REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of McKesson Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of McKesson Corporation and subsidiaries (the “Company”) as of March 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended March 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 13 to the financial statements, effective April 1, 2019, the Company adopted the Financial Accounting Standards Board’s (“FASB”) new standard related to leases using the modified retrospective basis.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Contingent Liabilities - Litigation and Claims involving Distribution of Controlled Substances - Refer to Note 21 to the financial statements
Critical Audit Matter Description
The Company and its affiliates are defendants in many cases asserting claims related to distribution of controlled substances, including opioids. The Company is named as a defendant 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. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its estimate for the ultimate loss. The Company reviews all loss 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. The Company also performs an assessment of loss contingencies where a loss is reasonably possible. If it is reasonably possible that a loss may have been incurred and the effect on the financial statements could be material, the Company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the financial statements. As of March 31, 2020, the Company has determined that a liability associated with these claims, whether through settlement or litigation, is not probable and a loss or range of loss is not reasonably estimable.
We identified litigation and claims involving the distribution of controlled substances as a critical audit matter because of the challenges auditing management’s judgments applied in determining the likelihood of loss related to the resolution of such claims. Specifically, auditing management’s determination of whether any contingent loss arising from the related litigation and claims is probable, reasonably possible, or remote, and the related disclosures, is subjective and requires significant judgment due to the large number of parties involved, together with the novelty and complexity of the issues.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to litigation and claims involving distribution of controlled substances included the following, among others:
|
|
•
|
We tested the effectiveness of internal controls related to management’s review of litigation and claims involving the distribution of controlled substances, and approval of the accounting treatment and related disclosures based on the most recent facts and circumstances.
|
|
|
•
|
We inquired of the Company’s internal and external legal counsel to understand the basis for the Company’s conclusion that any potential loss from the litigation and claims involving the distribution of controlled substances, including through broad resolution via settlement, is neither probable nor reasonably estimable as of March 31, 2020. In addition, we requested and received a written response from internal and external legal counsel as it relates to litigation and claims involving the distribution of controlled substances.
|
|
|
•
|
We evaluated management’s analysis of litigation and claims involving the distribution of controlled substances, read Board of Directors meeting minutes, including relevant sub-committee meeting minutes, and compared to responses from internal and external counsel. As part of our procedures, we also performed public domain searches for evidence contrary to management’s analysis.
|
|
|
•
|
We compared the Company's assessment of this matter to relevant history of similar legal contingencies that have been settled or otherwise resolved to evaluate the consistency of the Company's assessment of litigation and claims involving the distribution of controlled substances at March 31, 2020.
|
|
|
•
|
We consulted with our auditing and accounting experts to assist in our evaluation of the case facts and the Company’s related accounting treatment for the litigation and claims involving the distribution of controlled substances.
|
|
|
•
|
We evaluated any events subsequent to March 31, 2020 that might impact our evaluation of litigation and claims involving the distribution of controlled substances, including any related accrual or disclosure.
|
|
|
•
|
We obtained written representations from executives and internal counsel of the Company.
|
|
|
•
|
We read the Company’s related disclosures and evaluated them for consistency with our testing.
|
Goodwill - Refer to Note 14 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves comparing the carrying amount of each reporting unit to its fair value on the first day of the third fiscal quarter or whenever the Company believes a potential indicator of impairment requiring a more frequent assessment has occurred. The Company uses a combination of the income and market approaches to estimate reporting unit fair value. Under the market approach, fair value is estimated by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, the Company uses a discounted cash flow (“DCF”) model where cash flows anticipated over future periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate that is commensurate with the risk inherent within the reporting unit. The rate used to discount to present value includes an unsystematic risk premium, which is intended to address uncertainty related to the reporting unit’s future cash flow projections. The goodwill balance was $9.4 billion as of March 31, 2020, of which $1.4 billion was allocated to the McKesson Canada reporting unit. The fair value of all reporting units exceeded their respective carrying amounts as of the measurement date and, therefore, no impairment was recognized.
We identified the estimation of the fair value of the McKesson Canada reporting unit used to evaluate the recoverability of goodwill as a critical audit matter because of the challenges auditing significant judgments used in the selection of a discount rate, including the unsystematic risk premium. In particular, the fair value estimate is sensitive to the unsystematic risk premium assumption, which is affected by expected risk of changes in the Canadian business and regulatory environments. Auditing management’s selected discount rate required a high degree of auditor judgment and an increased extent of effort, including the need to involve more senior members of the team and our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s selection of a discount rate, including consideration of the unsystematic risk premium, for the McKesson Canada reporting unit included the following, among others:
|
|
•
|
We tested the effectiveness of internal controls related to management’s goodwill impairment evaluation, including those related to the selection of a discount rate and consideration of an unsystematic risk premium.
|
|
|
•
|
We evaluated management’s ability to accurately forecast operating results for the McKesson Canada reporting unit by comparing actual results to management’s historical forecasts, in order to consider the reasonableness and adequacy of management’s selected unsystematic risk premium.
|
|
|
•
|
As part of our assessment of the unsystematic risk premium, we evaluated the reasonableness of strategic plans expected to be implemented during the forecast period by comparing the forecasts to:
|
|
|
◦
|
Actual results of historical strategic plans
|
|
|
◦
|
Internal communications to management and the Board of Directors
|
|
|
•
|
With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate, including the unsystematic risk premium, by developing a range of independent estimates, testing the mathematical accuracy of the calculation and comparing to the discount rate selected by management.
|
Investment in Change Healthcare Joint Venture - Tax-free Separation of Change Healthcare JV - Refer to Note 2 to the financial statements
Critical Audit Matter Description
On March 10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare Joint Venture (“Joint Venture”). The separation was effected through the split-off of a wholly owned subsidiary of the Company (“SpinCo”) that held all of the Company’s interest in the Joint Venture, to certain of the Company’s stockholders through an exchange offer (“Split-off”), followed by the merger of SpinCo with and into Change Healthcare Inc. (“Change”), with Change surviving the merger (“Merger”).
In connection with the Split-off, on March 9, 2020, the Company distributed all outstanding shares of common stock of SpinCo to participating stockholders in exchange for shares of the Company common stock. Following consummation of the Split-off, on March 10, 2020 the Merger was consummated. The Split-off and Merger are intended to be generally tax-free transactions for U.S. Federal income tax purposes. Following the Split-off, the Company does not beneficially own any of Change’s outstanding securities.
We identified the classification of the Split-off and Merger as a tax-free transaction for US Federal income tax purposes to be a critical audit matter because of the complexity of the interpretation and application of the Internal Revenue Code (“Code”), the materiality of the potential tax consequences, and the need to involve our income tax specialists when performing audit procedures to evaluate the U.S. Federal taxability of the Split-Off and Merger.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the U.S Federal taxability of the Split-Off and Merger included the following, among others:
|
|
•
|
We tested the effectiveness of controls over management’s evaluation of the Split-Off and Merger as tax free for U.S. Federal income tax.
|
|
|
•
|
We inspected the opinion from the Company’s outside legal counsel and external tax advisor that management utilized in forming their conclusions on U.S. Federal taxability of the Split-off and Merger, including certain interpretations of the Code and related statutes.
|
|
|
•
|
We inspected meeting minutes of the Board of Directors and its committees, income tax filings, support from external advisors, historical financial results of the Company and the Joint Venture, and contracts associated with the Split-off and Merger for corroborating or contradictory evidence.
|
|
|
•
|
We obtained written representations from management concerning management’s intent associated with future transactions that could affect U.S. Federal taxability and we obtained representations made by Change management that it does not intend to cause any transactions that could affect the Company’s U.S. Federal taxability.
|
|
|
•
|
We assessed the key facts in the opinion from the Company’s outside legal counsel and tax advisor detailing the requirements under the Code and specifying how such requirements were met.
|
|
|
•
|
With the assistance of our income tax specialists, we evaluated management’s conclusion that the requirements were met to qualify the Split-Off and Merger as tax free for U.S. Federal income tax purposes.
|
|
|
|
/s/ Deloitte & Touche LLP
|
Dallas, Texas
|
May 22nd, 2020
|
We have served as the Company’s auditor since 1968.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
$
|
231,051
|
|
|
$
|
214,319
|
|
|
$
|
208,357
|
|
Cost of Sales
|
(219,028
|
)
|
|
(202,565
|
)
|
|
(197,173
|
)
|
Gross Profit
|
12,023
|
|
|
11,754
|
|
|
11,184
|
|
Operating Expenses
|
|
|
|
|
|
Selling, distribution and administrative expenses
|
(9,168
|
)
|
|
(8,403
|
)
|
|
(8,138
|
)
|
Research and development
|
(96
|
)
|
|
(71
|
)
|
|
(125
|
)
|
Goodwill impairment charges
|
(2
|
)
|
|
(1,797
|
)
|
|
(1,738
|
)
|
Restructuring, impairment and related charges
|
(268
|
)
|
|
(597
|
)
|
|
(567
|
)
|
Gain from sale of business
|
—
|
|
|
—
|
|
|
109
|
|
Gain on healthcare technology net asset exchange, net
|
—
|
|
|
—
|
|
|
37
|
|
Total Operating Expenses
|
(9,534
|
)
|
|
(10,868
|
)
|
|
(10,422
|
)
|
Operating Income
|
2,489
|
|
|
886
|
|
|
762
|
|
Other Income, Net
|
12
|
|
|
182
|
|
|
130
|
|
Equity Earnings and Charges from Investment in Change Healthcare Joint Venture
|
(1,108
|
)
|
|
(194
|
)
|
|
(248
|
)
|
Loss on Debt Extinguishment
|
—
|
|
|
—
|
|
|
(122
|
)
|
Interest Expense
|
(249
|
)
|
|
(264
|
)
|
|
(283
|
)
|
Income from Continuing Operations Before Income Taxes
|
1,144
|
|
|
610
|
|
|
239
|
|
Income Tax (Expense) Benefit
|
(18
|
)
|
|
(356
|
)
|
|
53
|
|
Income from Continuing Operations
|
1,126
|
|
|
254
|
|
|
292
|
|
Income (Loss) from Discontinued Operations, Net of Tax
|
(6
|
)
|
|
1
|
|
|
5
|
|
Net Income
|
1,120
|
|
|
255
|
|
|
297
|
|
Net Income Attributable to Noncontrolling Interests
|
(220
|
)
|
|
(221
|
)
|
|
(230
|
)
|
Net Income Attributable to McKesson Corporation
|
$
|
900
|
|
|
$
|
34
|
|
|
$
|
67
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share Attributable to
McKesson Corporation
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Continuing operations
|
$
|
4.99
|
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
Discontinued operations
|
(0.04
|
)
|
|
—
|
|
|
0.02
|
|
Total
|
$
|
4.95
|
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
Basic
|
|
|
|
|
|
Continuing operations
|
$
|
5.01
|
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
Discontinued operations
|
(0.03
|
)
|
|
—
|
|
|
0.02
|
|
Total
|
$
|
4.98
|
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
Weighted Average Common Shares
|
|
|
|
|
|
Diluted
|
182
|
|
|
197
|
|
|
209
|
|
Basic
|
181
|
|
|
196
|
|
|
208
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
Net Income
|
$
|
1,120
|
|
|
$
|
255
|
|
|
$
|
297
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
Foreign currency translation adjustments
|
(66
|
)
|
|
(190
|
)
|
|
624
|
|
Unrealized gains (losses) on cash flow hedges
|
86
|
|
|
24
|
|
|
(30
|
)
|
Changes in retirement-related benefit plans
|
129
|
|
|
(32
|
)
|
|
15
|
|
Other Comprehensive Income (Loss), Net of Tax
|
149
|
|
|
(198
|
)
|
|
609
|
|
|
|
|
|
|
|
Comprehensive Income
|
1,269
|
|
|
57
|
|
|
906
|
|
Comprehensive Income Attributable to Noncontrolling Interests
|
(223
|
)
|
|
(155
|
)
|
|
(415
|
)
|
Comprehensive Income (Loss) Attributable to McKesson Corporation
|
$
|
1,046
|
|
|
$
|
(98
|
)
|
|
$
|
491
|
|
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
4,015
|
|
|
$
|
2,981
|
|
Receivables, net
|
19,950
|
|
|
18,246
|
|
Inventories, net
|
16,734
|
|
|
16,709
|
|
Assets held for sale
|
906
|
|
|
—
|
|
Prepaid expenses and other
|
617
|
|
|
529
|
|
Total Current Assets
|
42,222
|
|
|
38,465
|
|
Property, Plant and Equipment, Net
|
2,365
|
|
|
2,548
|
|
Operating Lease Right-of-Use Assets
|
1,886
|
|
|
—
|
|
Goodwill
|
9,360
|
|
|
9,358
|
|
Intangible Assets, Net
|
3,156
|
|
|
3,689
|
|
Investment in Change Healthcare Joint Venture
|
—
|
|
|
3,513
|
|
Other Noncurrent Assets
|
2,258
|
|
|
2,099
|
|
Total Assets
|
$
|
61,247
|
|
|
$
|
59,672
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
|
|
|
|
Current Liabilities
|
|
|
|
Drafts and accounts payable
|
$
|
37,195
|
|
|
$
|
33,853
|
|
Current portion of long-term debt
|
1,052
|
|
|
330
|
|
Current portion of operating lease liabilities
|
354
|
|
|
—
|
|
Liabilities held for sale
|
683
|
|
|
—
|
|
Other accrued liabilities
|
3,340
|
|
|
3,443
|
|
Total Current Liabilities
|
42,624
|
|
|
37,626
|
|
Long-Term Debt
|
6,335
|
|
|
7,265
|
|
Long-Term Deferred Tax Liabilities
|
2,255
|
|
|
2,998
|
|
Long-Term Operating Lease Liabilities
|
1,660
|
|
|
—
|
|
Other Noncurrent Liabilities
|
1,662
|
|
|
2,103
|
|
Commitments and Contingent Liabilities (Note 21)
|
|
|
|
Redeemable Noncontrolling Interests
|
1,402
|
|
|
1,393
|
|
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, 2020 and 2019, 272 and 271 shares issued at March 31, 2020 and 2019
|
2
|
|
|
3
|
|
Additional Paid-in Capital
|
6,663
|
|
|
6,435
|
|
Retained Earnings
|
13,022
|
|
|
12,409
|
|
Accumulated Other Comprehensive Loss
|
(1,703
|
)
|
|
(1,849
|
)
|
Other
|
—
|
|
|
(2
|
)
|
Treasury Stock, at Cost, 110 and 81 shares at March 31, 2020 and 2019
|
(12,892
|
)
|
|
(8,902
|
)
|
Total McKesson Corporation Stockholders’ Equity
|
5,092
|
|
|
8,094
|
|
Noncontrolling Interests
|
217
|
|
|
193
|
|
Total Equity
|
5,309
|
|
|
8,287
|
|
Total Liabilities, Redeemable Noncontrolling Interests and Equity
|
$
|
61,247
|
|
|
$
|
59,672
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended March 31, 2020, 2019 and 2018
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McKesson Corporation Stockholders’ 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
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
424
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
424
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187
|
|
|
254
|
|
Repurchase of common stock
|
—
|
|
|
—
|
|
|
(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, $1.51 per common share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(298
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(298
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
|
(48
|
)
|
Balances, March 31, 2019
|
271
|
|
|
3
|
|
|
6,435
|
|
|
(2
|
)
|
|
12,409
|
|
|
(1,849
|
)
|
|
(81
|
)
|
|
(8,902
|
)
|
|
193
|
|
|
8,287
|
|
Opening Retained Earnings Adjustments: Adoption of New Accounting Standards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Balances, April 1, 2019
|
271
|
|
|
3
|
|
|
6,435
|
|
|
(2
|
)
|
|
12,420
|
|
|
(1,849
|
)
|
|
(81
|
)
|
|
(8,902
|
)
|
|
193
|
|
|
8,298
|
|
Issuance of shares under employee plans
|
1
|
|
|
—
|
|
|
113
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
93
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
115
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
115
|
|
Payments to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(154
|
)
|
|
(154
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
146
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
146
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
900
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
178
|
|
|
1,078
|
|
Repurchase of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
(1,934
|
)
|
|
—
|
|
|
(1,934
|
)
|
Change Healthcare share exchange
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
(2,036
|
)
|
|
—
|
|
|
(2,036
|
)
|
Cash dividends declared, $1.62 per common share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(294
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(294
|
)
|
Other
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
2
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Balances, March 31, 2020
|
272
|
|
|
$
|
2
|
|
|
$
|
6,663
|
|
|
$
|
—
|
|
|
$
|
13,022
|
|
|
$
|
(1,703
|
)
|
|
(110
|
)
|
|
$
|
(12,892
|
)
|
|
$
|
217
|
|
|
$
|
5,309
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating Activities
|
|
|
|
|
|
Net income
|
$
|
1,120
|
|
|
$
|
255
|
|
|
$
|
297
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
321
|
|
|
317
|
|
|
303
|
|
Amortization
|
601
|
|
|
632
|
|
|
648
|
|
Gain on Healthcare Technology Net Asset Exchange, net
|
—
|
|
|
—
|
|
|
(37
|
)
|
Goodwill and other asset impairment charges
|
139
|
|
|
2,079
|
|
|
2,217
|
|
Equity earnings and charges from investment in Change Healthcare Joint Venture
|
1,084
|
|
|
194
|
|
|
248
|
|
Deferred taxes
|
(342
|
)
|
|
189
|
|
|
(868
|
)
|
Credits associated with last-in, first-out inventory method
|
(252
|
)
|
|
(210
|
)
|
|
(99
|
)
|
Non-cash operating lease expense
|
366
|
|
|
—
|
|
|
—
|
|
Loss (gain) from sales of businesses and investments
|
33
|
|
|
(86
|
)
|
|
(169
|
)
|
Other non-cash items
|
615
|
|
|
52
|
|
|
67
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Receivables
|
(2,494
|
)
|
|
(967
|
)
|
|
1,175
|
|
Inventories
|
(376
|
)
|
|
(368
|
)
|
|
(458
|
)
|
Drafts and accounts payable
|
3,952
|
|
|
1,976
|
|
|
271
|
|
Operating lease liabilities
|
(377
|
)
|
|
—
|
|
|
—
|
|
Taxes
|
(8
|
)
|
|
(95
|
)
|
|
671
|
|
Other
|
(8
|
)
|
|
68
|
|
|
79
|
|
Net cash provided by operating activities
|
4,374
|
|
|
4,036
|
|
|
4,345
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
Payments for property, plant and equipment
|
(362
|
)
|
|
(426
|
)
|
|
(405
|
)
|
Capitalized software expenditures
|
(144
|
)
|
|
(131
|
)
|
|
(175
|
)
|
Acquisitions, net of cash, cash equivalents and restricted cash acquired
|
(133
|
)
|
|
(905
|
)
|
|
(2,893
|
)
|
Proceeds from sale of businesses and investments, net
|
37
|
|
|
101
|
|
|
374
|
|
Payments received on Healthcare Technology Net Asset Exchange, net
|
—
|
|
|
—
|
|
|
126
|
|
Other
|
23
|
|
|
(20
|
)
|
|
(20
|
)
|
Net cash used in investing activities
|
(579
|
)
|
|
(1,381
|
)
|
|
(2,993
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
Proceeds from short-term borrowings
|
21,437
|
|
|
37,265
|
|
|
20,542
|
|
Repayments of short-term borrowings
|
(21,437
|
)
|
|
(37,268
|
)
|
|
(20,725
|
)
|
Proceeds from issuances of long-term debt
|
—
|
|
|
1,099
|
|
|
1,522
|
|
Repayments of long-term debt
|
(298
|
)
|
|
(1,112
|
)
|
|
(2,287
|
)
|
Payments for debt extinguishments
|
—
|
|
|
—
|
|
|
(112
|
)
|
Common stock transactions:
|
|
|
|
|
|
|
Issuances
|
113
|
|
|
75
|
|
|
132
|
|
Share repurchases, including shares surrendered for tax withholding
|
(1,954
|
)
|
|
(1,639
|
)
|
|
(1,709
|
)
|
Dividends paid
|
(294
|
)
|
|
(292
|
)
|
|
(262
|
)
|
Other
|
(301
|
)
|
|
(355
|
)
|
|
(185
|
)
|
Net cash used in financing activities
|
(2,734
|
)
|
|
(2,227
|
)
|
|
(3,084
|
)
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(19
|
)
|
|
(119
|
)
|
|
150
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
1,042
|
|
|
309
|
|
|
(1,582
|
)
|
Cash, cash equivalents and restricted cash at beginning of year
|
2,981
|
|
|
2,672
|
|
|
4,254
|
|
Cash, cash equivalents and restricted cash at end of year
|
$
|
4,023
|
|
|
$
|
2,981
|
|
|
$
|
2,672
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
Interest, net
|
$
|
235
|
|
|
$
|
383
|
|
|
$
|
298
|
|
Income taxes, net of refunds
|
$
|
368
|
|
|
$
|
262
|
|
|
$
|
144
|
|
McKESSON CORPORATION
FINANCIAL NOTES
|
|
1.
|
Significant Accounting Policies
|
Nature of Operations: McKesson Corporation (“McKesson,” or the “Company,”) is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information technology. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. The Company reports its financial results in three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 24, “Segments of 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 the Company’s ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net Income Attributable to Noncontrolling Interests” in the consolidated statements of operations. All significant intercompany balances and transactions have been eliminated in consolidation, including the intercompany portion of transactions with equity method investees.
The Company considers itself to control an entity if it is the majority owner of or has voting control over such entity. The Company also assesses control through means other than voting rights (“variable interest entities” or “VIEs”) and determines which business entity is the primary beneficiary of the VIE. The Company consolidates VIEs when it is determined that it is the primary beneficiary of the VIE. Investments in business entities in which the Company does not have control but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for further information on the Company’s investment in Change Healthcare LLC (“Change Healthcare JV”).
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 the Company 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. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.
Cash and Cash Equivalents: All highly liquid debt and money market instruments purchased with an 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 U.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily denominated in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. The Company mitigates the risk of its 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 in “Prepaid expenses and other” and “Other Noncurrent Assets” in the consolidated balance sheets. Cash, cash equivalents and restricted cash in the Company’s consolidated statements of cash flows at March 31, 2020, includes restricted cash and restricted cash equivalents of $8 million for 2020 and nil for 2019 and 2018.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Marketable Securities Available-for-Sale: The Company’s marketable securities, which are available-for-sale, are carried at fair value and are included in “Prepaid expenses and other” 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 in stockholders’ equity. At March 31, 2020 and 2019, marketable securities were not material. In determining whether an other-than-temporary decline in market value has occurred, the Company considers 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 its 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 the Company intends 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 (expense), net, in the period in which the loss occurs.
Equity Method Investments: Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. The Company evaluates its 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, an impairment loss is recorded. Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for further information relating to the Company’s equity method investment in Change Healthcare which was split-off from McKesson in the fourth quarter of 2020.
Concentrations of Credit Risk and Receivables: The Company’s trade accounts receivable are subject to concentrations of credit risk with customers primarily in its U.S. Pharmaceutical and Specialty Solutions segment. During 2020, sales to the Company’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 51% of its total consolidated revenues and approximately 37% of total trade accounts receivable at March 31, 2020. Sales to the Company’s largest customer, CVS Health Corporation (“CVS”), accounted for approximately 20% of its total consolidated revenues in 2020 and comprised approximately 20% of total trade accounts receivable at March 31, 2020. As a result, the Company’s sales and credit concentration is significant. The Company has 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 the Company’s financial condition, results of operations and liquidity. In addition, trade receivables are subject to concentrations 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 Company’s customer base as well as its geographic dispersion. The Company estimates the receivables for which it does not expect full collection based on historical collection rates and ongoing evaluations of the creditworthiness of its customers. An allowance is recorded in the Company’s consolidated financial statements for these estimated amounts.
Financing Receivables: The Company assesses and monitors credit risk associated with financing receivables, primarily notes receivable, through regular review of its collections experience in determining its allowance for loan losses. On an ongoing basis, the Company also evaluates credit quality of its financing receivables utilizing historical collection rates and write-offs, as well as considering existing economic conditions, to determine if an allowance is required. Financing receivables are derecognized if legal title to them has transferred and all related risks and rewards incidental to ownership have passed to the buyer. As of March 31, 2020 and 2019, financing receivables were not material to our consolidated financial statements. Financing receivables and the related allowances are included in Receivables, net and Other Noncurrent Assets in the consolidated balance sheets.
Inventories: Inventories consist of merchandise held for resale. The Company reports inventories at the lower of cost or net realizable value, except for inventories determined using the last-in, first-out (“LIFO”) method which are valued at the lower of LIFO cost or market. The LIFO method presumes that the most recent inventory purchases are the first items sold and the inventory cost under LIFO approximates market. The majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign and certain domestic locations is based on the first-in, first-out (“FIFO”) method and weighted average purchase prices. Rebates, cash discounts, and other incentives received from vendors are recognized in cost of sales upon the sale of the related inventory.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The LIFO method was used to value approximately 60% and 62% of the Company’s inventories at March 31, 2020 and 2019. If the Company had used the moving average method of inventory valuation, inventories would have been approximately $444 million and $696 million higher than the amounts reported at March 31, 2020 and 2019. These amounts are equivalent to the Company’s LIFO reserves. The Company’s LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. The Company recognized LIFO credits of $252 million, $210 million and $99 million in 2020, 2019 and 2018 in cost of sales in its 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.
The Company believes that the moving average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, its LIFO inventory is valued at the lower of LIFO cost or market. As of March 31, 2020 and 2019, inventories at LIFO did not exceed market.
Shipping and Handling Costs: The Company includes costs to pack and deliver inventory to its customers in selling, distribution and administrative expenses. Shipping and handling costs of $1.0 billion, $951 million, and $914 million were recognized in 2020, 2019 and 2018.
Held for Sale: Assets and liabilities to be disposed of by sale (“disposal groups”) are reclassified into “held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The reclassification occurs when the disposal group is available for immediate sale and the sale is highly probable. These criteria are generally met when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying amount or fair value less costs to sell and are not depreciated or amortized. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. Refer to Financial Note 3, “Held for Sale,” for more information.
Property, Plant and Equipment: The Company states its property, plant and equipment (“PPE”) at cost and depreciates them under the straight-line method at rates designed to distribute the cost of PPE over estimated service lives, not to exceed 30 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 third quarter or more frequently if indicators of potential impairment exist. 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.
The Company applies the goodwill impairment test by comparing the estimated fair value of a reporting unit to its carrying value and recording an impairment charge equal to the amount of excess carrying value above estimated fair value, if any, but not to exceed the amount of goodwill allocated to the reporting unit.
To estimate the fair value of its reporting units, the Company generally uses a combination of the market approach and the income approach. Under the market approach, it estimates fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, it uses a discounted cash flow (“DCF”) model in which cash flows anticipated over future periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate that is commensurate with the risk inherent within the reporting unit. Other estimates inherent in both the market and income approaches include long-term growth rates, projected revenues and earnings and cash flow forecasts for the reporting units. In addition, the Company compares the aggregate of the reporting units’ fair values to the Company’s market capitalization as a further corroboration of the fair values. Goodwill testing requires a complex series of assumptions and judgments 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 the Company’s 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. The Company reviews 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 Internal Use: The Company capitalizes costs of software held for internal use during the application development stage of a project and amortizes those costs over their estimated useful lives, not to exceed 10 years. As of March 31, 2020 and 2019, capitalized software held for internal use was $400 million and $394 million, net of accumulated amortization of $1.3 billion and $1.2 billion, and is included in other noncurrent assets in the consolidated balance sheets. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred.
Insurance Programs: Under its insurance programs, the Company obtains coverage for catastrophic exposures as well as those risks required to be insured by law or contract. It is the Company’s 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 on the Company’s 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: 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 generated from the distribution of pharmaceutical and medical products represent the majority of the Company’s revenues. The Company orders product from the manufacturer, receives and carries the product at its central distribution facilities and delivers the product directly to its customers’ 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 the Company’s delivery to the customer or upon customer pick-up. The Company also earns revenues from a variety of other sources including its 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 each of the years ended March 31, 2020 and March 31, 2019.
Revenues are recorded gross when the Company is the principal in the transaction, has the ability to direct the use of the goods or services prior to transfer to a customer, is responsible for fulfilling the promise to its customer, has latitude in establishing prices, and controls the relationship with the customer. The Company records its revenues net of sales taxes. Revenues are measured based on the amount of consideration that the Company expects to receive, reduced by estimates for return allowances, discounts and rebates using historical data. Sales returns from customers were approximately $3.1 billion in 2020, $2.9 billion in 2019 and $3.1 billion in 2018. Assets for the right to recover products from customers and the associated refund liabilities for return allowances were not material as of March 31, 2020. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs. The Company records deferred revenues when payments are received or due in advance of its performance. Deferred revenues are primarily from the Company’s services arrangements and are recognized as revenues over the periods when services are performed.
The Company had no material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheets as of March 31, 2020 and 2019. The Company generally expenses costs to obtain a contract as incurred when the amortization period is less than one year.
Supplier Incentives: Fees for services 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplier Reserves: The Company establishes 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 it. 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. The Company evaluates the amounts due from suppliers on a continual basis and adjusts the reserve estimates when appropriate based on changes in facts and circumstances. Adjustments to supplier reserves are generally included in cost of sales unless consideration from the vendor is in exchange for distinct goods or services or for pass-through rebate purchases. The ultimate outcome of any outstanding claims may be different than the Company’s estimate. The supplier reserves primarily pertain to the Company’s U.S. Pharmaceutical and Specialty Solutions segment.
Income Taxes: The Company accounts 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.
Interest Expense: Interest expense primarily includes interest for the Company’s long-term debt obligations, commercial paper, net interest settlements of interest rate swaps, and the amortization of deferred issuance costs and original issue discounts on debt.
Foreign Currency Translation: The reporting currency of the Company and its subsidiaries is the U.S. dollar. Its 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 period-end exchange rates, while 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 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 the Company’s consolidated results of operations in 2020, 2019 or 2018. The Company releases cumulative translation adjustments from stockholders’ equity into earnings as a gain or loss only upon a complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. It also releases all or a pro rata portion of the cumulative translation adjustments into earnings upon the sale of an equity method investment that is a foreign entity or has a foreign component.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of foreign currency exchange and interest rate exposures and are recorded in 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 in earnings. The Company uses foreign currency-denominated notes and cross-currency swaps to hedge a portion of its net investment in its foreign subsidiaries. It uses 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 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. The Company evaluates 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. 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 earnings. The Company’s 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, 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. Net income attributable to noncontrolling interests includes recurring compensation that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe AG (“McKesson Europe”), formerly known as Celesio AG, under the domination and profit and loss transfer agreement. Net income attributable to noncontrolling interests also includes third-party equity interests in the Company’s consolidated entities including Vantage Oncology Holdings, LLC (“Vantage”) and ClarusONE Sourcing Services LLP (“ClarusONE”), which was established between McKesson and 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’ equity in the Company’s consolidated balance sheets. Refer to Financial Note 9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” for more information.
Share-Based Compensation: The Company accounts for all share-based compensation transactions 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 is classified in the consolidated statements of operations in the same manner as cash compensation paid to the Company’s employees.
Loss Contingencies: The Company is subject to various claims, including, but not limited to, 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 its business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its 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. The Company recognizes legal fees as incurred when the legal services are provided.
The Company reviews 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.
Restructuring Charges: Employee severance costs are generally recognized when payments are probable and amounts are reasonably estimable. Costs related to contracts without future benefit or contract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred.
Business Combinations: The Company accounts for business combinations using the acquisition method of accounting whereby the identifiable assets and liabilities of the acquired business, as well as any noncontrolling interest in the acquired business, are recorded at their estimated fair values as of the date that the Company obtains control of the acquired business. Any purchase consideration in excess of the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, the Company typically uses a method that is a form or variation of the income approach, whereby a forecast of future cash flows attributable to the asset are discounted to present value using a risk-adjusted discount rate. Some of the more significant estimates and assumptions inherent in the income approach 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 expected useful life.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Recently Adopted Accounting Pronouncements
Leases: In the first quarter of 2020, the Company adopted amended guidance for leases using the modified retrospective method and recorded a cumulative-effect adjustment to opening retained earnings on the date of adoption. Under the amended guidance, entities are required to recognize operating lease liabilities and operating lease right-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 Company elected 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 which commenced before April 1, 2019. The Company also elected not to separate lease from non-lease components for all leases and to exclude short-term leases with an initial term of 12 months or less from its consolidated balance sheets.
Upon adoption of this amended guidance, the Company recorded $2.2 billion of operating lease liabilities, $2.1 billion of operating lease ROU assets and a cumulative-effect adjustment of $69 million to opening retained earnings. The adjustment to opening retained earnings included impairment charges of $89 million, net of tax to the ROU assets primarily related to previously impaired long-lived assets at the retail pharmacies in the Company’s United Kingdom (“U.K.”) and Canadian businesses, partially offset by derecognition of existing deferred gain on the Company’s sale-leaseback transaction related to its former corporate headquarters building. The adoption of this amended guidance did not have a material impact on the Company’s consolidated statements of operations and cash flows.
Refer to Financial Note 13, “Leases,” for more information.
Derivatives and Hedging: In the first quarter of 2020, the Company prospectively adopted amended guidance that allows it to include the Secured Overnight Financing Rate Overnight Index Swap Rate as a benchmark interest rate for hedge accounting purposes. The adoption of this amended guidance did not have a material effect on the Company’s consolidated financial statements.
Accumulated Other Comprehensive Income: In the first quarter of 2020, the Company adopted amended guidance that allows for a reclassification of only those amounts related to the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) to retained earnings thereby eliminating the stranded tax effects. Previous guidance required 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. The Company elected not to reclassify the stranded tax effects within accumulated other comprehensive loss to retained earnings. The adoption of this amended guidance did not affect the Company’s consolidated financial statements.
Premium Amortization of Purchased Callable Debt Securities: In the first quarter of 2020, the Company adopted amended guidance on a modified retrospective basis that shortens 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 an accounting change for securities held at a discount as they would still be amortized to maturity. The adoption of this amended guidance did not affect the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Income Taxes: In December 2019, amended guidance was issued with the intent to simplify various aspects related to accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies and clarifies certain other aspects of accounting for income taxes. The guidance is effective for the Company in the first quarter of 2022 and early adoption is permitted. The Company is currently evaluating the impact of this amended guidance on its consolidated financial statements.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 in a cloud computing arrangement that has a software license. Upon adoption, the Company will begin capitalizing eligible implementation costs for cloud computing arrangement service contracts and recognizing the expense over the service period. The amended guidance is effective for the Company either on a retrospective or prospective basis in the first quarter of 2021. The Company will adopt this guidance prospectively in the first quarter of 2021 and adoption of this guidance will not have a material impact on its financial statements or disclosures.
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 the Company 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 the Company 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 the Company on a retrospective basis in the first quarter of 2021. The adoption of this amended guidance will not have a material effect in the consolidated statements of operations, comprehensive income, balance sheets or cash flows of the Company. 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 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 the Company in the first quarter of 2021. Certain requirements will be applied prospectively while other changes will be applied retrospectively upon the effective date. The adoption of this amended guidance will not have a material effect in the consolidated statements of operations, comprehensive income, balance sheets or cash flows of the Company. This amended guidance will result in changes in disclosures.
Financial Instruments - Credit Losses: In June 2016, amended guidance was issued which will change the impairment model for most financial assets from one based on current losses to a forward-looking model based on expected losses. This model will replace the existing incurred credit loss model, that generally requires a loss to be incurred before it is recognized. The forward-looking model will require the Company to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount in estimating credit losses and is expected to result in earlier recognition of allowances for credit losses. 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 financial assets. The guidance will also require enhanced disclosures. The amended guidance is effective for the Company in the first quarter of 2021 and any impact will be applied through a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The adoption of this guidance will not have a material impact on the Company’s financial statements or disclosures.
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Investment in Change Healthcare Joint Venture
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Healthcare Technology Net Asset Exchange
In the fourth quarter of 2017, the Company contributed the majority of its McKesson Technology Solutions businesses to form a joint venture, Change Healthcare JV, under a contribution agreement between McKesson and Change Healthcare Inc. (“Change”) and others, including shareholders of Change. In exchange for the contribution, the Company initially owned approximately 70% of the joint venture, with the remaining equity ownership of approximately 30% held by Change Healthcare Inc. The Change Healthcare JV was jointly governed by McKesson and shareholders of Change. The initial investment in the Change Healthcare JV represented the fair value of McKesson’s 70% equity interest in the joint venture upon closing of the transaction. In 2018, the Company 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, it received $126 million in cash from Change representing the final settlement of the net working capital and other adjustments.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Initial Public Offering by Change Healthcare Inc.
On June 27, 2019, common stock and certain other securities of Change began trading on the NASDAQ (“IPO”). Change was a holding company and did not own any material assets or have any operations other than its interest in the Change Healthcare JV.
On July 1, 2019, upon the completion of its IPO, Change received net cash proceeds of approximately $888 million. Change contributed the proceeds from its offering of common stock of $609 million to the Change Healthcare JV in exchange for additional membership interests of the Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change to acquire certain securities of the Change Healthcare JV that substantially mirror the terms of other securities included in the offering by Change. The Change Healthcare JV, in return, used the majority of the IPO proceeds to repay a portion of the joint venture’s outstanding debt. As a result, McKesson’s equity interest in the Change Healthcare JV was diluted from approximately 70% to approximately 58.5% while Change owned approximately 41.5% of the outstanding LLC Units. Accordingly, in the second quarter of 2020, the Company recognized a pre-tax dilution loss of $246 million ($184 million after-tax) primarily representing the difference between its proportionate share of the IPO proceeds and the dilution effect on the investment’s carrying value. The Company’s proportionate share of income or loss from this investment was subsequently reduced as immaterial settlements of stock option exercises occurred after the IPO. These amounts were included in “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statements of operations for the year ended March 31, 2020.
In the second quarter of 2020, the Company recorded a pre-tax other-than-temporary impairment (“OTTI”) charge of $1.2 billion ($864 million after-tax) to its investment in the Change Healthcare JV, representing the difference between the carrying value of the Company’s investment and the fair value derived from the corresponding closing price of Change’s common stock at September 30, 2019. This charge was included in “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statement of operations for the year ended March 31, 2020.
Equity Method Investment in the Change Healthcare Joint Venture
The Company’s investment in the joint venture has been accounted for using the equity method of accounting on a one-month reporting lag. The Company’s accounting policy has been to disclose any intervening events of the joint venture in the lag period that could materially affect its condensed consolidated financial statements. Effective April 1, 2019, the Change Healthcare JV adopted the amended revenue recognition guidance. In the first quarter of 2020, the Company recorded its proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net of tax, in the Company’s opening retained earnings.
The Company recorded its proportionate share of loss from its investment in the Change Healthcare JV of $119 million, $194 million and $248 million in 2020, 2019 and 2018. The Company’s proportionate share of income or loss from this investment includes transaction and integration expenses incurred by the Change Healthcare JV 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 the joint venture recorded in 2018 was partially offset by a provisional tax benefit of $76 million recognized by the Change Healthcare JV primarily due to a reduction in the future applicable tax rate related to the December 2017 enactment of the 2017 Tax Cuts and Jobs Act. These amounts were recorded under the caption “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statements of operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Separation of the Change Healthcare JV
On March 10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare JV. The separation was affected through the split-off of PF2 SpinCo, Inc. (“SpinCo”), a wholly owned subsidiary of the Company that held all of the Company’s interest in the Change Healthcare JV, to certain of the Company’s stockholders through an exchange offer (“Split-off”), followed by the merger of SpinCo with and into Change, with Change surviving the merger (“Merger”).
In connection with the Split-off, on March 9, 2020, the Company distributed all 176.0 million outstanding shares of common stock of SpinCo to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson common stock which now are held as treasury stock on the Company’s consolidated balance sheet as of March 31, 2020. Refer to Financial Note 22, “Stockholders' Equity,” for more information. Following consummation of the exchange offer, on March 10, 2020, SpinCo was merged with and into Change Healthcare, and each share of SpinCo common stock converted into one share of Change common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. The Split-off and the Merger are intended to be generally tax-free transactions for U.S. federal income tax purposes. Following the Split-off, the Company does not beneficially own any of Change’s outstanding securities. In the fourth quarter of 2020, the Company recognized an estimated gain of $414 million related to the transaction which is included under the caption “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statements of operations. The estimated gain was calculated as follows:
|
|
|
|
|
(In millions, except per share data)
|
|
Fair value of McKesson common stock accepted (15.4 million shares at $131.97 per share on March 9, 2020)
|
$
|
2,036
|
|
Investment in the Change Healthcare JV at exchange date
|
(2,096
|
)
|
Reversal of deferred tax liability
|
521
|
|
Release of accumulated other comprehensive attributable to the joint venture
|
(24
|
)
|
Less: Transaction costs incurred
|
(23
|
)
|
Estimated net gain on split-off of the Change Healthcare JV
|
$
|
414
|
|
At March 31, 2019, the Company’s carrying value of this investment was $3.5 billion. The carrying value included equity method intangible assets and goodwill which caused the Company’s investment basis to exceed its proportionate share of the Change Healthcare JV’s book value of net assets by approximately $4.2 billion at March 31, 2019.
Related Party Transactions
In connection with the formation of the Change Healthcare JV, McKesson, the Change Healthcare JV and certain shareholders of Change 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 agreements. Fees incurred or earned from the Advisory Agreement were not material for 2020, 2019 and 2018. Fees incurred or earned from the TSA were $22 million in 2020, $60 million in 2019 and $91 million in 2018. The Advisory Agreement was terminated in 2020.
In 2019, the Company renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability payable to the shareholders of Change. In exchange for the shareholders of Change agreeing to extinguish the liability, the Company agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from the Change Healthcare JV that would otherwise have been required to be 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 its consolidated statement of operations in 2019. At March 31, 2020 and 2019, the Company had no outstanding payable balance to the shareholders of Change under the TRA.
Revenues recognized and expenses incurred under commercial agreements with the Change Healthcare JV were not material during the years ended March 31, 2020, 2019 and 2018. At March 31, 2020 and 2019, receivables due from the Change Healthcare JV were not material.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Under the agreement executed in 2019 between the Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, McKesson has the ability to adjust the manner in which certain depreciation or amortization deductions are allocated among Change Healthcare Inc. and McKesson. McKesson exercised its right under the agreement and allocated certain depreciation and amortization deductions to Change for the tax year ended March 31, 2019 and estimated certain depreciation and amortization deductions for the tax year ended March 31, 2020. These allocated depreciation and amortization deductions may change as certain events occur, including the filing of the Change Healthcare JV tax return for the tax year ended March 31, 2020.
After McKesson’s separation of its interest in the Change Healthcare JV, the aforementioned TRA agreement requires the Change Healthcare JV to pay McKesson 85% of the net cash tax savings realized, or deemed to be realized, by Change resulting from the depreciation or amortization allocated to Change by McKesson. The receipt of any payments from the Change Healthcare JV under the TRA is dependent upon Change benefiting from this depreciation or amortization in future tax return filings. This creates uncertainty over the amount, timing and probability of the gain recognized. As such, the Company accounts for the TRA as a gain contingency, with no receivable recognized as of March 31, 2020.
Concurrent with the IPO in July 2019, Change Healthcare Inc. appointed two of the Company’s executive officers as well as McKesson’s former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting the Company applied to its investment in the Change Healthcare JV. Effective as of the time of the Merger, these individuals resigned from the Board of Directors of Change. Aside from the divestiture transaction discussed above, there were no material transactions with Change Healthcare Inc.
3. Held for Sale
Assets and liabilities that have met the classification as held for sale were $906 million and $683 million as of March 31, 2020. These amounts primarily consist of the majority of the Company’s German pharmaceutical wholesale business described below.
German Wholesale Joint Venture
On December 12, 2019, the Company announced that it had entered into an agreement (the “Contribution Agreement”) with a third-party intending to contribute the majority of its German wholesale business to create a joint venture in which McKesson will have a non-controlling interest. This business is within the Company’s European Pharmaceutical Solutions segment. The agreement is subject to regulatory approvals and is expected to close within the second half of 2021. The transaction does not meet the criteria to be reported as a discontinued operation as it does not constitute a significant strategic business shift. As of March 31, 2020, $842 million of assets, and $656 million of liabilities were classified as “Assets held for sale” and “Liabilities held for sale” in the consolidated balance sheet.
As part of the transaction, during 2020 the Company recorded charges totaling $275 million (pre-tax and after-tax) to remeasure the disposal group to the lower of carrying value or fair value less costs to sell. This amount is included in operating expenses in the consolidated statements of operations for the year ended March 31, 2020. The Company’s measurement of the fair value of the disposal group was based on the total consideration received by the Company as outlined in the Contribution Agreement. Certain components of the total consideration included fair value measurements that fall within Level 3 of the fair value hierarchy.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The total assets and liabilities of the German wholesale joint venture that are classified as held for sale on the Company’s consolidated balance sheet as of March 31, 2020, are as follows:
|
|
|
|
|
(In millions)
|
March 31, 2020
|
Assets
|
|
Current Assets
|
|
Receivables, net
|
$
|
548
|
|
Inventories, net
|
478
|
|
Long-term assets
|
88
|
|
Remeasurement of assets of business held for sale to fair value less cost to sell (1)
|
(272
|
)
|
Total Assets held for sale
|
$
|
842
|
|
|
|
Liabilities
|
|
Current Liabilities
|
|
Drafts and accounts payable
|
$
|
450
|
|
Other accrued liabilities
|
40
|
|
Long-term liabilities
|
166
|
|
Total Liabilities held for sale
|
$
|
656
|
|
|
|
(1)
|
Includes the effect of approximately $3 million of cumulative foreign currency translation adjustment.
|
4. Restructuring, Impairment and Related Charges
The Company recorded pre-tax restructuring, impairment and related charges of $268 million, $597 million and $567 million in 2020, 2019 and 2018. These charges are included under the caption “Restructuring, impairment and related charges” within operating expenses in the consolidated statements of operations. There were no material restructuring initiatives announced during 2020.
Fiscal 2019 Initiatives
On April 25, 2018, the Company announced a strategic growth initiative intended to drive long-term incremental profit growth and to increase operational efficiency. The initiative consists of multiple growth priorities and plans to optimize the Company’s operating models and cost structures primarily through centralization, cost management and outsourcing of certain administrative functions.
As part of the growth initiative, the Company committed to implement certain actions including a reduction in workforce, facility consolidation and store closures. This set of initiatives was substantially complete by the end of 2020. The Company recorded pre-tax charges of $15 million ($12 million after-tax) and $135 million ($122 million after-tax) in 2020 and 2019. Any remaining charges primarily consist of exit-related costs.
As previously announced on November 30, 2018, the Company relocated its corporate headquarters, effective April 1, 2019, from San Francisco, California to Irving, Texas to improve efficiency, collaboration and cost competitiveness. The Company anticipates that the relocation will be complete by January 2021. As a result, the Company recorded pre-tax charges of $44 million ($32 million after-tax) and $33 million ($24 million after-tax) in 2020 and 2019, primarily representing employee retention expenses, asset impairments and accelerated depreciation. The Company expects to record total pre-tax charges of approximately $80 million to $130 million, of which $77 million of pre-tax charges were recorded to date. The estimated remaining charges primarily consist of lease and other exit-related costs and employee-related expenses including retention.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
During the fourth quarter of 2019, the Company committed to additional programs to continue its operating model and cost optimization efforts. The Company continues to implement centralization of certain functions and outsourcing through an expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of business operations, related headcount reductions, the further closures of retail pharmacy stores in Europe and closures of other facilities. The Company expects to incur total charges of approximately $300 million to $350 million for these programs, of which pre-tax charges of $72 million ($55 million after-tax) and $163 million ($127 million after-tax) were recorded in 2020 and 2019, primarily representing employee severance, accelerated depreciation expense and project consulting fees. We anticipate these additional programs will be substantially completed by the end of 2021. The estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.
Restructuring, impairment and related charges for the Company’s fiscal 2019 initiatives for the year ended March 31, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2020
|
(In millions)
|
U.S. Pharmaceutical and Specialty Solutions
|
|
European Pharmaceutical Solutions
|
|
Medical-Surgical Solutions
|
|
Other
|
|
Corporate
|
|
Total
|
Severance and employee-related costs, net
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
33
|
|
|
$
|
40
|
|
Exit and other-related costs (1)
|
—
|
|
|
11
|
|
|
19
|
|
|
1
|
|
|
44
|
|
|
75
|
|
Asset impairments and accelerated depreciation
|
—
|
|
|
5
|
|
|
1
|
|
|
—
|
|
|
10
|
|
|
16
|
|
Total
|
$
|
3
|
|
|
$
|
17
|
|
|
$
|
22
|
|
|
$
|
2
|
|
|
$
|
87
|
|
|
$
|
131
|
|
|
|
(1)
|
Exit and other-related costs primarily include project consulting fees.
|
Restructuring, impairment and related charges for the Company’s 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, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
U.S. Pharmaceutical and Specialty Solutions
|
|
European Pharmaceutical Solutions
|
|
Medical-Surgical Solutions
|
|
Other
|
|
Corporate
|
|
Total
|
Balance, March 31, 2019 (1)
|
$
|
31
|
|
|
$
|
38
|
|
|
$
|
15
|
|
|
$
|
29
|
|
|
$
|
37
|
|
|
$
|
150
|
|
Restructuring charges recognized
|
3
|
|
|
17
|
|
|
22
|
|
|
2
|
|
|
87
|
|
|
131
|
|
Non-cash charges
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
|
—
|
|
|
(10
|
)
|
|
(16
|
)
|
Cash payments
|
(13
|
)
|
|
(26
|
)
|
|
(16
|
)
|
|
(20
|
)
|
|
(61
|
)
|
|
(136
|
)
|
Other
|
1
|
|
|
—
|
|
|
(2
|
)
|
|
(4
|
)
|
|
(14
|
)
|
|
(19
|
)
|
Balance, March 31, 2020 (2)
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
18
|
|
|
$
|
7
|
|
|
$
|
39
|
|
|
$
|
110
|
|
|
|
(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.
|
|
|
(2)
|
As of March 31, 2020, the total reserve balance was $110 million of which $99 million was recorded in other accrued liabilities and $11 million was recorded in other noncurrent liabilities.
|
Fiscal 2018 McKesson Europe Plan
In the second quarter of 2018, the Company committed to a restructuring plan, which primarily consisted of the closures of underperforming retail pharmacy stores in the U.K. and a reduction in workforce. Under this plan, the Company expected to record total pre-tax charges of approximately $90 million to $130 million for its European Pharmaceutical Solutions segment, of which $92 million of pre-tax charges were recorded through the end of 2019. The plan was substantially completed in 2020 and additional charges and payments in 2020 were not material. In 2019 and 2018, the Company 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. It made cash payments of $32 million and $10 million during 2019 and 2018, primarily related to severance. The reserve balances as of March 31, 2020 and 2019 were $4 million and $19 million, recorded in other accrued liabilities in the Company’s consolidated balance sheets.
Other Plans
There were no material restructuring, impairment and related charges for other plans recorded during 2020, 2019 and 2018. The restructuring liabilities for other plans as of March 31, 2020 and 2019 were $43 million and $68 million.
Long-Lived Asset Impairments
McKesson Europe
In 2020, the Company recorded pre-tax charges of $82 million ($66 million after-tax) to impair certain long-lived and intangible assets within the Company’s European Pharmaceutical Solutions segment. These charges related primarily to intangible assets associated with pharmacy licenses within the U.K retail business due to a decline in estimated future cash flows driven by additional U.K. government reimbursement reductions communicated in the third quarter of 2020. The Company used a combination of an income approach (a DCF method) and a market approach to estimate the fair value of the long-lived and intangible 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2019, the Company recorded pre-tax charges of $210 million ($172 million after-tax) to impair certain long-lived assets (primarily pharmacy licenses) for its U.K. retail business primarily driven by government reimbursement reductions and competitive pressures in the U.K. In 2018, the Company recorded 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 its European businesses including consideration of significant government reimbursement reductions in its U.K. retail business. In 2019 and 2018, the Company used an income approach (a DCF method) or a combination of an income approach and a market approach to estimate the fair value of the 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 2020, the Company performed an interim impairment test of long-lived and intangible assets for its Rexall Health retail business due to the decline in the estimated future cash flows primarily driven by lower than expected growth in both prescription volume and sales of non-prescription goods. As a result, the Company recognized a charge of $30 million (pre-tax and after-tax) to impair certain long-lived and intangible assets, primarily customer relationships. The Company utilized an income approach (a DCF method) for estimating the fair value of the long-lived and intangible assets. The fair value of these assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information.
In 2019 and 2018, the Company recorded charges of $35 million and $33 million (pre-tax and after-tax) to impair certain intangible assets (primarily customer relationships) for its Rexall Health retail business. The impairments were primarily the result of the decline in estimated future cash flows for this business. The estimated cash flow projections were negatively affected by lower projected overall growth rate from the ongoing impact of government regulations in 2019 and significant generics reimbursement reductions across Canada and minimum wage increases in multiple provinces in 2018. The Company utilized an income approach (a DCF method) for estimating the fair value of 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.
Refer to Financial Note 19, “Fair Value Measurements,” for more information on nonrecurring fair value measurements.
|
|
5.
|
Business Acquisitions and Divestitures
|
During 2020, the Company did not complete any material acquisitions. During 2020 and 2019, the Company did not complete any material divestitures aside from the separation of the Change Healthcare JV, as described in more detail in Financial Note 2, “Investment in Change Healthcare Joint Venture.”
Acquisitions
2019 Acquisition
Medical Specialties Distributors LLC (“MSD”)
On June 1, 2018, the Company completed its 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 the Company’s consolidated statements of operations within its Medical-Surgical 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 in the first quarter of 2020. The final purchase price allocation included acquired identifiable intangibles of $326 million primarily representing customer relationships with a weighted average life of 18 years.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the final recording of the fair value of the assets acquired and liabilities assumed for this acquisition as of the acquisition date as well as adjustments made during the measurement period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Amounts Previously Recognized as of Acquisition Date (Provisional as Adjusted) (1)
|
|
FY20 Measurement Period Adjustments
|
|
Amounts Recognized as of the Acquisition Date (2)
|
Receivables
|
$
|
113
|
|
|
$
|
(1
|
)
|
|
$
|
112
|
|
Other current assets, net of cash and cash equivalents acquired
|
72
|
|
|
(1
|
)
|
|
71
|
|
Goodwill
|
381
|
|
|
7
|
|
|
388
|
|
Intangible assets
|
326
|
|
|
—
|
|
|
326
|
|
Other long-term assets
|
55
|
|
|
1
|
|
|
56
|
|
Current liabilities
|
(72
|
)
|
|
—
|
|
|
(72
|
)
|
Other long-term liabilities
|
(91
|
)
|
|
(6
|
)
|
|
(97
|
)
|
Net assets acquired, net of cash and cash equivalents
|
$
|
784
|
|
|
$
|
—
|
|
|
$
|
784
|
|
|
|
(1)
|
Provisional amounts as of March 31, 2019.
|
|
|
(2)
|
Final amounts as of May 31, 2019.
|
2018 Acquisitions
RxCrossroads
On January 2, 2018, the Company completed its 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 the Company’s 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, the Company completed its 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 the first quarter of 2019. The financial results of CMM have been included in the Company’s 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, the Company recorded a liability for this remaining contingent consideration at its estimated fair value of $113 million as of the acquisition date in its 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 was extinguished and changes in fair value were recorded in the Company’s consolidated statements of operations. The initial fair value of this contingent consideration was a non-cash investing activity. Pursuant to the agreement, the Company paid additional contingent consideration of $69 million and $68 million in May 2019 and May 2018. As of March 31, 2020 and 2019, the related liability was nil and $69 million.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Other
During 2018, the Company also completed 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 the Company’s 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.
Other Acquisitions
During the three years presented, the Company also completed a number of other de minimis acquisitions within its operating segments. Financial results for the Company’s business acquisitions have been included in the Company’s consolidated financial statements since their respective acquisition dates. Purchase prices for business acquisitions have been allocated based on estimated fair values at the respective acquisition dates.
Goodwill recognized for business acquisitions is generally not expected to be deductible for tax purposes. However, if the assets of another company are acquired, the goodwill may be deductible for tax purposes.
Divestiture
Fiscal 2018
Enterprise Information Solutions
On August 1, 2017, the Company entered into an agreement with a third party to sell its Enterprise Information Solutions (“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. McKesson received net cash proceeds of $169 million after $16 million of assumed net debt by the third party. The Company recognized a pre-tax gain of $109 million ($30 million after-tax) upon the disposition of this business in the third quarter of 2018 in operating expenses.
|
|
6.
|
Share-Based Compensation
|
The Company provides share-based compensation to its employees, officers and non-employee directors, including restricted stock units (“RSUs”), performance-based stock units (“PSUs”, formerly referred to as total shareholder return units or “TSRUs”), performance-based restricted stock units (“PeRSUs”), stock options and an employee stock purchase plan (“ESPP”) (collectively, “share-based awards”). Most of the share-based awards are granted in the first quarter of each fiscal year.
Compensation expense for the share-based awards is recognized for the portion of awards ultimately expected to vest. The Company estimates 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.
Compensation expense is classified in the consolidated statements of operations or capitalized in the consolidated balance sheets in the same manner as cash compensation paid to the Company’s employees. No share-based compensation expenses were capitalized as part of the cost of an asset in 2020 and 2019. No material amounts were capitalized in 2018.
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,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Restricted stock unit awards (1)
|
$
|
104
|
|
|
$
|
75
|
|
|
$
|
46
|
|
Stock options
|
7
|
|
|
12
|
|
|
14
|
|
Employee stock purchase plan
|
8
|
|
|
8
|
|
|
9
|
|
Share-based compensation expense
|
119
|
|
|
95
|
|
|
69
|
|
Tax benefit for share-based compensation expense (2)
|
(18
|
)
|
|
(12
|
)
|
|
(28
|
)
|
Share-based compensation expense, net of tax
|
$
|
101
|
|
|
$
|
83
|
|
|
$
|
41
|
|
|
|
(1)
|
Includes compensation expense recognized for RSUs, PSUs and PeRSUs.
|
|
|
(2)
|
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 2020 and 2019 included discrete income tax expense of $2 million and $4 million. 2018 included a discrete income tax benefit of $8 million related to the adoption of the amended accounting guidance on share-based compensation.
|
Stock Plans
In July 2013, the Company’s stockholders approved the 2013 Stock Plan to replace the 2005 Stock Plan. Under these stock plans, the Company may issue restricted stock, RSUs, PSUs, PeRSUs, stock options and other share-based awards to selected employees, officers and non-employee directors. The 2013 Stock Plan reserves 30 million shares plus unused reserved shares under the 2005 Stock Plan. As of March 31, 2020, 20 million shares remain available for future grant under the 2013 Stock Plan.
Restricted Stock Unit Awards
RSUs entitle the holder to receive a specified number of shares of the Company’s common stock which vest over a period of generally three to four years as determined by the Compensation Committee at the time of grant. The fair value of the award is determined based on the market price of the Company’s common stock on the grant date and the related compensation expense is recognized over the vesting period on a straight-line basis.
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, 2020, approximately 72,000 RSUs for the Company’s directors are vested.
PSUs are conditional upon the attainment of market and performance objectives over a specified period. The number of vested PSUs is assessed at the end of a three-year performance period upon attainment of meeting certain earnings per share targets, average return on invested capital and for certain participants, total shareholder return relative to a peer group of companies and for special PSUs granted in 2019 meeting certain cumulative operating profit metrics. The Company uses the Monte Carlo simulation model to measure the fair value of the 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 generally three years. Expense is attributed to the requisite service period on a straight-line basis based on the fair value of the PSUs, adjusted for the performance modifier at the end of each reporting period. For PSUs that are designated as equity awards, the fair value is measured at the grant date. For PSUs that are eligible for cash settlement and designated as liability awards, the Company re-measures the fair value at the end of each reporting period and adjusts a corresponding liability in its consolidated balance sheets for changes in fair value.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
PeRSUs are awards for which the number of RSUs awarded is conditional upon the attainment of one or more performance objectives over a specified period. The Company did not grant any PeRSUs during the year ended March 31, 2020. The Compensation Committee approves the target number of PeRSUs representing the base number of RSUs that could be awarded 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, 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. The Company recognizes compensation expense for these awards on a straight-line basis over the requisite aggregate service period of generally four years.
The weighted-average assumptions used in the Monte Carlo valuations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
Expected stock price volatility
|
30
|
%
|
|
31
|
%
|
|
29
|
%
|
Expected dividend yield
|
1.3
|
%
|
|
0.9
|
%
|
|
0.8
|
%
|
Risk-free interest rate
|
2.2
|
%
|
|
2.6
|
%
|
|
1.5
|
%
|
Expected life (in years)
|
3
|
|
|
3
|
|
|
3
|
|
The following table summarizes activity for restricted stock unit awards (RSUs, PSUs and PeRSUs) during 2020:
|
|
|
|
|
|
|
(In millions, except per share data)
|
Shares
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
Nonvested, March 31, 2019
|
2
|
|
$
|
142.77
|
|
Granted
|
1
|
|
129.90
|
|
Cancelled
|
—
|
|
134.28
|
|
Vested
|
—
|
|
158.08
|
|
Nonvested, March 31, 2020
|
3
|
|
$
|
135.57
|
|
The following table provides data related to restricted stock unit award activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Total fair value of shares vested
|
$
|
67
|
|
|
$
|
59
|
|
|
$
|
156
|
|
Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax
|
$
|
155
|
|
|
$
|
119
|
|
|
$
|
97
|
|
Weighted-average period in years over which restricted stock unit award cost is expected to be recognized
|
3
|
|
|
2
|
|
|
2
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 vesting schedule.
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. The Company uses the Black-Scholes options-pricing model to estimate the fair value of its 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.
Weighted-average assumptions used to estimate the fair value of employee stock options were as follow: (1)
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
2019
|
|
2018
|
Expected stock price volatility (2)
|
|
26
|
%
|
|
25
|
%
|
Expected dividend yield (3)
|
|
0.9
|
%
|
|
0.8
|
%
|
Risk-free interest rate (4)
|
|
2.8
|
%
|
|
1.7
|
%
|
Expected life (in years) (5)
|
|
4.6
|
|
|
4.5
|
|
|
|
(1)
|
The Company did not grant any stock options during the year ended March 31, 2020.
|
|
|
(2)
|
The computation of expected volatility was based on a combination of the historical volatility of the Company’s common stock and implied market volatility. The Company believes this market-based input provides a reasonable estimate of its future stock price movements and is consistent with employee stock option valuation considerations.
|
|
|
(3)
|
Expected dividend yield is based on historical experience and investors’ current expectations.
|
|
|
(4)
|
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 grant date.
|
|
|
(5)
|
The expected life of the options is based primarily on historical employee stock option exercises and other behavioral data and reflects the impact of changes in the contractual life of current option grants compared to the Company’s historical grants.
|
The following is a summary of stock options outstanding at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
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
|
$
|
118.41
|
|
–
|
$178.13
|
|
1
|
|
|
4
|
|
$
|
148.36
|
|
|
—
|
|
|
$
|
148.62
|
|
178.14
|
|
–
|
237.86
|
|
1
|
|
|
2
|
|
198.25
|
|
|
1
|
|
|
199.88
|
|
|
|
|
|
2
|
|
|
|
|
|
|
1
|
|
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes stock option activity during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value (2)
|
Outstanding, March 31, 2019
|
3
|
|
$
|
166.72
|
|
|
3
|
|
$
|
4
|
|
Granted
|
—
|
|
—
|
|
|
|
|
|
Cancelled
|
—
|
|
171.39
|
|
|
|
|
|
Exercised
|
(1)
|
|
113.34
|
|
|
|
|
|
Outstanding, March 31, 2020
|
2
|
|
$
|
180.48
|
|
|
3
|
|
$
|
1
|
|
Vested and expected to vest (1)
|
2
|
|
$
|
180.52
|
|
|
3
|
|
$
|
1
|
|
Vested and exercisable, March 31, 2020
|
2
|
|
189.28
|
|
|
2
|
|
1
|
|
|
|
(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)
|
2020
|
|
2019
|
|
2018
|
Weighted-average grant date fair value per stock option
|
$
|
—
|
|
|
$
|
34.98
|
|
|
$
|
34.24
|
|
Aggregate intrinsic value on exercise
|
$
|
17
|
|
|
$
|
16
|
|
|
$
|
60
|
|
Cash received upon exercise
|
$
|
66
|
|
|
$
|
29
|
|
|
$
|
77
|
|
Tax benefits realized related to exercise
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
22
|
|
Total fair value of stock options vested
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
20
|
|
Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax
|
$
|
6
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Weighted-average period in years over which stock option compensation cost is expected to be recognized
|
2
|
|
|
2
|
|
|
2
|
|
Employee Stock Purchase Plan
The Company has an ESPP under which 21 million shares have been authorized for issuance. The ESPP allows eligible employees to purchase shares of the Company’s 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 for all the years presented. The Company recognizes costs for employer matching contributions as ESPP expense over the relevant purchase period. Shares issued under the ESPP were not material in 2020, 2019, and 2018. At March 31, 2020, 3 million shares remain available for issuance.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Interest income
|
$
|
49
|
|
|
$
|
39
|
|
|
$
|
48
|
|
Equity in earnings, net (1)
|
36
|
|
|
43
|
|
|
32
|
|
Gain from sale of equity investment (2)
|
—
|
|
|
56
|
|
|
43
|
|
Actuarial losses from pension plans (3)
|
(127
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
54
|
|
|
44
|
|
|
7
|
|
Total
|
$
|
12
|
|
|
$
|
182
|
|
|
$
|
130
|
|
|
|
(1)
|
Primarily recorded within the Company’s European 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.
|
|
|
(3)
|
Includes $116 million from the termination of the U.S. defined benefit pension plan and $11 million related to a settlement from the executive benefit retirement plan for a recently retired executive. Refer to Financial Note 17, “Pension Benefits.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Income from continuing operations before income taxes
|
|
|
|
|
|
U.S.
|
$
|
216
|
|
|
$
|
1,512
|
|
|
$
|
1,175
|
|
Foreign
|
928
|
|
|
(902
|
)
|
|
(936
|
)
|
Total income from continuing operations before income taxes
|
$
|
1,144
|
|
|
$
|
610
|
|
|
$
|
239
|
|
Income tax expense (benefit) related to continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
Federal
|
$
|
170
|
|
|
$
|
(20
|
)
|
|
$
|
577
|
|
State
|
48
|
|
|
35
|
|
|
33
|
|
Foreign
|
142
|
|
|
152
|
|
|
205
|
|
Total current
|
360
|
|
|
167
|
|
|
815
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
(204
|
)
|
|
223
|
|
|
(767
|
)
|
State
|
(105
|
)
|
|
44
|
|
|
17
|
|
Foreign
|
(33
|
)
|
|
(78
|
)
|
|
(118
|
)
|
Total deferred
|
(342
|
)
|
|
189
|
|
|
(868
|
)
|
Income tax expense (benefit)
|
$
|
18
|
|
|
$
|
356
|
|
|
$
|
(53
|
)
|
The Company recorded income tax expense of $18 million and $356 million in 2020 and 2019, and income tax benefit of $53 million related to continuing operations in 2018.
The Company’s reported income tax expense rates were 1.6% and 58.4% in 2020 and 2019 and an income tax benefit rate of 22.2% in 2018. Fluctuations in the Company’s reported income tax rates are primarily due to the impact of the Change Healthcare joint venture divestiture in 2020, the 2017 Tax Act in 2018, the impact of nondeductible impairment charges, and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21% for 2020 and 2019 and 31.6% for 2018 to income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Income tax expense at federal statutory rate
|
$
|
240
|
|
|
$
|
128
|
|
|
$
|
75
|
|
State income taxes, net of federal tax benefit
|
(41
|
)
|
|
70
|
|
|
50
|
|
Tax effect of foreign operations
|
(81
|
)
|
|
(86
|
)
|
|
(146
|
)
|
Unrecognized tax benefits and settlements
|
(7
|
)
|
|
20
|
|
|
454
|
|
Non-deductible goodwill
|
7
|
|
|
357
|
|
|
585
|
|
Share-based compensation
|
2
|
|
|
4
|
|
|
(8
|
)
|
Net tax benefit on intellectual property transfer
|
—
|
|
|
(42
|
)
|
|
(178
|
)
|
Tax-free gain on investment exit (1)
|
(87
|
)
|
|
—
|
|
|
—
|
|
Impact of change in U.S. tax rate on temporary differences
|
—
|
|
|
(81
|
)
|
|
(1,324
|
)
|
Transition tax on foreign earnings
|
—
|
|
|
(5
|
)
|
|
457
|
|
Capital loss carryback
|
(19
|
)
|
|
—
|
|
|
—
|
|
Other, net (2)
|
4
|
|
|
(9
|
)
|
|
(18
|
)
|
Income tax expense (benefit)
|
$
|
18
|
|
|
$
|
356
|
|
|
$
|
(53
|
)
|
|
|
(1)
|
Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for additional information regarding the separation of the Change Healthcare JV.
|
|
|
(2)
|
The Company’s effective tax rates were impacted by other favorable U.S. federal permanent differences including research and development credits of $7 million, $7 million and $11 million in 2020, 2019 and 2018.
|
On March 10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare JV as described in Financial Note 2, “Investment in Change Healthcare Joint Venture.” The Company’s reported income tax expense rate for 2020 was favorably impacted by this transaction given that it was intended to generally be a tax-free split-off for U.S. federal income tax purposes. In the fourth quarter of 2020, the Company recognized an estimated gain for financial reporting purposes of $414 million (pre-tax and after-tax) related to the separation transaction.
The Company’s reported income tax expense rate for 2020 was unfavorably impacted by non-cash pre-tax charges of $275 million (pre-tax and after-tax) to remeasure the carrying value of assets and liabilities held for sale related to the expected formation of a new German wholesale joint venture within the Company’s European Pharmaceutical Solutions segment. Refer to Financial Note 3, “Held for Sale,” for more information.
The Company’s reported income tax expense rate for 2019 was unfavorably impacted by non-cash pre-tax charges of $1.8 billion (pre-tax and after-tax) to impair the carrying value of goodwill for its European Pharmaceutical Solutions segment, given that these charges are generally not deductible for tax purposes. Its reported income tax benefit rate for 2018 was unfavorably impacted by non-cash charges of $1.7 billion (pre-tax and after-tax) to impair the carrying value of goodwill, given that generally no tax benefit was recognized for these charges. Refer to Financial Note 14, “Goodwill and Intangible Assets, Net,” for more information.
During 2019, the Company 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 U.S. was the acquirer of the software and is entitled to amortize the purchase price of the assets for tax purposes. In accordance with the adopted amended accounting guidance on income taxes, a discrete tax benefit of $42 million was recognized in the second quarter of 2019 with a corresponding increase to a deferred tax asset for the future tax amortization.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On December 19, 2016, the Company sold various software relating to its technology 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 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 recognized over the tax lives of the assets. As a result, the Company recognized a net tax benefit of $178 million in 2018. The Company no longer recognized the tax benefit associated with this amortization in continuing operations upon adoption of the amended guidance related to intra-entity transfer of an asset other than inventory in 2020 or 2019.
Deferred tax balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
Assets
|
|
|
|
Receivable allowances
|
$
|
72
|
|
|
$
|
70
|
|
Compensation and benefit related accruals
|
331
|
|
|
377
|
|
Net operating loss and credit carryforwards
|
828
|
|
|
885
|
|
Lease obligations
|
482
|
|
|
—
|
|
Other
|
109
|
|
|
216
|
|
Subtotal
|
1,822
|
|
|
1,548
|
|
Less: valuation allowance
|
(833
|
)
|
|
(870
|
)
|
Total assets
|
989
|
|
|
678
|
|
Liabilities
|
|
|
|
Inventory valuation and other assets
|
(1,947
|
)
|
|
(2,016
|
)
|
Fixed assets and systems development costs
|
(202
|
)
|
|
(170
|
)
|
Intangibles
|
(531
|
)
|
|
(513
|
)
|
Change Healthcare equity investment
|
—
|
|
|
(885
|
)
|
Lease right-of-use assets
|
(449
|
)
|
|
—
|
|
Other
|
(56
|
)
|
|
(34
|
)
|
Total liabilities
|
(3,185
|
)
|
|
(3,618
|
)
|
Net deferred tax liability
|
$
|
(2,196
|
)
|
|
$
|
(2,940
|
)
|
|
|
|
|
Long-term deferred tax asset
|
$
|
59
|
|
|
$
|
58
|
|
Long-term deferred tax liability
|
(2,255
|
)
|
|
(2,998
|
)
|
Net deferred tax liability
|
$
|
(2,196
|
)
|
|
$
|
(2,940
|
)
|
The Company assesses 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 allowances were approximately $833 million and $870 million in 2020 and 2019 and primarily relate to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. The decrease in the valuation allowance of $37 million included $30 million of expense related to foreign losses incurred in 2020, for which no benefit was recognized, offset by the remeasurement of foreign loss carryforwards and their related valuation allowance of $67 million.
The Company has federal, state and foreign net operating loss carryforwards of $75 million, $3.3 billion and $1.9 billion at March 31, 2020. Federal and state net operating losses will expire at various dates from 2021 through 2041. Substantially all its foreign net operating losses have indefinite lives. In addition, the Company has foreign capital loss carryforwards of $739 million with indefinite lives.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Unrecognized tax benefits at beginning of period
|
$
|
1,052
|
|
|
$
|
1,183
|
|
|
$
|
486
|
|
Additions based on tax positions related to prior years
|
20
|
|
|
78
|
|
|
47
|
|
Reductions based on tax positions related to prior years
|
(168
|
)
|
|
(234
|
)
|
|
(124
|
)
|
Additions based on tax positions related to current year
|
82
|
|
|
68
|
|
|
778
|
|
Reductions based on settlements
|
(8
|
)
|
|
(13
|
)
|
|
(7
|
)
|
Reductions based on the lapse of the applicable statutes of limitations
|
(13
|
)
|
|
(25
|
)
|
|
—
|
|
Exchange rate fluctuations
|
(7
|
)
|
|
(5
|
)
|
|
3
|
|
Unrecognized tax benefits at end of period
|
$
|
958
|
|
|
$
|
1,052
|
|
|
$
|
1,183
|
|
As of March 31, 2020, the Company had $958 million of unrecognized tax benefits, of which $763 million would reduce income tax expense and the effective tax rate, if recognized. The decrease in unrecognized tax benefits in 2020 compared to 2019 is primarily attributable to the favorable resolution of an outstanding California tax refund claim which decreased unrecognized tax benefits by $91 million. 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. During the next twelve months, the Company does not expect any material reduction in its unrecognized tax benefits. However, this may change as it continues to have ongoing negotiations with various taxing authorities throughout the year.
The Company reports interest and penalties on income taxes as income tax expense. It recognized income tax expense of $23 million and $33 million in 2020 and 2019 and an income tax benefit of $1 million in 2018, representing interest and penalties, in its consolidated statements of operations. As of March 31, 2020 and 2019, it accrued $91 million and $68 million cumulatively in interest and penalties on unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. During the three months ended March 31, 2020, the Company signed the Revenue Agent’s Report from the U.S. Internal Revenue Service (“IRS”) relating to their audit of the fiscal years 2013 through 2015. During the third quarter of 2018, the Company signed the Revenue Agent’s Report from the U.S. IRS relating to their audit of the fiscal years 2010 through 2012. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2013 through the current fiscal year.
Undistributed earnings of the Company’s foreign operations of approximately $5 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. The Company may remit foreign earnings to the United States to the extent it is tax efficient to do so. It does not expect the tax impact from remitting these earnings to be material.
9. Redeemable Noncontrolling Interests and Noncontrolling Interests
Redeemable Noncontrolling Interests
The Company’s redeemable noncontrolling interests primarily relate to its consolidated subsidiary, McKesson Europe. Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share. As a result, during 2020, 2019 and 2018, the Company recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $42 million, $45 million and $43 million. All amounts were recorded in net income attributable to noncontrolling interests in the Company’s consolidated statements of operations and the corresponding liability balance was recorded in other accrued liabilities in the Company’s consolidated balance sheets.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have a right to put (“Put Right”) their noncontrolling shares at €22.99 per share, increased annually for interest in the amount of five 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 noncontrolling interests. During 2020 and 2019, there were no material exercises of the Put Right. During 2018, the Company 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 by $53 million. The balance of redeemable noncontrolling interests is reported as 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, 2020 and 2019, the carrying value of redeemable noncontrolling interests of $1.40 billion and $1.39 billion exceeded the maximum redemption value of $1.22 billion and $1.23 billion. At March 31, 2020 and 2019, the Company owned approximately 77% of McKesson Europe’s outstanding common shares. In April 2020, the Company paid $46 million to purchase 1.8 million shares of McKesson Europe through the exercises of the Put Right by the noncontrolling shareholders, which increased the Company’s ownership of McKesson Europe’s outstanding common shares to 78%.
Appraisal Proceedings
Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of McKesson Europe initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court (the “Court”) to challenge the adequacy of the Put Amount, annual recurring compensation amount, and/or the guaranteed dividend. During the pendency of the Appraisal Proceedings, such amount will be paid as specified currently in the Domination Agreement. On September 19, 2018, the Court ruled that the Put Amount shall be increased by €0.51 resulting in an adjusted Put Amount of €23.50. The annual recurring compensation amount and/or the 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, the Company would be required to make certain additional payments for any shortfall to all McKesson Europe noncontrolling shareholders who previously received amounts under the Domination Agreement.
Noncontrolling Interests
Noncontrolling interests represent third-party equity interests in the Company’s consolidated entities primarily related to ClarusONE and Vantage, which were $217 million and $193 million at March 31, 2020 and 2019 in the Company’s consolidated balance sheets. During 2020, 2019 and 2018, the Company allocated a total of $178 million, $176 million and $187 million of net income to noncontrolling interests.
Changes in redeemable noncontrolling interests and noncontrolling interests for the years ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
Noncontrolling
Interests
|
|
Redeemable
Noncontrolling
Interests
|
Balance, March 31, 2018
|
$
|
253
|
|
|
$
|
1,459
|
|
Net income attributable to noncontrolling interests
|
176
|
|
|
45
|
|
Other comprehensive loss
|
—
|
|
|
(66
|
)
|
Reclassification of recurring compensation to other accrued liabilities
|
—
|
|
|
(45
|
)
|
Payments to noncontrolling interests
|
(184
|
)
|
|
—
|
|
Other
|
(52
|
)
|
|
—
|
|
Balance, March 31, 2019
|
193
|
|
|
1,393
|
|
Net income attributable to noncontrolling interests
|
178
|
|
|
42
|
|
Other comprehensive income
|
—
|
|
|
3
|
|
Reclassification of recurring compensation to other accrued liabilities
|
—
|
|
|
(42
|
)
|
Payments to noncontrolling interests
|
(154
|
)
|
|
—
|
|
Other
|
—
|
|
|
6
|
|
Balance, March 31, 2020
|
$
|
217
|
|
|
$
|
1,402
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
There were no material changes in the Company’s ownership interests related to redeemable noncontrolling interests during 2020 and 2019. The effect of changes in its ownership interests related to redeemable noncontrolling interests on its 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 was $900 million, $34 million and $70 million in 2020, 2019 and 2018.
|
|
10.
|
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 the former reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
The computations for basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions, except per share amounts)
|
2020
|
|
2019
|
|
2018
|
Income from continuing operations
|
$
|
1,126
|
|
|
$
|
254
|
|
|
$
|
292
|
|
Net income attributable to noncontrolling interests
|
(220
|
)
|
|
(221
|
)
|
|
(230
|
)
|
Income from continuing operations attributable to McKesson
|
906
|
|
|
33
|
|
|
62
|
|
Income (loss) from discontinued operations, net of tax
|
(6
|
)
|
|
1
|
|
|
5
|
|
Net income attributable to McKesson
|
$
|
900
|
|
|
$
|
34
|
|
|
$
|
67
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
181
|
|
|
196
|
|
|
208
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Restricted stock units
|
1
|
|
|
1
|
|
|
1
|
|
Diluted
|
182
|
|
|
197
|
|
|
209
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to McKesson: (1)
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Continuing operations
|
$
|
4.99
|
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
Discontinued operations
|
(0.04
|
)
|
|
—
|
|
|
0.02
|
|
Total
|
$
|
4.95
|
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
Basic
|
|
|
|
|
|
Continuing operations
|
$
|
5.01
|
|
|
$
|
0.17
|
|
|
$
|
0.30
|
|
Discontinued operations
|
(0.03
|
)
|
|
—
|
|
|
0.02
|
|
Total
|
$
|
4.98
|
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
|
|
(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 2 million, 3 million and 2 million potentially dilutive securities for 2020, 2019 and 2018 were excluded from the computations of diluted net earnings per common share, as they were anti-dilutive.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
11. Receivables, Net
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
Customer accounts
|
$
|
17,201
|
|
|
$
|
14,941
|
|
Other
|
3,014
|
|
|
3,584
|
|
Total
|
20,215
|
|
|
18,525
|
|
Allowances
|
(265
|
)
|
|
(279
|
)
|
Net
|
$
|
19,950
|
|
|
$
|
18,246
|
|
Other receivables primarily include amounts due from suppliers. The allowances are primarily for estimated uncollectible accounts.
12. Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
Land
|
$
|
151
|
|
|
$
|
172
|
|
Building, machinery, equipment and other
|
4,043
|
|
|
4,154
|
|
Total property, plant and equipment
|
4,194
|
|
|
4,326
|
|
Accumulated depreciation
|
(1,829
|
)
|
|
(1,778
|
)
|
Property, plant and equipment, net
|
$
|
2,365
|
|
|
$
|
2,548
|
|
Lessee
The Company leases facilities and equipment primarily under operating leases. The Company recognizes lease 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. Remaining terms for facility leases generally range from one to fifteen years, while remaining terms for equipment leases generally range from one to five years. Most real property leases contain renewal options (typically for five-year increments). Generally, the renewal option periods are not included within the lease term as the Company is not reasonably certain to exercise that right at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
ROU assets and operating lease liabilities are recognized at the lease commencement date. ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease liabilities are recognized based on the present value of the future lease payments over the lease term, discounted at the Company’s incremental borrowing rate as the implicit rate in the lease is not readily determinable for most of the Company’s leases. The Company estimates the discount rate as its incremental borrowing rate based on qualitative factors including Company specific credit rating, lease term, general economics and the interest rate environment. For existing leases that commenced prior to the adoption of the amended leasing guidance, the Company determined the discount rate on April 1, 2019 using the full lease term. Operating lease liabilities are recorded under the captions “Current portion of operating lease liabilities” and “Long-Term Operating Lease Liabilities,” and the corresponding lease assets are recorded under the caption “Operating Lease Right-of-Use Assets” in the Company’s consolidated balance sheet. Finance lease assets are included in property, plant and equipment, net and finance lease liabilities are included in the Current portion of long-term debt and Long-Term Debt in the Company’s consolidated balance sheet.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
(In millions, except lease term and discount rate)
|
March 31, 2020
|
Operating leases
|
|
Operating Lease Right-of-Use Assets
|
$
|
1,886
|
|
|
|
Current portion of operating lease liabilities
|
$
|
354
|
|
Long-Term Operating Lease Liabilities
|
1,660
|
|
Total operating lease liabilities
|
$
|
2,014
|
|
|
|
Finance Leases
|
|
Property, Plant and Equipment, net
|
$
|
180
|
|
|
|
Current portion of long-term debt
|
$
|
15
|
|
Long-Term Debt
|
151
|
|
Total finance lease liabilities
|
$
|
166
|
|
|
|
Weighted Average Remaining Lease Term (Years)
|
|
Operating leases
|
7.7
|
|
Finance leases
|
12.1
|
|
|
|
Weighted Average Discount Rate
|
|
Operating leases
|
3.03
|
%
|
Finance leases
|
2.86
|
%
|
The components of lease cost were as follows:
|
|
|
|
|
(In millions)
|
Year Ended
March 31, 2020
|
Short-term lease cost
|
$
|
29
|
|
Operating lease cost
|
459
|
|
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
14
|
|
Interest on lease liabilities
|
5
|
|
Total finance lease cost
|
19
|
|
|
|
Variable lease cost (1)
|
125
|
|
Sublease income
|
(33
|
)
|
Total lease cost (2)
|
$
|
599
|
|
|
|
(1)
|
These amounts include payments for maintenance, taxes, payments affected by the consumer price index and other similar metrics and payments contingent on usage.
|
|
|
(2)
|
These amounts were primarily recorded in operating expenses in the consolidated statement of operations.
|
Rent expense under operating leases was $576 million and $568 million in 2019 and 2018.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
(In millions)
|
Year Ended
March 31, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
(377
|
)
|
Operating cash flows from finance leases
|
(3
|
)
|
Financing cash flows from finance leases
|
(18
|
)
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases (1)
|
$
|
2,378
|
|
Finance leases
|
166
|
|
(1) These amounts include the transition adjustment for the adoption of the amended leasing guidance discussed in Financial Note 1, “Significant Accounting Policies.”
Maturities of lease liabilities as of March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2021
|
$
|
398
|
|
|
$
|
19
|
|
|
$
|
417
|
|
2022
|
371
|
|
|
19
|
|
|
390
|
|
2023
|
310
|
|
|
18
|
|
|
328
|
|
2024
|
252
|
|
|
17
|
|
|
269
|
|
2025
|
213
|
|
|
16
|
|
|
229
|
|
Thereafter
|
730
|
|
|
110
|
|
|
840
|
|
Total lease payments (1)
|
2,274
|
|
|
199
|
|
|
2,473
|
|
Less imputed interest
|
(260
|
)
|
|
(33
|
)
|
|
(293
|
)
|
Present value of lease liabilities
|
$
|
2,014
|
|
|
$
|
166
|
|
|
$
|
2,180
|
|
|
|
(1)
|
Total lease payments have not been reduced by minimum sublease income of $178 million due under future noncancelable subleases.
|
As of March 31, 2020, the Company entered into additional leases primarily for facilities that have not yet commenced with future lease payments of $149 million that are not reflected in the table above. These operating leases will commence between 2021 and 2024 with noncancelable lease terms of 2 to 15 years.
As previously disclosed in the Company’s 2019 Annual Report and under the previous lease accounting, the minimum lease payments required under operating leases were as follows as of March 31, 2019:
|
|
|
|
|
(In millions)
|
Noncancelable Operating
Leases
|
2020
|
$
|
454
|
|
2021
|
397
|
|
2022
|
343
|
|
2023
|
290
|
|
2024
|
236
|
|
Thereafter
|
936
|
|
Total minimum lease payments (1) (2)
|
$
|
2,656
|
|
|
|
(1)
|
Amount includes future minimum lease payments for the sale-leaseback transaction of $49 million.
|
|
|
(2)
|
Total minimum lease payments have not been reduced by minimum sublease income of $133 million due under future noncancelable subleases.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Lessor
The Company primarily leases certain owned equipment, that are classified as direct financing or sales-type leases, to physician practices. As of March 31, 2020, the total lease receivable was $272 million with a weighted average remaining lease term of approximately seven years. Interest income from these leases was not material for the year ended March 31, 2020.
14. Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
U.S. Pharmaceutical and Specialty Solutions
|
|
European Pharmaceutical Solutions
|
|
Medical-Surgical Solutions
|
|
Other
|
|
Total
|
Balance, March 31, 2018
|
$
|
4,110
|
|
|
$
|
1,850
|
|
|
$
|
2,070
|
|
|
$
|
2,894
|
|
|
$
|
10,924
|
|
Goodwill acquired
|
17
|
|
|
52
|
|
|
360
|
|
|
13
|
|
|
442
|
|
Acquisition accounting, transfers and other adjustments
|
13
|
|
|
(5
|
)
|
|
21
|
|
|
6
|
|
|
35
|
|
Impairment charges
|
—
|
|
|
(1,776
|
)
|
|
—
|
|
|
(21
|
)
|
|
(1,797
|
)
|
Foreign currency translation adjustments, net
|
(62
|
)
|
|
(121
|
)
|
|
—
|
|
|
(63
|
)
|
|
(246
|
)
|
Balance, March 31, 2019
|
4,078
|
|
|
—
|
|
|
2,451
|
|
|
2,829
|
|
|
9,358
|
|
Goodwill acquired
|
—
|
|
|
62
|
|
|
—
|
|
|
14
|
|
|
76
|
|
Acquisition accounting, transfers and other adjustments
|
1
|
|
|
4
|
|
|
7
|
|
|
—
|
|
|
12
|
|
Other changes/disposals
|
(1
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(6
|
)
|
Impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Foreign currency translation adjustments, net
|
(11
|
)
|
|
(3
|
)
|
|
—
|
|
|
(64
|
)
|
|
(78
|
)
|
Balance, March 31, 2020
|
$
|
4,067
|
|
|
$
|
63
|
|
|
$
|
2,453
|
|
|
$
|
2,777
|
|
|
$
|
9,360
|
|
Goodwill Impairment Charges
The Company evaluates goodwill for impairment on an annual basis each year and at an interim date, if indicators of potential impairment exist. On October 1, 2019, the Company voluntarily changed its annual goodwill impairment testing date from January 1 to October 1 to better align with the timing of the Company’s annual long-term planning process. Accordingly, management determined that the change in accounting principle is preferable under the circumstance. This change has been applied prospectively from October 1, 2019 as retrospective application is deemed impracticable due to the inability to objectively determine the assumptions and significant estimates used in earlier periods without the benefit of hindsight. This change was not material to the Company’s consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge.
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The fair value of 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 key 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 assessments of the reporting unit are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information.
Goodwill charges listed below were recorded under the caption, “Goodwill impairment charges” in operating expenses in the consolidated statements of operations. Most of the goodwill impairment for these reporting units were generally not deductible for income tax purposes.
Fiscal 2020
The impairment testing performed in 2020 did not indicate any material impairment of goodwill.
Fiscal 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except rates)
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Reporting Unit
|
|
Segment
|
|
Discount Rate
|
|
Terminal Growth Rate
|
|
Goodwill Impairment
|
(1)
|
June 2018
|
|
PD
|
|
European Pharmaceutical Solutions
|
|
8.0
|
%
|
|
1.25
|
%
|
|
$
|
238
|
|
(2)
|
June 2018
|
|
RP
|
|
European Pharmaceutical Solutions
|
|
8.5
|
%
|
|
1.25
|
%
|
|
251
|
|
(3)
|
June 2018
|
|
PD
|
|
European Pharmaceutical Solutions
|
|
8.0
|
%
|
|
1.25
|
%
|
|
81
|
|
(3)
|
March 2019
|
|
RP
|
|
European Pharmaceutical Solutions
|
|
10.0
|
%
|
|
1.25
|
%
|
|
465
|
|
(4)
|
March 2019
|
|
PD
|
|
European Pharmaceutical Solutions
|
|
9.0
|
%
|
|
1.25
|
%
|
|
741
|
|
(4)
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
1,776
|
|
|
|
|
(1)
|
Represents pre-tax and after-tax amounts, except for an aggregate $20 million of tax charges related to the March 2019 Retail Pharmacy impairment. Total goodwill impairment for 2019 also includes $21 million related to the Company’s Rexall Health business within Other recorded in the third quarter of 2019.
|
|
|
(2)
|
Prior to implementing its new segment reporting structure in the first quarter of 2019, the Company’s European operations were considered a single reporting unit. Following the change in reportable segments, its European Pharmaceutical Solutions segment was divided into two distinct reporting units, Retail Pharmacy (“RP”), formerly Consumer Solutions, and Pharmaceutical Distribution (“PD”), formerly Pharmacy Solutions, for the purposes of goodwill impairment testing. This change required performance of a goodwill impairment test for these two new reporting units which resulted in a goodwill impairment charge as PD’s estimated fair value was lower than its reassigned carrying value.
|
|
|
(3)
|
Both RP and PD projected a decline in the estimated future cash flows primarily triggered by additional U.K. government actions which were announced on June 29, 2018. An interim goodwill impairment test for these reporting units identified that their carrying values exceeded their estimated fair value and resulted in an impairment charge.
|
|
|
(4)
|
As a result of the annual goodwill impairment test, the carrying values of the PD and RP reporting units exceeded their estimated fair value which required the Company to record impairment charges for the reporting units. These 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. As of March 31, 2019 the entire remaining goodwill balances of both reporting units were impaired.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except rates)
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Reporting Unit
|
|
Segment (3)
|
|
Discount Rate
|
|
Terminal Growth Rate
|
|
Goodwill Impairment
|
(1)
|
September 2017
|
|
McKesson Europe (2)
|
|
European Pharmaceutical Solutions
|
|
7.5
|
%
|
|
1.25
|
%
|
|
$
|
350
|
|
(4)
|
March 2018
|
|
McKesson Europe
|
|
European Pharmaceutical Solutions
|
|
8.0
|
%
|
|
1.25
|
%
|
|
933
|
|
(5)
|
March 2018
|
|
Rexall
|
|
Other
|
|
10.0
|
%
|
|
2.00
|
%
|
|
455
|
|
(6)
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
1,738
|
|
|
|
|
(1)
|
Represents pre-tax and after-tax amounts.
|
|
|
(2)
|
This reporting unit was divided into two reporting units in the first quarter of 2019 upon a change in segment reporting structure. See above for more information.
|
|
|
(3)
|
The impairment charges recorded in 2018 were attributable to the former McKesson Distribution Solutions segment. The segment reporting structure which included McKesson Distribution Solutions was reorganized in the first quarter of 2019. The segments presented above for 2018 reflect the revised segment reporting structure.
|
|
|
(4)
|
The reporting unit projected a decline in its estimated future cash flows primarily triggered by government reimbursement reductions in its retail business in the U.K. Accordingly, the Company performed an interim one-step goodwill impairment test prior to its annual impairment test. As a result, the Company determined that the carrying value of this reporting unit exceeded its estimated fair value and recorded a goodwill impairment charge.
|
|
|
(5)
|
As a result of the Company’s annual impairment test, it was determined that the carrying value of the reporting unit further exceeded its estimated fair value and recorded a goodwill impairment charge. This reporting unit had a further decline in its estimated future cash flows driven by weakening script growth outlook in the Company’s U.K. business and by a more competitive environment in France.
|
|
|
(6)
|
As a result of the Company’s annual impairment test, it was determined that the carrying value of the reporting unit exceeded its estimated fair value and recorded a goodwill impairment charge. 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 could only be partially mitigated through the business’ cost saving efforts. As of March 31, 2018, the entire remaining goodwill balance related to the Company’s acquisition of Rexall Health was impaired.
|
Refer to Financial Note 19, “Fair Value Measurements,” for more information on these nonrecurring fair value measurements. As of March 31, 2020, accumulated goodwill impairment losses were $3.1 billion in the Company’s European Pharmaceutical Solutions segment and $478 million in Other. As of March 31, 2019, accumulated goodwill impairment losses were $3.1 billion in the Company’s European Pharmaceutical Solutions segment and $476 million in Other.
Intangible Assets
Information regarding intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
(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
|
Customer relationships
|
11
|
|
$
|
3,650
|
|
|
$
|
(1,950
|
)
|
|
$
|
1,700
|
|
|
$
|
3,818
|
|
|
$
|
(1,801
|
)
|
|
$
|
2,017
|
|
Service agreements
|
10
|
|
994
|
|
|
(480
|
)
|
|
514
|
|
|
1,017
|
|
|
(430
|
)
|
|
587
|
|
Pharmacy licenses
|
26
|
|
492
|
|
|
(232
|
)
|
|
260
|
|
|
513
|
|
|
(209
|
)
|
|
304
|
|
Trademarks and trade names
|
13
|
|
808
|
|
|
(242
|
)
|
|
566
|
|
|
887
|
|
|
(232
|
)
|
|
655
|
|
Technology
|
3
|
|
175
|
|
|
(111
|
)
|
|
64
|
|
|
141
|
|
|
(94
|
)
|
|
47
|
|
Other
|
5
|
|
273
|
|
|
(221
|
)
|
|
52
|
|
|
288
|
|
|
(209
|
)
|
|
79
|
|
Total
|
|
|
$
|
6,392
|
|
|
$
|
(3,236
|
)
|
|
$
|
3,156
|
|
|
$
|
6,664
|
|
|
$
|
(2,975
|
)
|
|
$
|
3,689
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Amortization expense of intangible assets was $462 million, $485 million and $503 million for 2020, 2019 and 2018. Estimated annual amortization expense of intangible assets is as follows: $451 million, $351 million, $251 million, $236 million and $233 million for 2021 through 2025, and $1.6 billion thereafter. All intangible assets were subject to amortization as of March 31, 2020 and 2019.
Refer to Financial Note 4, “Restructuring, Impairment and Related Charges,” for more information on intangible asset impairment charges recorded in 2020, 2019 and 2018.
|
|
15.
|
Debt and Financing Activities
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
U.S. Dollar notes (1) (2)
|
|
|
|
3.65% Notes due November 30, 2020
|
$
|
700
|
|
|
$
|
700
|
|
4.75% Notes due March 1, 2021
|
323
|
|
|
323
|
|
2.70% Notes due December 15, 2022
|
400
|
|
|
400
|
|
2.85% Notes due March 15, 2023
|
400
|
|
|
400
|
|
3.80% Notes due March 15, 2024
|
1,100
|
|
|
1,100
|
|
7.65% Debentures due March 1, 2027
|
167
|
|
|
167
|
|
3.95% Notes due February 16, 2028
|
600
|
|
|
600
|
|
4.75% Notes due May 30, 2029
|
400
|
|
|
400
|
|
6.00% Notes due March 1, 2041
|
282
|
|
|
282
|
|
4.88% Notes due March 15, 2044
|
411
|
|
|
411
|
|
Foreign currency notes (1) (3)
|
|
|
|
Floating Rate Euro Notes due February 12, 2020 (4)
|
—
|
|
|
280
|
|
0.63% Euro Notes due August 17, 2021
|
662
|
|
|
673
|
|
1.50% Euro Notes due November 17, 2025
|
659
|
|
|
670
|
|
1.63% Euro Notes due October 30, 2026
|
552
|
|
|
560
|
|
3.13% Sterling Notes due February 17, 2029
|
557
|
|
|
586
|
|
|
|
|
|
Lease and other obligations
|
174
|
|
|
43
|
|
Total debt
|
7,387
|
|
|
7,595
|
|
Less: Current portion
|
1,052
|
|
|
330
|
|
Total long-term debt
|
$
|
6,335
|
|
|
$
|
7,265
|
|
|
|
(1)
|
These notes are unsecured and unsubordinated obligations of the Company.
|
|
|
(2)
|
Interest on these notes is payable semi-annually.
|
|
|
(3)
|
Interest on these foreign currency notes is payable annually, except the 2020 Floating Rate Euro Notes.
|
|
|
(4)
|
Interest on these notes is payable quarterly.
|
Long-Term Debt
The Company’s long-term debt includes both U.S. dollar and foreign currency-denominated borrowings. At March 31, 2020 and March 31, 2019, $7.4 billion and $7.6 billion of total debt was outstanding, of which $1.1 billion and $330 million was included under the caption “Current portion of long-term debt” in the Company’s consolidated balance sheets.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Debt Offerings
On November 30, 2018, the Company completed a public offering of 3.65% Notes due November 30, 2020 (the “2020 Notes”) in a principal amount of $700 million and 4.75% Notes due May 30, 2029 (the “2029 Notes”) in a principal amount of $400 million. Interest on the 2020 Notes and 2029 Notes is payable semi-annually on May 30th and November 30th of each year, commencing on May 30, 2019. The Company utilized the net proceeds from these notes of $1.1 billion, net of discounts and offering expenses, for general corporate purposes.
Tender Offers and Early Repayments
In 2018, the Company paid $1.4 billion to redeem the $1.2 billion principal amount of its 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”), premiums of $112 million and $22 million of interest. The Company recorded a pre-tax loss on debt extinguishment of $122 million ($78 million after-tax) in connection with the redemption of the Tender Offer Notes.
Repayments at Maturity
In 2020, the Company repaid at maturity its €250 million Floating Rate Euro Notes due February 12, 2020. In 2019, the Company repaid at maturity its $1.1 billion 2.28% notes due March 15, 2019. In 2018, the Company repaid at maturity its €500 million 4.50% Euro-denominated bonds due April 26, 2017 and its $500 million 1.40% notes due March 15, 2018.
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 required notice to holders of notes with fixed interest rates, the Company may redeem those notes at any time prior to maturity, in whole or in part, for cash at redemption 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 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 the Company may not consolidate, merge or sell all or substantially all of its assets, incur liens, or enter into sale-leaseback transactions exceeding specific terms, without the lenders’ consent. The indentures also contain customary events of default provisions.
Other Information
Scheduled principal payments of long-term debt are $1.1 billion in 2021, $704 million in 2022, $813 million in 2023, $1.1 billion in 2024, $16 million in 2025 and $3.7 billion thereafter.
Revolving Credit Facilities
In the second quarter of 2020, the Company entered into a syndicated $4 billion five-year senior unsecured credit facility (the “2020 Credit Facility”), which has a $3.6 billion aggregate sublimit of availability in Canadian dollars, British pound sterling and Euro. The 2020 Credit Facility matures in September 2024 and had no borrowings during 2020 and no amounts outstanding as of March 31, 2020. The remaining terms and conditions of the 2020 Credit Facility are substantially similar to those previously in place under the $3.5 billion five-year senior unsecured revolving credit facility (the “Global Facility”), which was scheduled to mature in October 2020. The Global Facility was terminated in connection with the execution of the 2020 Credit Facility in September 2019 and had no borrowings during the six months ended September 30, 2019 and the year ended March 31, 2018, and had no amounts outstanding as of March 31, 2019.
Borrowings under the 2020 Credit Facility bear interest based upon the London Interbank Offered Rate (“LIBOR”), Canadian Dealer Offered Rate for credit extensions denominated in Canadian dollars, a prime rate, or alternative overnight rates as applicable, plus agreed margins. The 2020 Credit 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 the Company does not comply with these covenants, its ability to use the 2020 Credit Facility may be suspended and repayment of any outstanding balances under the 2020 Credit Facility may be required. At March 31, 2020, the Company was in compliance with all covenants.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company also maintains bilateral credit facilities primarily denominated in Euros with a committed amount of $12 million and an uncommitted amount of $166 million as of March 31, 2020. Borrowings and repayments were not material in 2020 and 2019 and amounts outstanding under these credit lines were not material as of March 31, 2020 and 2019.
Commercial Paper
The Company maintains a commercial paper program to support its working capital requirements and for other general corporate purposes. Under the program, the Company can issue up to $4.0 billion in outstanding commercial paper notes. During 2020 and 2019, it borrowed $21.4 billion and $37.3 billion and repaid $21.4 billion and $37.3 billion under the program. At March 31, 2020 and 2019, there were no commercial paper notes outstanding.
16. Variable Interest Entities
The Company evaluates its ownership, contractual and other interests in entities to determine if they are VIEs, if it has 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, among other factors. Based on its evaluations, if the Company determines it is the primary beneficiary of such VIEs, it consolidates such entities into its financial statements.
Consolidated Variable Interest Entities
The Company consolidates a VIE when it has 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, is considered the primary beneficiary of the VIE. It consolidates certain single-lessee leasing entities where it, as the lessee, has the majority risk of the leased assets due to its minimum lease payment obligations to these leasing entities. As a result of absorbing this risk, the leases provide the Company 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 the Company’s consolidated statements of operations and cash flows. Total assets and liabilities included in its consolidated balance sheets for these VIEs were $695 million and $82 million at March 31, 2020 and $896 million and $64 million at March 31, 2019.
Investments in Unconsolidated Variable Interest Entities
The Company is involved with VIEs which it does not consolidate because it does not have the power to direct the activities that most significantly impact their economic performance and thus is not considered the primary beneficiary of the entities. Its relationships include equity method investments and lending, leasing, contractual or other relationships with the VIEs. The Company’s most significant relationships are with oncology and other specialty practices. Under these practice arrangements, it generally owns or leases all of the real estate and equipment used by the affiliated practices and manages the practices’ administrative functions. It also has relationships with certain pharmacies in Europe with whom it may provide financing, have equity ownership and/or a supply agreement whereby it supplies the vast majority of the pharmacies’ purchases. The Company’s maximum exposure to loss (regardless of probability) as a result of all unconsolidated VIEs was $1.4 billion at March 31, 2020 and $1.1 billion at March 31, 2019, 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 20, “Financial Guarantees and Warranties.” The Company believes there is no material loss exposure on these assets or from these relationships.
The Company maintains 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. The Company also has 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 23, 2018, the Company’s Board of Directors approved the termination of its frozen U.S. defined benefit pension plan (“Plan”). During the first quarter of 2020, the Company offered the option of receiving a lump sum payment to certain participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 1,300 participants elected to receive the settlement, and lump sum payments of approximately $49 million were made from plan assets to these participants in June 2019. The benefit obligation settled approximated payments to plan participants and a pre-tax settlement charge of $17 million ($12 million after-tax) was recorded during the first quarter of 2020. During the second quarter of 2020, the Company transferred the remainder of the Plan’s pension obligation to a third-party insurance provider by purchasing annuity contracts for approximately $280 million which was fully funded directly by plan assets. The third-party insurance provider assumed the obligation to pay future pension benefits and provide administrative services on November 1, 2019. As a result, the remaining previously recorded unrecognized losses in accumulated other comprehensive loss for this Plan were recognized as expense and a pre-tax settlement charge of approximately $105 million ($78 million after-tax) was recorded in other income (expense), net, in the Company’s consolidated statements of operations during the second quarter of 2020. As of March 31, 2020 and 2019, this defined benefit pension plan had an accumulated comprehensive loss of approximately nil and $121 million.
During the third quarter of 2020, a cash payment of $114 million was made to settle a participant’s liability from the executive benefit retirement plan. As a result, a majority of the remaining recorded unrecognized losses in accumulated other comprehensive loss for this Plan were recognized as expense and a pre-tax settlement charge of approximately $11 million ($8 million after-tax) was recorded in other income (expense), net, in the Company’s consolidated statements of operations. As of March 31, 2020 and 2019, this plan had an accumulated comprehensive loss of approximately $1 million and $12 million.
The Company’s non-U.S. defined benefit pension plans cover eligible employees located predominantly in Norway, the 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. In the U.K., the Company has subsidiaries that participate in a joint pension plan. The pension obligation in Germany is unfunded with the exception of the contractual trust arrangement used to fund pensions of McKesson 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 the Company’s pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Service cost - benefits earned during the year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Interest cost on projected benefit obligation
|
6
|
|
|
14
|
|
|
14
|
|
|
19
|
|
|
21
|
|
|
22
|
|
Expected return on assets
|
(4
|
)
|
|
(16
|
)
|
|
(19
|
)
|
|
(22
|
)
|
|
(23
|
)
|
|
(26
|
)
|
Amortization of unrecognized actuarial loss and prior service costs
|
2
|
|
|
5
|
|
|
6
|
|
|
6
|
|
|
4
|
|
|
5
|
|
Curtailment/settlement loss
|
127
|
|
|
4
|
|
|
2
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Net periodic pension expense
|
$
|
131
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
19
|
|
|
$
|
18
|
|
|
$
|
17
|
|
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 period of active employees.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Information regarding the changes in benefit obligations and plan assets for the Company’s pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Change in benefit obligations
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period (1)
|
$
|
439
|
|
|
$
|
485
|
|
|
$
|
990
|
|
|
$
|
1,035
|
|
Service cost
|
—
|
|
|
—
|
|
|
16
|
|
|
15
|
|
Interest cost
|
6
|
|
|
14
|
|
|
19
|
|
|
21
|
|
Actuarial loss (gain)
|
20
|
|
|
4
|
|
|
(36
|
)
|
|
35
|
|
Benefits paid
|
(179
|
)
|
|
(64
|
)
|
|
(43
|
)
|
|
(36
|
)
|
Annuity Premium Transfer
|
(276
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Expenses paid
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Acquisitions
|
—
|
|
|
—
|
|
|
2
|
|
|
1
|
|
Foreign exchange impact and other
|
—
|
|
|
—
|
|
|
(52
|
)
|
|
(80
|
)
|
Benefit obligation at end of period (1)
|
$
|
10
|
|
|
$
|
439
|
|
|
$
|
896
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
322
|
|
|
$
|
335
|
|
|
$
|
642
|
|
|
$
|
687
|
|
Actual return on plan assets
|
27
|
|
|
12
|
|
|
3
|
|
|
18
|
|
Employer and participant contributions
|
116
|
|
|
39
|
|
|
28
|
|
|
23
|
|
Benefits paid
|
(179
|
)
|
|
(64
|
)
|
|
(43
|
)
|
|
(36
|
)
|
Annuity Premium Transfer
|
(276
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Expenses paid
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Foreign exchange impact and other
|
(10
|
)
|
|
—
|
|
|
(35
|
)
|
|
(49
|
)
|
Fair value of plan assets at end of period
|
$
|
—
|
|
|
$
|
322
|
|
|
$
|
594
|
|
|
$
|
642
|
|
|
|
|
|
|
|
|
|
Funded status at end of period
|
$
|
(10
|
)
|
|
$
|
(117
|
)
|
|
$
|
(302
|
)
|
|
$
|
(348
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized on the balance sheet
|
|
|
|
|
|
|
|
Assets
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
49
|
|
|
$
|
20
|
|
Current liabilities (2)
|
(1
|
)
|
|
(115
|
)
|
|
(162
|
)
|
|
(13
|
)
|
Long-term liabilities
|
(9
|
)
|
|
(9
|
)
|
|
(189
|
)
|
|
(355
|
)
|
Total
|
$
|
(10
|
)
|
|
$
|
(117
|
)
|
|
$
|
(302
|
)
|
|
$
|
(348
|
)
|
|
|
(1)
|
The benefit obligation is the projected benefit obligation.
|
|
|
(2)
|
Current liabilities includes $151 million reclassified from long-term liabilities to assets held for sale in 2020 in conjunction with the Company’s German wholesale business to be contributed to a joint venture as discussed in Financial Note 3, “Held for Sale”.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table provides the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all the Company’s pension plans, including accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31,
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
10
|
|
|
$
|
439
|
|
|
$
|
896
|
|
|
$
|
990
|
|
Accumulated benefit obligation
|
10
|
|
|
439
|
|
|
856
|
|
|
949
|
|
Fair value of plan assets
|
—
|
|
|
322
|
|
|
594
|
|
|
642
|
|
Amounts recognized in accumulated other comprehensive income (pre-tax) consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31,
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net actuarial loss
|
$
|
1
|
|
|
$
|
133
|
|
|
$
|
149
|
|
|
$
|
186
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(4
|
)
|
Total
|
$
|
1
|
|
|
$
|
133
|
|
|
$
|
146
|
|
|
$
|
182
|
|
Other changes in accumulated other comprehensive income (pre-tax) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net actuarial loss (gain)
|
$
|
(3
|
)
|
|
$
|
8
|
|
|
$
|
(15
|
)
|
|
$
|
(24
|
)
|
|
$
|
42
|
|
|
$
|
(11
|
)
|
Prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
(129
|
)
|
|
(9
|
)
|
|
(8
|
)
|
|
(6
|
)
|
|
(5
|
)
|
|
(6
|
)
|
Prior service credit (cost)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign exchange impact and other
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(12
|
)
|
|
19
|
|
Total recognized in other comprehensive loss (income)
|
$
|
(132
|
)
|
|
$
|
(1
|
)
|
|
$
|
(23
|
)
|
|
$
|
(36
|
)
|
|
$
|
25
|
|
|
$
|
—
|
|
The Company expects to amortize $5 million of actuarial loss for the pension plans from stockholders’ equity to pension expense in 2021. The comparable 2020 amount was $8 million of actuarial loss. In addition, the Company recognized $127 million in actuarial losses for the pension plans to stockholders’ equity in 2020 as a result of $116 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 the Company’s unfunded U.S. plans were $10 million and $124 million at March 31, 2020 and 2019. Pension obligations for its unfunded plans are based on the recommendations of independent actuaries. Projected benefit obligations relating to the Company’s unfunded non-U.S. plans were $298 million and $293 million at March 31, 2020 and 2019. Funding obligations for its non-U.S. plans vary based on the laws of each non-U.S. jurisdiction.
Expected benefit payments for the Company’s pension plans are as follows: $36 million, $35 million, $36 million, $36 million and $38 million for 2021 to 2025 and $208 million for 2026 through 2030. 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 the Company’s pension plans are $33 million for 2021.
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
|
|
Years Ended March 31,
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net periodic pension expense
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates
|
3.66%
|
|
3.83%
|
|
3.55%
|
|
2.03%
|
|
2.35%
|
|
2.34%
|
Rate of increase in compensation
|
N/A (1)
|
|
N/A (1)
|
|
4.00
|
|
2.93
|
|
3.13
|
|
2.72
|
Expected long-term rate of return on plan assets
|
4.00
|
|
5.25
|
|
6.25
|
|
3.01
|
|
3.71
|
|
4.03
|
Benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates
|
3.08%
|
|
3.65%
|
|
3.69%
|
|
2.03%
|
|
2.13%
|
|
2.35%
|
Rate of increase in compensation
|
N/A (1)
|
|
N/A (1)
|
|
N/A (1)
|
|
2.93
|
|
3.18
|
|
2.59
|
|
|
(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.
|
The Company’s 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 its plans. For March 31, 2020, the Company’s U.S. defined benefit liabilities are valued using a weighted average discount rate of 3.08%, which represents a decrease of 57 basis points from its 2019 weighted-average discount rate of 3.65%. The Company’s non-U.S. defined benefit pension plan liabilities are valued using a weighted-average discount rate of 2.03%, which represents a decrease of 10 basis points from its 2019 weighted average discount rate of 2.13%.
Plan Assets
Investment Strategy: The overall objective for U. S. pension plan assets was 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 were 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. As of March 31, 2020, no assets remained related to the U.S. pension plan. The target allocation for U.S. plan assets at March 31, 2019 was 100% fixed income investments including cash and cash equivalents. 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 investments were in a commingled real estate fund.
For 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.
The Company develops 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fair Value Measurements: 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. The following tables represent the Company’s pension plan assets as of March 31, 2020 and 2019, using the fair value hierarchy by asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
March 31, 2020
|
|
March 31, 2020
|
(In millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity commingled funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
75
|
|
|
—
|
|
|
128
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
139
|
|
|
—
|
|
|
145
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
17
|
|
|
—
|
|
|
31
|
|
Mortgage-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Asset-backed securities and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income commingled funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107
|
|
|
101
|
|
|
—
|
|
|
208
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
2
|
|
|
3
|
|
|
8
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
215
|
|
|
$
|
334
|
|
|
$
|
3
|
|
|
$
|
552
|
|
Assets held at NAV practical expedient (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity commingled funds
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
8
|
|
Fixed income commingled funds
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Real estate funds
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
34
|
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594
|
|
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
|
|
|
|
(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 3 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, 2020 and 2019, this includes $29 million and $35 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, 2020 and 2019.
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, it also contributed to the Pensjonsordningen for Apoteketaten (“POA”), a mandatory multiemployer pension scheme for its 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 the Company’s withdrawal liability and contributions may increase.
Contributions and amounts accrued for U.S. Plans were not material for the years ended March 31, 2020, 2019, and 2018. Contributions to the POA for non-U.S. Plans exceeding 5% of total plan contributions were $17 million, $27 million and $16 million in 2020, 2019 and 2018. Based on actuarial calculations, the Company estimates the funded status for its non-U.S. Plans to be approximately 76% as of March 31, 2020. No amounts were accrued for liability associated with the POA as the Company has no intention to withdraw from the plan.
Defined Contribution Plans
The Company has a contributory retirement savings plan (“RSP”) for U.S. eligible employees. Eligible employees may contribute to the RSP 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 RSP and non-U.S. plans were $102 million, $92 million and $82 million for the years ended March 31, 2020, 2019, and 2018.
Postretirement Benefits
The Company maintains 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. It also provides 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 the Company’s postretirement welfare benefits was not material for the years ended March 31, 2020, 2019, and 2018. The benefit obligation at March 31, 2020 and 2019 was $65 million and $73 million.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
18. Hedging Activities
In the normal course of business, the Company is exposed to interest rate and foreign currency exchange rate fluctuations. At times, the Company limits these risks through the use of derivatives such as cross-currency swaps, foreign currency forward contracts and interest rate swaps. In accordance with the Company’s policy, derivatives are only used for hedging purposes. It does not use derivatives for trading or speculative purposes.
Foreign currency exchange risk
The Company conducts its business worldwide in U.S. dollars and the functional currencies of its foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on the Company’s financial results that are reported in U.S. dollars. The Company is also exposed to foreign currency exchange rate risk related to its foreign subsidiaries, including intercompany loans denominated in non-functional currencies. The Company has certain foreign currency exchange rate risk programs that use foreign currency forward contracts and cross-currency swaps. These forward contracts and cross-currency swaps are generally used to offset the potential income statement effects from intercompany loans and other obligations denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.
Non-Derivative Instruments Designated as Hedges
At March 31, 2020 and 2019, the Company had €1.7 billion and €1.95 billion of Euro-denominated notes designated as non-derivative net investment hedges. These hedges are utilized to hedge portions of the Company’s 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. 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 in accumulated other comprehensive loss in the consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on the Company’s net investments. 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. In December 2019, the Company prospectively de-designated from net investment hedges €250 million of its Euro-denominated notes which matured in February 2020.
At March 31, 2019, the Company also had £450 million British pound sterling-denominated notes designated as non-derivative net investment hedges. On September 30, 2019, the Company de-designated its £450 million British pounding sterling-denominated notes prospectively from net investment hedges as the hedging relationship ceased to be effective.
Gains or losses from net investment hedges recorded in other comprehensive income were gains of $39 million and $259 million in 2020 and 2019 and a loss of $268 million in 2018. Ineffectiveness on the Company’s non-derivative net investment hedges during 2020 resulted in gains of $34 million which were recorded in earnings in other income (expense), net in the consolidated statements of operations. There was no ineffectiveness in the Company’s net investment hedges for the years ended March 31, 2019 and 2018.
Derivatives Designated as Hedges
At March 31, 2020 and 2019, the Company had cross-currency swaps designated as net investment hedges with a total gross notional amount of $1.5 billion Canadian dollars. Under the terms of the cross-currency swap contracts, the Company agrees 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 the Company’s net investments denominated in 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 loss in the consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on the Company’s net investments denominated in Canadian dollars. To the extent cross-currency swaps designated as hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. There was no ineffectiveness in the Company’s net investment hedges for the years ended March 31, 2020 and 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
At March 31, 2019, the Company also had cross-currency swaps designated as net investment hedges with a total gross notional amount of £932 million British pound sterling. In 2020, the Company terminated these swaps due to ineffectiveness in its British pound sterling hedging program that arose due to 2019 impairments of goodwill and certain long-lived assets in its U.K. businesses. Proceeds from the termination of these swaps totaled $84 million and resulted in a settlement gain of $34 million in 2020. This gain was recorded in earnings in other income (expense), net.
Gains or losses from the Company’s cross-currency swaps designated as net investment hedges recorded in other comprehensive income were gains of $76 million and $53 million in 2020 and 2019 and losses of $7 million in 2018. There was no ineffectiveness in the Company’s hedges for the years ended March 31, 2020 and 2019. These cross-currency swaps will mature between November 2020 and November 2024.
On September 30, 2019, the Company entered into a number of cross-currency swaps designated as fair value hedges with total notional amounts of £450 million British pound sterling. Under the terms of the cross-currency swap contracts, the Company agreed with third parties to exchange fixed interest payments in British pound sterling for floating interest payments in U.S. dollars based on three-month LIBOR plus a spread. These swaps are utilized to hedge the changes in the fair value of the underlying £450 million British pound sterling notes resulting from changes in benchmark interest rates and foreign exchange rates. The changes in the fair value of these derivatives, which are designated as fair value hedges, and the offsetting changes in the fair value of the hedged notes are recorded in earnings. Gains from these fair value hedges recorded in earnings were $6 million in 2020, largely offsetting the losses recorded in earnings related to the hedged notes. The swaps will mature in February 2023.
At March 31, 2019, the Company had a forward contract to hedge the U.S. dollar against cash flows denominated in Canadian dollars with a total gross notional amount of $81 million, which was designated as a cash flow hedge. The contract matured in March 2020.
From time to time, the Company also enters into cross-currency swaps to hedge intercompany loans denominated in non-functional currencies. For our cross-currency swap transactions, 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 cross-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, 2020 and 2019, the Company had cross-currency swaps with total gross notional amounts of approximately $2.9 billion, which are designated as cash flow hedges. These swaps will mature between April 2020 and January 2024.
For forward contracts and cross-currency swaps that are designated as cash flow hedges, the effective portion of changes in the fair value of the hedges is recorded in 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 from cash flow hedges recorded in other comprehensive income were gains of $98 million and $28 million in 2020 and 2019 and losses of $30 million in 2018. Gains or losses reclassified from accumulated other comprehensive income and recorded in operating expenses in the consolidated statements of operations were not material in 2020, 2019 and 2018. There was no ineffectiveness in the Company’s cash flow hedges for the years ended March 31, 2020, 2019 and 2018.
Derivatives Not Designated as Hedges
Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the change in value included in earnings.
The Company has a number of forward contracts to hedge the Euro against cash flows denominated in British pound sterling and other European currencies. At March 31, 2020 and 2019, the total gross notional amounts of these contracts were $29 million and $28 million. These contracts will mature through December 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 in operating expenses. Changes in the fair values were not material in 2020, 2019 and 2018. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany obligations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2020, the Company also entered into a number of forward contracts and swaps to offset a portion of the earnings impacts from the ineffectiveness of net investment hedges discussed above. These contracts matured through January 2020 and none of these contracts were designated for hedge accounting. In December 2019, the Company entered into a series of forward contracts with a total notional amount of €250 million to offset the earnings impact from its Euro-denominated notes. These contracts and the notes against which they are offsetting matured in February 2020 and were not designated for hedge accounting. Changes in the fair value for contracts not designated as hedges are recorded directly in earnings. In 2020, losses of $44 million were recorded in earnings in other income (expense), net, which offsets the ineffectiveness on the Company’s non-derivative net investment hedges noted above.
Information regarding the fair value of derivatives on a gross basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Caption
|
March 31, 2020
|
|
March 31, 2019
|
|
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
|
|
Cross-currency swaps (current)
|
Prepaid expenses and other/Other accrued liabilities
|
112
|
|
19
|
|
1,279
|
|
|
—
|
|
18
|
|
—
|
|
Cross-currency swaps (non-current)
|
Other Noncurrent Assets/Liabilities
|
182
|
|
—
|
|
3,313
|
|
|
91
|
|
33
|
|
5,283
|
|
Total
|
|
$
|
294
|
|
$
|
19
|
|
|
|
$
|
108
|
|
$
|
51
|
|
|
Derivatives not designated for hedge accounting
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (current)
|
Prepaid expenses and other
|
$
|
2
|
|
$
|
—
|
|
$
|
24
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
14
|
|
Foreign exchange contracts (current)
|
Other accrued liabilities
|
—
|
|
—
|
|
5
|
|
|
—
|
|
—
|
|
14
|
|
Total
|
|
$
|
2
|
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
—
|
|
|
Refer to Financial Note 19, “Fair Value Measurements,” for more information on these recurring fair value measurements.
|
|
19.
|
Fair Value Measurements
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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, 2020 and 2019, 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.
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FINANCIAL NOTES (Continued)
The fair value of the Company’s commercial paper was determined using quoted prices in active markets for identical liabilities, which are considered Level 1 inputs.
The Company’s long-term debt is carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were $7.4 billion and $7.8 billion at March 31, 2020 and $7.6 billion and $7.9 billion at March 31, 2019. The estimated fair value of its 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.
Assets Measured at Fair Value on a Recurring Basis
Cash and cash equivalents at March 31, 2020 and 2019 included investments in money market funds of $2.0 billion and $1.2 billion, which are reported at fair value. The fair value of money market funds was determined 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 the Company’s marketable securities were not material at March 31, 2020 and 2019.
Fair values of the Company’s forward foreign currency contracts were determined using observable inputs from available market information. Fair values of the Company’s cross-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 18, “Hedging Activities,” for fair value and other information on the Company’s foreign currency derivatives including forward foreign currency contracts and cross-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, 2020 and 2019.
Assets Measured at Fair Value on a Nonrecurring Basis
At March 31, 2020, assets measured at fair value on a nonrecurring basis included long-lived assets for the Company’s European Pharmaceuticals Solutions segment and the Rexall Health business within Other. Refer to Financial Note 4, “Restructuring, Impairment and Related Charges” for more information.
At March 31, 2019, assets measured at fair value on a nonrecurring basis primarily consisted of goodwill and long-lived assets for the Company’s European Pharmaceutical Solutions segment.
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. The Company considered a market approach as well as an income approach (a DCF model) to determine the fair value of the reporting unit.
Refer to Financial Note 14, “Goodwill and Intangible Assets, Net,” for more information regarding goodwill impairment charges recorded for certain reporting units during 2019 and 2018.
Long-lived Assets
The Company utilizes 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 from its 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.
The Company measures certain long-lived and intangible assets at fair value on a nonrecurring basis when events occur that indicate an asset group may not be recoverable. If the carrying amount of an asset group is not recoverable, an impairment charge is recorded to reduce the carrying amount by the excess over its fair value.
Liabilities Measured at Fair Value on a Nonrecurring Basis
There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2020 and 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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20.
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Financial Guarantees and Warranties
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Financial Guarantees
The Company has agreements with certain of its customers’ financial institutions, mainly in Canada and Europe, under which it has guaranteed the repurchase of its customers’ inventory or its customers’ debt in the event these customers are unable to meet their obligations to those financial institutions. For the Company’s 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 generally range from one to 10 years and are primarily provided to facilitate financing for certain customers. The majority of the Company’s customers’ debt guarantees are secured by certain assets of the customer. At March 31, 2020, the maximum amounts of inventory repurchase guarantees and customers’ debt guarantees were $274 million and $129 million, of which the Company has not accrued any material amounts. The expirations of these financial guarantees are as follows: $222 million, $17 million, $13 million, $32 million and $10 million from 2021 through 2025 and $109 million thereafter.
At March 31, 2020, the Company’s banks and insurance companies have issued $170 million of standby letters of credit and surety bonds, which were issued on the Company’s behalf primarily related to its customer contracts and in order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations and its workers’ compensation and automotive liability programs.
The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if its software products infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnification agreements and has not accrued any liabilities related to such obligations.
In conjunction with certain transactions, primarily divestitures, the Company 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, the Company has historically not made material payments as a result of these indemnification provisions.
Warranties
In the normal course of business, the Company provides certain warranties and indemnification protection for its products and services. For example, the Company provides warranties that the pharmaceutical and medical-surgical products it distributes are in compliance with the U.S. Food, Drug and Cosmetic Act and other applicable laws and regulations. It has received the same warranties from its suppliers, which customarily are the manufacturers of the products. In addition, the Company has indemnity obligations to its customers for these products, which have also been provided from its suppliers, either through express agreement or by operation of law. Accrued warranty costs were not material to the consolidated balance sheets.
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21.
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Commitments and Contingent Liabilities
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In addition to commitments and obligations incurred in the ordinary course of business, the Company is subject to a variety of claims and legal proceedings, including claims from customers and vendors, pending and potential legal actions for damages, governmental investigations and other matters. The Company and its affiliates are parties to the legal claims and proceedings described below. The Company is vigorously defending itself against those claims and in those proceedings. Significant developments in those matters are described below. If the Company is unsuccessful in defending, or if it determines to settle, any of these matters, it may be required to pay substantial sums, be subject to injunction and/or be forced to change how it operates its business, which could have a material adverse impact on its financial position or results of operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Unless otherwise stated, the Company is unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for the Company to 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 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. The Company reviews loss contingencies at least quarterly, to determine whether the loss probability has changed and whether it can make a reasonable estimate of the possible loss or range of loss. When the Company determines that a loss from a claim is probable and reasonably estimable, it records a liability in the amount of its estimate for the ultimate loss. The Company also provides 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 its recorded liability.
I. Litigation and Claims Involving Distribution of Controlled Substances
The Company and its affiliates are defendants in many cases asserting claims related to distribution of controlled substances. They 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 seek monetary damages and other forms of relief based on 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 (“RICO”), 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 proceedings 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-2804. At present, there are approximately 2,800 cases under the jurisdiction of the MDL court. In suits filed against the Company by Cuyahoga County, Ohio, and Summit County, Ohio, the parties finalized a settlement agreement on December 26, 2019. Under the terms of the agreement, the Company did not admit liability and expressly denied wrongdoing, and paid the counties a total of $82 million on January 9, 2020. This charge was recorded in operating expenses for the year ended March 31, 2020.
Three cases involving McKesson that were previously part of the federal MDL were remanded to other federal courts. On January 14, 2020, the Judicial Panel on Multidistrict Litigation finalized its Conditional Remand Order, ordering that the cases against the three largest distributors brought by Cabell County, West Virginia and the City of Huntington, West Virginia be remanded to the U.S. District Court for the Southern District of West Virginia and a trial date has been scheduled for October 19, 2020. On February 5, 2020, the case brought by the City and County of San Francisco was remanded to the U.S. District Court for the Northern District of California and the case brought by the Cherokee Nation was remanded to the U.S. District Court for the Eastern District of Oklahoma.
The Company is also named in approximately 385 similar state court cases pending in 36 states plus Puerto Rico. These include actions filed by 27 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. Trial dates have been set in several of these state cases. Trial was previously set to begin in March 2020 in the Supreme Court of New York, Suffolk County for a case brought by the New York attorney general and two New York county governments, but the trial was indefinitely postponed in light of the COVID-19 pandemic.
The Company has been involved in discussions with the objective of achieving broad resolution of opioid-related claims brought by governmental entities. For example, on October 21, 2019, four state attorneys general announced certain terms of a proposed framework for the potential settlement of those opioid claims which they indicated they would find acceptable. The proposed framework would have expected the three largest U.S. pharmaceutical distributors to pay an aggregate amount of up to $18.0 billion over 18 years, with up to approximately $6.9 billion over 18 years expected from the Company, with any finally-determined amount being subject to adjustment based on various contingencies, including sufficient resolution with States, political subdivisions and other governmental entities nationwide. The proposed framework also would have required the three distributors, including the Company, to adopt changes to anti-diversion programs and to participate in a program involving the distribution of certain medication used to treat opioid use disorder. Discussions with attorneys general and other parties continue. If the negotiating parties are able to agree on potential terms for a broad resolution, those potential terms would need to be agreed to by numerous other state and local governments before an agreement could be finalized.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Because of the novelty of the claims asserted and the complexity of litigation involving numerous parties across multiple jurisdictions, and the added uncertainty introduced by the economic and other implications of the COVID-19 pandemic, the Company has determined that liability is not probable, and is not able to reasonably estimate a loss or range of loss. To be viable, a broad settlement arrangement would require participation of numerous parties and the resolution of many complex issues. The scope and terms of any settlement framework, including the financial terms, have not been determined. Because of the many uncertainties associated with any potential settlement arrangements, the significance of unresolved elements of a potential settlement and the uncertainty of the scope of potential participation by plaintiffs, the Company has not reached a point where settlement is probable, and as such has not recognized any liability related to any potential settlement framework as of March 31, 2020. The Company believes that it has valid defenses to the claims pending against it and intends to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on the Company’s financial position, cash flows or liquidity, or results of operations.
The Company and certain of its current and former directors and officers were defendants in a consolidated shareholder derivative action in the Northern District of California captioned In re McKesson Corporation Derivative Litigation, No. 4:17-cv-1850. The consolidated complaint alleged claims of breach of fiduciary duty, waste, and insider trading purportedly on behalf of the Company. The Company was named as a nominal defendant. The consolidated complaint alleged that the defendants violated their fiduciary duties by causing, allowing, or otherwise failing to prevent the purported conduct underlying the Company's previously disclosed agreement with the Drug Enforcement Administration (DEA), Department of Justice (DOJ), and various United States Attorneys' offices to settle potential administrative and civil claims relating to investigations about the Company's suspicious order reporting practices for controlled substances. The consolidated complaint sought unspecified damages, restitution, disgorgement, attorneys' fees, and other equitable relief. The Company and certain of its current and former directors and officers were also defendants in a similar consolidated shareholder derivative action in the Delaware Court of Chancery captioned In re McKesson Corporation Stockholder Derivative Litigation, No. 2017-0736. On May 25, 2018, the court stayed further proceedings in this matter in favor of the In re McKesson Corporation Derivative Litigation action. The parties reached an agreement to resolve these shareholder derivative actions. The court in the In re McKesson Corporation Derivative Litigation action issued a final judgment and order approving the settlement on April 22, 2020. Under that agreement: (i) insurance carriers will pay the Company $175 million, less $44 million in attorneys’ fees and expenses awarded by the court to plaintiffs’ counsel; and (ii) the Company will implement certain corporate governance enhancements that will remain in effect for at least four years. On April 24, 2020, pursuant to the terms of the settlement agreement, the parties to the In re McKesson Corporation Stockholder Derivative Litigation action pending in the Delaware Court of Chancery filed a stipulation dismissing that action with prejudice. No cash payment has yet been received by the Company.
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 federal 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 of controlled substances. 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 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 would be dismissed. In April 2019, the widow of the relator filed a motion to substitute their daughter as the relator; the United States and defendants opposed this substitution request. The motion remains pending and the case remains stayed.
In December 2019, the Company was served with two qui tam complaints filed by the same two relators alleging violations of the federal False Claims Act, the California False Claims Act, and the California Unfair Business Practices statute based on alleged predicate violations of the Controlled Substances Act and its implementing regulations, United States ex rel. Kelley, 19-cv-2233, and State of California ex rel. Kelley, CGC-19-576931. The complaints seek relief including treble damages, civil penalties, attorney fees, and costs in unspecified amounts.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
II. Other Litigation and Claims
On May 17, 2013, the Company was served 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., No. CV-13-02219 (HG). Plaintiffs seek statutory damages from $500 to $1,500 per violation plus injunctive relief. True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. Both plaintiffs alleged that defendants violated the TCPA by sending faxes that did not contain notices regarding how to opt out of receiving the faxes. On July 16, 2015, plaintiffs filed a motion for class certification. On August 22, 2016, the court denied plaintiffs’ motion. On July 17, 2018, the United States Court of Appeals for the Ninth Circuit Court 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. On August 13, 2019, the court granted plaintiffs’ renewed motion for class certification. After class notice and the opt-out period, 9,490 fax numbers remain in the class, representing 48,769 faxes received. On March 5, 2020, McKesson moved to decertify the class and moved for summary judgment on plaintiffs’ claim for treble damages. Plaintiffs’ moved for summary judgment on the same day. The hearing for these motions is scheduled for May 21, 2020.
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. On December 30, 2017, four investment funds, which had allegedly entered into swap transactions regarding shares in Celesio AG that would have enabled them to decide whether to accept McKesson Europe Holdings’s takeover offer in its acquisition of Celesio AG, filed a complaint, Davidson Kempner International (BVI) Ltd. et al. v. McKesson Europe Holdings GmbH & Co. KGaA, No.16 O 475/17. The complaints allege 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 in Polygon 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 the Polygon matter. On February 4, 2019, plaintiffs filed a complaint against denial of leave to appeal with the Federal Court of Justice (Bundesgerichtshof). On March 15, 2019, the lower court in Davidson similarly dismissed the case. Plaintiffs appealed this ruling and, on October 9, 2019, the Higher Regional Court (Oberlandesgericht) of Stuttgart confirmed the full dismissal of the Davidson matter. On November 13, 2019, plaintiffs filed a complaint against denial of leave to appeal with the Federal Court of Justice (Bundesgerichtshof).
On March 5, 2018, the Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads), was served with a qui tam complaint filed in July 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. The United States and the states named in the complaint have declined to intervene in the suit. On December 17, 2018, the United States filed a motion to dismiss the complaint in its entirety; this motion was denied on April 15, 2019. On June 7, 2019, the court denied the United States’ motion for reconsideration. On July 8, 2019, the United States appealed to the United States Court of Appeals for the Seventh Circuit seeking interlocutory review of the denial of its motion for reconsideration of the denial of the motion to dismiss the complaint. On September 3, 2019, the United States District Court for the Southern District of Illinois stayed the district court proceedings pending the appeal. The court set a trial date of April 5, 2021.
On April 16, 2013, the Company’s subsidiary, U.S. Oncology, Inc. (“USON”), was served with a third amended qui 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 September 30, 2013, the court granted the United States’ motion to dismiss the claims pled against Amgen. On September 17, 2018, the court granted USON’s motion to dismiss the claims pled against it, with leave to amend. On November 16, 2018, the relators filed a fourth amended complaint.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On June 17, 2014, U.S. Oncology Specialty, LP (“USOS”) was served with a fifth amended qui tam complaint filed in the United States District Court for the Eastern District of New York by a relator alleging that USOS, among others, solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute, the federal 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 September 17, 2018, the court granted USOS’s motion to dismiss and gave the relator 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; the parties are awaiting the Court’s decision.
On 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 4, 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 December 9, 2019, the United States District Court for the Eastern District of New York ordered the unsealing of another complaint filed by the same relator, alleging the same misconduct and seeking the same relief with respect to US Oncology, Inc., purportedly on behalf of the same government entities, United States ex rel. Omni Healthcare, Inc. v. US Oncology, Inc., 19-cv-05125. The United States and the named states declined to intervene in the case.
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 March 5, 2020, the United States Court of Appeals for the Seventh Circuit vacated the district court’s order, and ruled that dismissal was appropriate on alternative grounds. The case was remanded to the district court to allow the plaintiffs an opportunity to amend their complaint.
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. On June 26, 2019, the court granted the Company’s motion to dismiss and authorized plaintiffs to seek leave to amend the claims against the Company. On March 11, 2020, the Company received a complaint alleging that the Company and other distributors violated the Sherman Act by colluding with manufacturers to restrain trade in the sale of generic drugs. Reliable Pharmacy, et al. v. Actavis Holdco US, et al., No. 2:19-cv-6044. The complaint seeks relief including treble damages, disgorgement, attorney fees, and costs in unspecified amounts. On the same date, the plaintiffs moved to amend the new complaint.
On December 12, 2018, the Company received a class action complaint in the United States District Court for the Northern District of California, alleging that McKesson and two of its former officers, CEO John Hammergren and 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 undisclosed 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 defendant Hammergren.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
On May 21, 2019, Jean E. Henry, a purported Company shareholder, filed a shareholder derivative complaint in the Superior Court of San Francisco, California against certain current and former officers and directors of the Company, and the Company as a nominal defendant, alleging violations of fiduciary duties and waste of corporate assets with respect to an alleged conspiracy to fix the prices of generic drugs, Henry v. Tyler, et al., CGC-19-576119. On May 23, 2019, the Company removed the case to the United States District Court for the Northern District of California, Case No. 19-cv-02869. On August 26, 2019, the plaintiff filed an amended complaint, removing all claims except for an alleged breach of fiduciary duty by the named current and former officers and directors of the Company. On January 21, 2020, the United States District Court for the Northern District of California granted the defendants’ motion to dismiss the complaint, and on February 20, 2020, the plaintiff filed an amended complaint.
In July 2015, The Great Atlantic & Pacific Tea Company (“A&P”), a former customer of the Company, filed for reorganization in bankruptcy under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court for the Southern District of New York. In re The Great Atlantic & Pacific Tea Company, Inc., et al., Case No. 15-23007. A suit filed against the Company in this bankruptcy case seeks to recover approximately $68 million in alleged preferential transfers. The Official Committee of Unsecured Creditors on behalf of the bankruptcy estate of The Great Atlantic & Pacific Tea Company, Inc., et al. v. McKesson Corporation d/b/a McKesson Drug Co., Adv. Proc. No. 17-08264.
In October 2019, the Company’s subsidiary RelayHealth Corporation (“RelayHealth”) was served with three purported class action complaints filed in the United States District Court for the Northern District of Illinois. The complaints allege that RelayHealth violated the Sherman Act by entering into an agreement with co-defendant Surescripts, LLC not to compete in the electronic prescription routing market, and by conspiring with Surescripts, LLC to monopolize that market, Powell Prescription Center, et al. v. Surescripts, LLC, et al., No. 1:19-cv-06627; Intergrated Pharmaceutical Solutions LLC v. Surescripts, LLC, et al., 1:19-cv-06778; Falconer Pharmacy, Inc. v. Surescripts LLC, et al., No. 1:19-cv-07035. In November 2019, three similar complaints were filed in the United States District Court for the Northern District of Illinois. Kennebunk Village Pharmacy, Inc. v. SureScripts, LLC, et al., 1:19-cv-7445; Whitman v. SureScripts, LLC et al., No. 1:19-cv-7448; BBK Global Corp. v. SureScripts, LLC et al., 1:19-cv-7640. In December 2019, the six actions were consolidated in the Northern District of Illinois. The complaints seek relief including treble damages, attorney fees, and costs.
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. Such subpoenas and requests 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 of claims against the Company. The Company responds to these requests in the ordinary course of business.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 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. In April and June 2019, the United States Attorney’s Office for the Eastern District of New York served grand jury subpoenas seeking documents related to the Company’s anti-diversion policies and procedures and its distribution of Schedule II controlled substances. The Company believes the subpoenas are part of a broader investigation by that office into pharmaceutical manufacturers’ and distributors’ compliance with the Controlled Substances Act and related statutes. In July 2019, the Drug Enforcement Administration served an administrative inspection warrant on the Company’s distribution center in West Sacramento, California seeking information about the Company’s compliance with the Controlled Substances Act and related statutes. On November 12, 2019, the New York Department of Financial Services sent a Notice of Intent to Commence Enforcement Action to McKesson Corporation and PSS World Medical, Inc. for alleged violations of the New York Insurance Law and/or New York Financial Services Law, and seeking civil monetary penalties, in connection with manufacturing and distributing opioids in New York. In January 2020, the United States Attorney’s Office for the District of Massachusetts served a Civil Investigative Demand on the Company seeking documents related to certain discounts and rebates paid to physician practice customers.
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 million, net of amounts anticipated from third parties. The $10 million is expected to be paid out between April 2020 and March 2050. The Company has accrued for the estimated probable loss for these environmental matters.
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 14 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 liabilities 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. Accordingly, the Company’s estimated probable loss at those 14 sites is approximately $22.5 million, which has been accrued for in the consolidated balance sheets. However, it is possible that the ultimate costs of these matters may exceed or be less than the reserves.
V. Value Added Tax Assessments
The Company operates 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. The Company has received assessments for VAT which are in various stages of appeal. The Company disagrees with these assessments and believes that it has a strong legal argument to defend its 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 currently available information, the Company believes the ultimate outcome of these matters will not have a material adverse effect on its financial position, cash flows or results of operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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 2019, the Company’s quarterly dividend was raised from $0.39 to $0.41 per common share for dividends declared on or after such date by the Board. Dividends were $1.62 per share in 2020, $1.51 per share in 2019 and $1.30 per share in 2018. 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 the Company’s stock price, corporate and regulatory requirements, restrictions under the Company’s debt obligations and other market and economic conditions.
Information regarding the share repurchase activity over the last three years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Balance, March 31, 2017
|
|
|
|
|
|
$
|
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
|
|
Shares repurchased
|
|
13.9
|
|
|
$
|
138.94
|
|
|
(1,934
|
)
|
Balance, March 31, 2020
|
|
|
|
|
|
$
|
1,535
|
|
|
|
(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. It also excludes shares related to the Company’s Split-off of the Change Healthcare JV as described below.
|
|
|
(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, the Company’s share repurchases were transacted through both open market transactions and ASR programs with third party financial institutions.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2018, the Company 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, the Company 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, it 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, the Company 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 increased to $5.1 billion. During 2019, the Company 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. In December 2018, the Company 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, the Company retired 5.0 million or $542 million of its treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with the Company’s accounting policy, it allocates any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, its retained earnings and additional paid-in capital were reduced by $472 million and $70 million during 2019.
In 2020, the Company repurchased 9.2 million of the Company’s shares for $1.3 billion through open market transactions at an average price per share of $144.68.
During 2020, the Company entered into an ASR program with a third-party financial institution to repurchase $600 million of the Company’s common stock. The total number of shares repurchased under this ASR program was 4.7 million shares at an average price per share of $127.68. The total authorization outstanding for repurchase of the Company’s common stock was $1.5 billion at March 31, 2020.
On March 9, 2020, the Company completed the Split-off of its interest in the Change Healthcare JV. In connection with the Split-off, the Company distributed all 176.0 million outstanding shares of SpinCo common stock, which held all of the Company’s interests in the Change Healthcare JV, to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson stock, which are now held as treasury stock on the Company’s consolidated balance sheet. Following consummation of the exchange offer, on March 10, 2020, SpinCo merged with and into Change Healthcare, Inc. with each share of SpinCo common stock converted into one share of Change Healthcare, Inc. common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. See Note 2 , “Investment in Change Healthcare Joint Venture,” for more information.
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)
|
2020
|
|
2019
|
|
2018
|
Foreign currency translation adjustments:(1)
|
|
|
|
|
|
Foreign currency translation adjustments arising during period, net of income tax expense of nil, nil and nil (2) (3)
|
$
|
(151
|
)
|
|
$
|
(431
|
)
|
|
$
|
804
|
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
|
—
|
|
|
—
|
|
|
—
|
|
|
(151
|
)
|
|
(431
|
)
|
|
804
|
|
Unrealized gains (losses) on net investment hedges (4)
|
|
|
|
|
|
Unrealized gains (losses) on net investment hedges arising during period, net of income tax (expense) benefit of ($30), ($71), and $95
|
85
|
|
|
241
|
|
|
(180
|
)
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
241
|
|
|
(180
|
)
|
Unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax (expense) benefit of ($12), ($4), and $9
|
86
|
|
|
24
|
|
|
(30
|
)
|
Reclassified to income statement, net of income tax expense of nil, nil and nil
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
|
24
|
|
|
(30
|
)
|
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 ($8), $5, and ($2) (5)
|
27
|
|
|
(51
|
)
|
|
25
|
|
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax (expense) benefit of $1, nil, and ($2) (6)
|
2
|
|
|
9
|
|
|
5
|
|
Foreign currency translation adjustments and other, net of income tax expense of nil, nil and nil
|
6
|
|
|
10
|
|
|
(15
|
)
|
Reclassified to income statement, net of income tax expense of ($33), nil and
nil (7)
|
94
|
|
|
—
|
|
|
—
|
|
|
129
|
|
|
(32
|
)
|
|
15
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), net of tax
|
$
|
149
|
|
|
$
|
(198
|
)
|
|
$
|
609
|
|
|
|
(1)
|
Foreign currency translation adjustments primarily result from the conversion of non-U.S. dollar financial statements of the Company’s foreign subsidiary McKesson Europe into the Company’s reporting currency, U.S. dollars.
|
|
|
(2)
|
The 2020 net foreign currency translation losses of $151 million were primarily due to the weakening of the Euro and Canadian dollar against the U.S. dollar, partially offset by the strengthening of the British pound sterling from April 1, 2019 to March 31, 2020. 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.
|
|
|
(3)
|
2020 and 2018 include net foreign currency translation gains of $1 million and $189 million and 2019 includes net foreign currency translation losses of $61 million attributable to noncontrolling and redeemable noncontrolling interests.
|
|
|
(4)
|
2020, 2019 and 2018 include foreign currency gains of $39 million and $259 million and losses of $268 million on the net investment hedges from the Euro and British pound sterling-denominated notes. 2020, 2019 and 2018 also include foreign currency gains of $76 million and $53 million and losses of $7 million on the net investment hedges from the cross-currency swaps.
|
|
|
(5)
|
The 2020 net actuarial gain of $2 million and 2019 and 2018 net actuarial losses of $5 million and $4 million were attributable to noncontrolling and redeemable noncontrolling interests.
|
|
|
(6)
|
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.
|
|
|
(7)
|
Primarily reflects a reclassification of losses in 2020 upon the termination of the Plan from accumulated other comprehensive loss to other income (expense), net in the Company’s consolidated statement of operations.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the Company’s accumulated other comprehensive income (loss) by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
|
|
|
|
(In millions)
|
Foreign Currency Translation Adjustments, Net of Tax
|
|
Unrealized Gains (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, 2018
|
$
|
(1,258
|
)
|
|
$
|
(188
|
)
|
|
$
|
(61
|
)
|
|
$
|
(210
|
)
|
|
$
|
(1,717
|
)
|
Other comprehensive income (loss) before reclassifications
|
(431
|
)
|
|
241
|
|
|
24
|
|
|
(41
|
)
|
|
(207
|
)
|
Amounts reclassified to earnings and
other
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
Other comprehensive income (loss)
|
(431
|
)
|
|
241
|
|
|
24
|
|
|
(32
|
)
|
|
(198
|
)
|
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests
|
(61
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(66
|
)
|
Other comprehensive income (loss) attributable to McKesson
|
(370
|
)
|
|
241
|
|
|
24
|
|
|
(27
|
)
|
|
(132
|
)
|
Balance at March 31, 2019
|
(1,628
|
)
|
|
53
|
|
|
(37
|
)
|
|
(237
|
)
|
|
(1,849
|
)
|
Other comprehensive income (loss) before reclassifications
|
(151
|
)
|
|
85
|
|
|
86
|
|
|
33
|
|
|
53
|
|
Amounts reclassified to earnings and other
|
—
|
|
|
—
|
|
|
—
|
|
|
96
|
|
|
96
|
|
Other comprehensive income (loss)
|
(151
|
)
|
|
85
|
|
|
86
|
|
|
129
|
|
|
149
|
|
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests
|
1
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
3
|
|
Other comprehensive income (loss) attributable to McKesson
|
(152
|
)
|
|
85
|
|
|
86
|
|
|
127
|
|
|
146
|
|
Balance at March 31, 2020
|
$
|
(1,780
|
)
|
|
$
|
138
|
|
|
$
|
49
|
|
|
$
|
(110
|
)
|
|
$
|
(1,703
|
)
|
|
|
23.
|
Related Party Balances and Transactions
|
During 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, the Company 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 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 its consolidated balance sheet. The pledge was fully paid in 2019. Additionally, during the fourth quarter of 2020, the Company contributed $20 million to the McKesson Foundation, which supports the Company’s employees and their community involvement efforts, with a special focus on cancer. A portion of this contribution was directed to an emergency employee assistance fund administered by the Emergency Assistance Foundation, an independent nonprofit organization, to provide support for employees impacted by the COVID-19 pandemic.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
McKesson Europe has investments in pharmacies located across Europe that are accounted for under the equity method. McKesson Europe maintains distribution arrangements with these pharmacies for the sale of related goods and services under which revenues of $141 million, $137 million, and $154 million are included in the consolidated statements of operations for the years ended March 31, 2020, 2019 and 2018 and receivables related to these transactions included in the consolidated balance sheets were not material as of March 31, 2020 and 2019.
In 2020 and 2019, the Company’s pharmaceutical sales to one of its equity method investees in the U.S. Pharmaceutical and Specialty Solutions segment totaled $60 million and $34 million. Trade receivables related to these transactions from this investee were not material as of March 31, 2020 and 2019.
Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for information regarding related party balances and transactions with Change Healthcare Inc. and Change Healthcare JV.
The Company reports its financial results in three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. The Company evaluates the performance of its operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.
The Company’s U.S. Pharmaceutical and Specialty Solutions segment distributes pharmaceutical and other healthcare-related products and also provides pharmaceutical solutions to life sciences companies in the United States.
The Company’s European Pharmaceutical Solutions segment provides distribution and services to wholesale, institutional and retail customers and serves patients and consumers in 13 European countries through its own pharmacies and participating pharmacies that operate under brand partnership and franchise arrangements.
The Company’s Medical-Surgical Solutions segment distributes medical-surgical supplies and provides logistics and other services to healthcare providers in the United States.
Other primarily consists of the following:
|
|
•
|
McKesson Canada which distributes pharmaceutical and medical products and operates Rexall Health retail pharmacies;
|
|
|
•
|
McKesson Prescription Technology Solutions which provides innovative technologies that support retail pharmacies; and
|
|
|
•
|
the Company’s investment in the Change Healthcare JV which was split-off from the Company in the fourth quarter of 2020.
|
Corporate includes income and expenses associated with administrative functions and projects, and the results of certain investments. Corporate expenses, net are allocated to operating segments to the extent that these items are directly attributable.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Financial information relating to the Company’s reportable operating segments and reconciliations to the consolidated totals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
U.S. Pharmaceutical and Specialty Solutions (1)
|
$
|
183,341
|
|
|
$
|
167,763
|
|
|
$
|
162,587
|
|
European Pharmaceutical Solutions (1)
|
27,390
|
|
|
27,242
|
|
|
27,320
|
|
Medical-Surgical Solutions (1)
|
8,305
|
|
|
7,618
|
|
|
6,611
|
|
Other
|
12,015
|
|
|
11,696
|
|
|
11,839
|
|
Total Revenues
|
$
|
231,051
|
|
|
$
|
214,319
|
|
|
$
|
208,357
|
|
|
|
|
|
|
|
Operating profit (loss) (2)
|
|
|
|
|
|
U.S. Pharmaceutical and Specialty Solutions (3)
|
$
|
2,767
|
|
|
$
|
2,697
|
|
|
$
|
2,535
|
|
European Pharmaceutical Solutions (4)
|
(261
|
)
|
|
(1,978
|
)
|
|
(1,681
|
)
|
Medical-Surgical Solutions
|
499
|
|
|
455
|
|
|
461
|
|
Other (5) (6) (7) (8)
|
(595
|
)
|
|
394
|
|
|
(107
|
)
|
Total
|
2,410
|
|
|
1,568
|
|
|
1,208
|
|
Corporate Expenses, Net (9)
|
(1,017
|
)
|
|
(694
|
)
|
|
(564
|
)
|
Loss on Debt Extinguishment
|
—
|
|
|
—
|
|
|
(122
|
)
|
Interest Expense
|
(249
|
)
|
|
(264
|
)
|
|
(283
|
)
|
Income from Continuing Operations Before Income Taxes
|
$
|
1,144
|
|
|
$
|
610
|
|
|
$
|
239
|
|
|
|
|
|
|
|
Depreciation and amortization (10)
|
|
|
|
|
|
U.S. Pharmaceutical and Specialty Solutions
|
$
|
228
|
|
|
$
|
238
|
|
|
$
|
210
|
|
European Pharmaceutical Solutions
|
235
|
|
|
257
|
|
|
296
|
|
Medical-Surgical Solutions
|
136
|
|
|
118
|
|
|
97
|
|
Other
|
187
|
|
|
214
|
|
|
237
|
|
Corporate
|
136
|
|
|
122
|
|
|
111
|
|
Total
|
$
|
922
|
|
|
$
|
949
|
|
|
$
|
951
|
|
|
|
|
|
|
|
Expenditures for long-lived assets (11)
|
|
|
|
|
|
U.S. Pharmaceutical and Specialty Solutions
|
$
|
94
|
|
|
$
|
88
|
|
|
$
|
126
|
|
European Pharmaceutical Solutions
|
95
|
|
|
85
|
|
|
104
|
|
Medical-Surgical Solutions
|
36
|
|
|
110
|
|
|
34
|
|
Other
|
61
|
|
|
68
|
|
|
42
|
|
Corporate
|
76
|
|
|
75
|
|
|
99
|
|
Total
|
$
|
362
|
|
|
$
|
426
|
|
|
$
|
405
|
|
|
|
|
|
|
|
Revenues, net by geographic area
|
|
|
|
|
|
|
|
|
United States
|
$
|
192,709
|
|
|
$
|
176,296
|
|
|
$
|
169,943
|
|
Foreign
|
38,342
|
|
|
38,023
|
|
|
38,414
|
|
Total Revenues
|
$
|
231,051
|
|
|
$
|
214,319
|
|
|
$
|
208,357
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
(1)
|
Revenues from services represent less than 1% of the Company’s U.S. Pharmaceutical and Specialty Solutions segment’s total revenues, less than 10% of the Company’s European Pharmaceutical Solutions segment’s total revenues and less than 2% of the Company’s Medical-Surgical Solutions segment’s total revenues.
|
|
|
(2)
|
Segment operating profit (loss) includes gross profit, net of operating expenses, as well as other income (expense), net, for the Company’s operating segments.
|
|
|
(3)
|
The Company’s U.S. Pharmaceutical and Specialty Solutions segment’s operating profit for 2020, 2019 and 2018 includes pre-tax credits of $252 million, $210 million and $99 million ($186 million, $156 million and $64 million after-tax) related to the LIFO method of accounting for inventories. Operating profit for 2020, 2019 and 2018 also includes $22 million, $202 million and $144 million of cash receipts for the Company’s share of antitrust legal settlements. In addition, operating profit for 2019 includes a pre-tax charge of $61 million ($45 million after-tax) related to a customer bankruptcy and 2018 includes a pre-tax gain of $43 million ($26 million after-tax) from the sale of an equity investment.
|
|
|
(4)
|
European Pharmaceutical Solutions segment’s operating loss for 2020 includes a charge of $275 million (pre-tax and after-tax) to remeasure to fair value the assets and liabilities of the Company’s German wholesale business to be contributed to a joint venture, and for 2020, 2019 and 2018 also includes pre-tax long-lived asset impairment charges of $82 million, $210 million and $446 million ($66 million, $172 million and $410 million after-tax). Operating loss for 2019 and 2018 includes pre-tax goodwill impairment charges of $1.8 billion and $1.3 billion (pre-tax and after-tax).
|
|
|
(5)
|
Operating loss for Other for 2020 includes a pre-tax impairment charge of $1.2 billion ($864 million after-tax) and a pre-tax dilution loss of $246 million ($184 million after-tax) associated with the Company’s investment in the Change Healthcare JV, along with an estimated gain of $414 million (pre-tax and after-tax) related to the split-off of the Change Healthcare JV.
|
|
|
(6)
|
Operating profit (loss) for Other for 2020, 2019 and 2018 includes pre-tax goodwill and long-lived asset impairment charges of $32 million, $56 million and $488 million (pre-tax and after-tax) recognized for the Company’s Rexall Health retail business. The 2019 operating profit for Other also includes a pre-tax gain from an escrow settlement of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to the Company’s 2017 acquisition of Rexall Health. In addition, operating profit for 2019 includes pre-tax restructuring and asset impairment charges of $91 million ($86 million after-tax), primarily associated with lease and other exit-related costs and a pre-tax gain of $56 million ($41 million after-tax) recognized from the sale of an equity investment.
|
|
|
(7)
|
Operating profit for Other for 2019 includes a pre-tax credit of $90 million ($66 million after-tax) for the derecognition of the TRA liability payable to the shareholders of Change. Operating profit (loss) for Other also includes the Company’s proportionate share of loss from the Change Healthcare JV of $119 million, $194 million and $248 million for 2020, 2019 and 2018.
|
|
|
(8)
|
Operating loss for Other for 2018 includes a pre-tax gain of $109 million ($30 million after-tax) from the sale of the Company’s EIS business and a pre-tax credit of $46 million ($30 million after-tax) representing a reduction in its TRA liability.
|
|
|
(9)
|
Corporate expenses, net, for 2020 include pre-tax settlement charges of $122 million ($90 million after-tax) for the termination of the Company’s defined benefit pension plan and a settlement charge of $82 million ($61 million after-tax) related to opioid claims. Corporate expenses, net, for 2019 include pre-tax restructuring and asset impairment charges of $94 million ($70 million after-tax) primarily associated with employee severance and other exit-related costs.
|
|
|
(10)
|
Amounts primarily consist of amortization of acquired intangible assets purchased in connection with business acquisitions and capitalized software for internal use.
|
|
|
(11)
|
Long-lived assets consist of property, plant and equipment.
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Segment assets and property, plant and equipment, net by geographic areas were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
(In millions)
|
2020
|
|
2019
|
Segment assets
|
|
|
|
U.S. Pharmaceutical and Specialty Solutions
|
$
|
34,927
|
|
|
$
|
32,310
|
|
European Pharmaceutical Solutions
|
9,499
|
|
|
7,829
|
|
Medical-Surgical Solutions
|
5,395
|
|
|
5,260
|
|
Other
|
7,944
|
|
|
11,006
|
|
Corporate
|
3,482
|
|
|
3,267
|
|
Total
|
$
|
61,247
|
|
|
$
|
59,672
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
United States
|
$
|
1,642
|
|
|
$
|
1,698
|
|
Foreign
|
723
|
|
|
850
|
|
Total
|
$
|
2,365
|
|
|
$
|
2,548
|
|
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
|
|
25.
|
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
|
Fiscal 2020
|
|
|
|
|
|
|
|
Revenues
|
$
|
55,728
|
|
|
$
|
57,616
|
|
|
$
|
59,172
|
|
|
$
|
58,535
|
|
Gross Profit (1)
|
2,787
|
|
|
2,867
|
|
|
3,033
|
|
|
3,336
|
|
Income (Loss) After Income Taxes:
|
|
|
|
|
|
|
|
Continuing operations (1) (2) (3) (4) (5) (6)
|
$
|
483
|
|
|
$
|
(676
|
)
|
|
$
|
247
|
|
|
$
|
1,072
|
|
Discontinued operations
|
(6
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
6
|
|
Net Income (Loss)
|
$
|
477
|
|
|
$
|
(677
|
)
|
|
$
|
242
|
|
|
$
|
1,078
|
|
Net Income (Loss) Attributable to McKesson Corporation
|
$
|
423
|
|
|
$
|
(730
|
)
|
|
$
|
186
|
|
|
$
|
1,021
|
|
Earnings (loss) Per Common Share Attributable
to McKesson Corporation (7)
|
|
|
|
|
|
|
|
Diluted (8)
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.27
|
|
|
$
|
(3.99
|
)
|
|
$
|
1.06
|
|
|
$
|
5.82
|
|
Discontinued operations
|
(0.03
|
)
|
|
—
|
|
|
(0.03
|
)
|
|
0.03
|
|
Total
|
$
|
2.24
|
|
|
$
|
(3.99
|
)
|
|
$
|
1.03
|
|
|
$
|
5.85
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.28
|
|
|
$
|
(3.99
|
)
|
|
$
|
1.06
|
|
|
$
|
5.86
|
|
Discontinued operations
|
(0.03
|
)
|
|
—
|
|
|
(0.02
|
)
|
|
0.03
|
|
Total
|
$
|
2.25
|
|
|
$
|
(3.99
|
)
|
|
$
|
1.04
|
|
|
$
|
5.89
|
|
|
|
(1)
|
Gross profit for the first, second, third and fourth quarters of 2020 includes pre-tax credits of $15 million, $33 million, $66 million and $138 million ($11 million, $25 million, $49 million and $101 million after-tax) related to the LIFO method of accounting for inventories.
|
|
|
(2)
|
Financial results for the fourth quarter of 2020 include an estimated gain of $414 million (pre-tax and after-tax) related to the split-off of the Change Healthcare JV. Financial results for the second quarter of 2020 include a pre-tax impairment charge of $1.2 billion ($864 million after-tax) and pre-tax dilution loss of $246 million ($184 million after-tax) associated with the Company’s investment in the Change Healthcare JV.
|
|
|
(3)
|
Financial results for the third quarter of 2020 includes a charge of $282 million (pre-tax and after-tax) to remeasure to fair value the assets and liabilities of the Company’s German wholesale business to be contributed to a joint venture, pre-tax long-lived asset impairment charges of $64 million ($53 million after-tax) within the Company’s European Pharmaceutical Solutions segment, and goodwill and long-lived asset impairment charges of $32 million (pre-tax and after-tax) recognized for the Company’s Rexall Health retail business.
|
|
|
(4)
|
Financial results for the first, second, third and fourth quarters of 2020 include the Company’s proportionate share of income from the Change Healthcare JV of $4 million and losses of $51 million, $28 million and $44 million.
|
|
|
(5)
|
Financial results for the second quarter of 2020 includes a pre-tax settlement charge of $105 million ($78 million after-tax) for the termination of the Company’s defined benefit pension plan.
|
|
|
(6)
|
Financial results for the second quarter of 2020 includes a pre-tax settlement charge of $82 million ($61 million after-tax) related to opioids claims.
|
|
|
(7)
|
Certain computations may reflect rounding adjustments.
|
|
|
(8)
|
As a result of the Company’s reported net loss for the second quarter of 2020, potentially dilutive securities were excluded from the per share computations for that quarter due to their antidilutive effect.
|
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Fiscal 2019
|
|
|
|
|
|
|
|
Revenues
|
$
|
52,607
|
|
|
$
|
53,075
|
|
|
$
|
56,208
|
|
|
$
|
52,429
|
|
Gross Profit (1) (2)
|
2,779
|
|
|
2,804
|
|
|
2,970
|
|
|
3,201
|
|
Income (Loss) after Income Taxes:
|
|
|
|
|
|
|
|
Continuing operations (1) (2) (3) (4) (5) (6) (7)
|
$
|
(81
|
)
|
|
$
|
552
|
|
|
$
|
527
|
|
|
$
|
(744
|
)
|
Discontinued operations
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
Net Income (Loss)
|
$
|
(80
|
)
|
|
$
|
553
|
|
|
$
|
526
|
|
|
$
|
(744
|
)
|
Net Income (Loss) Attributable to McKesson Corporation
|
$
|
(138
|
)
|
|
$
|
499
|
|
|
$
|
469
|
|
|
$
|
(796
|
)
|
Earnings (Loss) Per Common Share Attributable
to McKesson Corporation (8)
|
|
|
|
|
|
|
|
Diluted (9)
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.69
|
)
|
|
$
|
2.51
|
|
|
$
|
2.41
|
|
|
$
|
(4.17
|
)
|
Discontinued operations
|
0.01
|
|
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
Total
|
$
|
(0.68
|
)
|
|
$
|
2.51
|
|
|
$
|
2.40
|
|
|
$
|
(4.17
|
)
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.69
|
)
|
|
$
|
2.52
|
|
|
$
|
2.42
|
|
|
$
|
(4.17
|
)
|
Discontinued operations
|
0.01
|
|
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
Total
|
$
|
(0.68
|
)
|
|
$
|
2.52
|
|
|
$
|
2.41
|
|
|
$
|
(4.17
|
)
|
|
|
(1)
|
Gross profit for the first, second, third and fourth quarters of 2019 includes pre-tax credits of $21 million, $22 million, $21 million and $146 million ($15 million, $17 million, $15 million and $109 million after-tax) related to the LIFO method of accounting for inventories.
|
|
|
(2)
|
Gross profit for the first, third and fourth quarters of 2019 includes $35 million, $104 million, and $63 million of cash receipts for the Company’s share of antitrust legal settlements.
|
|
|
(3)
|
Financial results for the first and fourth quarters of 2019 include goodwill impairment charges of $570 million and $1.2 billion (both pre-tax and after-tax) within the Company’s two reporting units within the European Pharmaceutical Solutions segment.
|
|
|
(4)
|
Financial results for the first and fourth quarters of 2019 include pre-tax asset impairment charges of $20 million ($16 million after-tax) and $190 million ($156 million after-tax) primarily for the Company’s U.K. retail business. Financial results for the third quarter of 2019 include asset impairment charges of $35 million (pre-tax and after-tax) for the Company’s Rexall Health retail business.
|
|
|
(5)
|
Financial results for the first, second, third and fourth quarters of 2019 include the Company’s proportionate share of loss from the Change Healthcare JV of $56 million, $56 million, $50 million and $32 million.
|
|
|
(6)
|
Financial results for the first quarter of 2019 include a gain from an escrow settlement of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to the Company’s 2017 acquisition of Rexall Health.
|
|
|
(7)
|
Financial results for the second quarter of 2019 include a pre-tax credit of $90 million ($66 million after-tax) for the derecognition of the TRA liability payable to the shareholders of Change.
|
|
|
(8)
|
Certain computations may reflect rounding adjustments.
|
|
|
(9)
|
As a result of the Company’s 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.
|