Date: May 15, 2019 | | |
| | | | DIRECTORS AND OFFICERS | | | | BOARD OF DIRECTORS | | CORPORATE OFFICERS | | | | John H. HammergrenDominic J. Caruso | | John H. HammergrenBrian S. Tyler | Chairman of the Board,Executive Vice President and | | Chairman of the Board, | President and Chief Executive Officer, | | President and Chief Executive Officer | McKesson Corporation | | McKesson Corporation | Chief Financial Officer, Retired, | | | Andy D. BryantJohnson & Johnson | | James A. BeerBritt J. Vitalone | Chairman of the Board, | | Executive Vice President and Chief Financial Officer | Intel Corporation | | | | | Jorge L. Figueredo | Wayne A. Budd | | Executive Vice President, Human Resources | Senior Counsel, | | | Goodwin Procter LLP | | Paul C. Julian | | | Executive Vice President and Group President | N. Anthony Coles, M. D. | | | Chairman and Chief Executive Officer, | | Jorge L. Figueredo | Yumanity Therapeutics, LLC | | Executive Vice President and Chief Human Resources Officer | | | | M. Christine Jacobs | | Kathleen D. McElligott | Yumanity Therapeutics, LLCChairman of the Board, President and | | Executive Vice President, Chief Information Officer and | Chief Executive Officer, Retired, | | Chief Technology Officer | M. Christine JacobsTheragenics Corporation | | | Chairman of the Board, President and | | Bansi Nagji | Chief Executive Officer, Retired, | | Executive Vice President, | Theragenics Corporation | | Corporate Strategy and Business Development | | | | Donald R. Knauss | | Lori A. SchechterExecutive Vice President and | Executive Chairman of the Board, Retired, | | Executive Vice President, General CounselChief Strategy and Business Development Officer | The Clorox Company | | Chief Compliance Officer | | | Lori A. Schechter | Marie L. Knowles | | Erin M. LampertExecutive Vice President, General Counsel and | Executive Vice President and | | Senior Vice President and ControllerChief Compliance Officer | Chief Financial Officer, Retired, | | | Atlantic Richfield Company | | Brian P. MooreSundeep G. Reddy | | | Senior Vice President and Controller | Bradley E. Lerman | | | Senior Vice President, General Counsel and | | Brian P. Moore | Corporate Secretary, | | Senior Vice President and Treasurer | Medtronic plc | | | | | Paul A. Smith | Edward A. Mueller | | Senior Vice President, Taxes | Chairman of the Board and | | Paul A. Smith | Chief Executive Officer, Retired, | | Senior Vice President, TaxesMichele Lau | Qwest Communications International Inc. | | Corporate Secretary | | | John G. Saia | Susan R. Salka | | Corporate Secretary | Chief Executive Officer and President, | | | AMN Healthcare Services, Inc. | | | | | | Brian S. Tyler | | | Chief Executive Officer, | | | McKesson Corporation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CORPORATE INFORMATION Common Stock McKesson Corporation common stock is listed on the New York Stock Exchange (ticker symbol MCK) and is quoted in the daily stock tables carried by most newspapers. Stockholder Information Wells FargoEQ Shareowner 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 Corporation stock or to request replacement of lost dividend checks, stock certificates or 1099-DIVs, or to have your dividend check deposited directly into your checking or savings account, stockholders may call Wells FargoEQ Shareowner Services’ telephone response center at (866) 614-9635. For the hearing impaired call (651) 450-4144. Wells FargoEQ Shareowner Services also has a website—www.wellsfargo.com/shareownerserviceshttps://www.shareowneronline.com—that-that stockholders may use 24 hours a day to request account information.
Dividends and Dividend Reinvestment Plan Dividends are generally paid on the first business day of January, April, July and October. McKesson Corporation’s Dividend Reinvestment Plan offers stockholders the opportunity to reinvest dividends in common stock and to purchase additional shares of common stock. Stock in an individual’s Dividend Reinvestment Plan is held in book entry at the Company’s transfer agent, Wells FargoEQ Shareowner Services. For more information, or to request an enrollment form, call Wells FargoEQ Shareowner Services’ telephone response center at (866) 614-9635. From outside the United States, call +1-651-450-4064. Annual Meeting McKesson Corporation’s Annual Meeting of Stockholders will be held at 8:30 a.m. CDT, on July 26, 201731, 2019 at Irving-Las Colinas Chamber of Commerce, 5201 N. O’Connor Blvd.,the Dallas/Fort Worth Airport Marriott, 8440 Freeport Parkway, Irving, TX 75039.75063.
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