filings.toolsItem 8. Financial Statements and Supplementary Data.
352K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
McKESSON CORPORATION
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of McKesson Corporation is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of March 31, 2021.
Deloitte & Touche LLP, an independent registered public accounting firm, audited the financial statements included in this Annual Report on Form 10-K and has also audited the effectiveness of the Company’s internal control over financial reporting as of March 31, 2021. This audit report appears on the following page of this Annual Report on Form 10-K.
May 12, 2021
| /s/ Brian S. Tyler | ||
| Brian S. Tyler | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
| /s/ Britt J. Vitalone | ||
| Britt J. Vitalone | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial Officer) |
McKESSON CORPORATION
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, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended March 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2021, 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, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 11 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.
McKESSON CORPORATION
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 - Broad Settlement of Opioid Claims brought by Governmental Entities - Refer to Note 1 and Note 19 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, tribal nations, health and welfare funds, third-party payors and individuals. The Company is in ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives, who represent states, their political subdivisions and other government entities (“governmental entities”), regarding a framework under which the three largest U.S. pharmaceutical distributors would pay up to approximately $21.0 billion over a period of 18 years, with up to approximately $8.0 billion to be paid by the Company to resolve the claims brought by governmental entities (“broad settlement of opioid claims”). 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. For the year ended March 31, 2021, management believes that a loss through broad settlement of opioid claims brought by governmental entities is both probable and reasonably estimable, and accordingly, recorded a charge in the amount of $8.0 billion, which represents management’s best estimate of future loss related to these specific matters.
We identified the potential broad settlement of opioid claims as a critical audit matter because of the significant judgment and challenges auditing management’s determination of whether such loss is probable and reasonably estimable. Specifically, auditing management’s determination and disclosure of whether the contingent loss arising from the potential broad settlement of opioid claims is probable, and the related measurement of such loss, is subjective and requires significant judgment given that the potential loss is based upon settlement terms that have not yet been finalized.
McKESSON CORPORATION
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the potential broad settlement of opioid claims included the following, among others:
-
We tested the effectiveness of internal controls related to the potential broad settlement of opioid claims, 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, as well as executives and other members of management, to understand the basis for the Company’s conclusion that a loss related to a potential broad settlement of opioid claims, is probable and reasonably estimable as of March 31, 2021. In addition, we inspected responses to inquiry letters sent to both internal and external legal counsel as it relates to the status of discussions with plaintiffs’ counsel and the Company’s intent regarding the framework for a potential broad settlement of opioid claims.
-
We evaluated management’s analysis of the potential broad settlement of opioid claims, including the methodology used by management to determine the probability of such loss. We also evaluated the methodology used by management to estimate the most likely loss to be incurred by the Company as a result of a potential broad settlement of opioid claims.
-
We examined Board of Directors meeting minutes, including relevant sub-committee meeting minutes, held inquiries with a director serving on the sub-committee, and compared to internal and external counsel’s written responses to our inquiry letters.
-
We performed public domain searches for evidence contrary to management’s analysis.
-
With the assistance of our specialists in accounting for loss contingencies, we evaluated the facts, evidence and the Company’s related accounting treatment for the potential broad settlement of opioid claims.
-
We evaluated any events subsequent to March 31, 2021 that might impact our evaluation of the potential broad settlement of opioid claims.
-
We obtained written representations from executives and internal counsel of the Company.
-
We examined proposed terms related to the potential broad settlement framework.
-
We evaluated the Company’s related disclosures for consistency with our testing.
Uncertain Tax Position - Broad Settlement of Opioid Claims brought by Governmental Entities - Refer to Note 1 and Note 8 to the financial statements
Critical Audit Matter Description
For the year ended March 31, 2021, the Company recognized $1.3 billion of tax benefit related to a potential broad settlement of opioid claims and had an additional $0.5 billion of potential benefit relating to an uncertain tax position that had not been recognized. 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 net amount recognized by management is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized. The Company uses significant judgment in evaluating the technical tax merits of income tax benefits that qualify for recognition, including the determination of the amount that is more likely than not of being realized for U.S. federal and state income tax purposes.
We identified the Company’s uncertain tax position related to the charge for the potential broad settlement of opioid claims as a critical audit matter because of the challenges in auditing management’s estimate of the amount of income tax benefit that qualifies for recognition. Specifically, auditing management’s uncertain tax position in this area was challenging because the assumptions and estimates involved in management’s analysis required significant judgment as they are based upon the potential terms of a broad settlement, including provisions related to deductibility, that have not yet been finalized. There is also significant judgment associated with the assessment of the technical tax merits of such a settlement, including the related interpretation of applicable tax laws and regulations.
McKESSON CORPORATION
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's uncertain tax position associated with a potential broad settlement of opioid claims included the following, among others:
-
We tested the effectiveness of internal controls related to the Company’s assessment of the technical merits of its tax position, including the Company’s assessment as to the amount of benefit that is more likely than not to be realized.
-
With the assistance of our tax specialists, we evaluated the facts, evidence and the Company’s related income tax analysis for the charge related to the potential broad settlement of opioid claims, including assumptions used by management to measure the related recognized and unrecognized tax benefits.
-
We inquired of the Company’s internal and external legal counsel to understand the basis for the Company’s conclusion that a portion of the potential broad settlement of opioid claims would be deductible based on the most recent discussions with plaintiffs’ counsel.
-
We held inquiries with the Company’s external income tax advisors and we also read and evaluated management’s documentation of information received from these external advisors, which informed the basis of management’s position related to the uncertain tax position associated with the potential broad settlement of opioid claims.
-
We compared management's income tax assessment of this matter to the treatment of other recorded opioid charges to evaluate the consistency of the Company’s judgments related to the uncertain tax position.
-
We evaluated any events subsequent to March 31, 2021 that might impact our evaluation of the Company’s uncertain tax position related to the charge for the potential broad settlement of opioid claims.
-
We obtained written representations from executives and internal counsel of the Company.
-
We examined proposed terms related to the potential broad settlement framework.
-
We evaluated the Company’s related disclosures for consistency with our testing and also searched for contradictory evidence by reading disclosures from peer companies, who are also party to the potential broad settlement of opioid claims.
Goodwill - Refer to Note 1 and Note 12 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 $9.5 billion as of March 31, 2021, of which $1.5 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.
McKESSON CORPORATION
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.
| /s/ Deloitte & Touche LLP | ||
| Dallas, Texas | ||
| May 12, 2021 |
We have served as the Company’s auditor since 1968.
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| Years Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Revenues | $ | 238,228 | $ | 231,051 | $ | 214,319 | |||||||||||
| Cost of sales | (226,080) | (219,028) | (202,565) | ||||||||||||||
| Gross profit | 12,148 | 12,023 | 11,754 | ||||||||||||||
| Operating expenses | |||||||||||||||||
| Selling, distribution, general, and administrative expenses | (8,849) | (9,182) | (8,437) | ||||||||||||||
| Claims and litigation charges, net | (7,936) | (82) | (37) | ||||||||||||||
| Goodwill impairment charges | (69) | (2) | (1,797) | ||||||||||||||
| Restructuring, impairment, and related charges, net | (334) | (268) | (597) | ||||||||||||||
| Total operating expenses | (17,188) | (9,534) | (10,868) | ||||||||||||||
| Operating income (loss) | (5,040) | 2,489 | 886 | ||||||||||||||
| Other income, net | 223 | 12 | 182 | ||||||||||||||
| Equity earnings and charges from investment in Change Healthcare Joint Venture | — | (1,108) | (194) | ||||||||||||||
| Interest expense | (217) | (249) | (264) | ||||||||||||||
| Income (loss) from continuing operations before income taxes | (5,034) | 1,144 | 610 | ||||||||||||||
| Income tax benefit (expense) | 695 | (18) | (356) | ||||||||||||||
| Income (loss) from continuing operations | (4,339) | 1,126 | 254 | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | (1) | (6) | 1 | ||||||||||||||
| Net income (loss) | (4,340) | 1,120 | 255 | ||||||||||||||
| Net income attributable to noncontrolling interests | (199) | (220) | (221) | ||||||||||||||
| Net income (loss) attributable to McKesson Corporation | $ | (4,539) | $ | 900 | $ | 34 | |||||||||||
| Earnings (loss) per common share attributable to McKesson Corporation | |||||||||||||||||
| Diluted | |||||||||||||||||
| Continuing operations | $ | (28.26) | $ | 4.99 | $ | 0.17 | |||||||||||
| Discontinued operations | — | (0.04) | — | ||||||||||||||
| Total | $ | (28.26) | $ | 4.95 | $ | 0.17 | |||||||||||
| Basic | |||||||||||||||||
| Continuing operations | $ | (28.26) | $ | 5.01 | $ | 0.17 | |||||||||||
| Discontinued operations | — | (0.03) | — | ||||||||||||||
| Total | $ | (28.26) | $ | 4.98 | $ | 0.17 | |||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||
| Diluted | 160.6 | 181.6 | 197.3 | ||||||||||||||
| Basic | 160.6 | 180.6 | 196.3 |
See Financial Notes
70
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| Years Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net income (loss) | $ | (4,340) | $ | 1,120 | $ | 255 | |||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Foreign currency translation adjustments | 184 | (66) | (190) | ||||||||||||||
| Unrealized gains (losses) on cash flow hedges | (36) | 86 | 24 | ||||||||||||||
| Changes in retirement-related benefit plans | 22 | 129 | (32) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 170 | 149 | (198) | ||||||||||||||
| Comprehensive income (loss) | (4,170) | 1,269 | 57 | ||||||||||||||
| Comprehensive income attributable to noncontrolling interests | (146) | (223) | (155) | ||||||||||||||
| Comprehensive income (loss) attributable to McKesson Corporation | $ | (4,316) | $ | 1,046 | $ | (98) |
See Financial Notes
71
McKESSON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 6,278 | $ | 4,015 | |||||||
| Receivables, net | 19,181 | 19,950 | |||||||||
| Inventories, net | 19,246 | 16,734 | |||||||||
| Assets held for sale | 12 | 906 | |||||||||
| Prepaid expenses and other | 665 | 617 | |||||||||
| Total current assets | 45,382 | 42,222 | |||||||||
| Property, plant, and equipment, net | 2,581 | 2,365 | |||||||||
| Operating lease right-of-use assets | 2,100 | 1,886 | |||||||||
| Goodwill | 9,493 | 9,360 | |||||||||
| Intangible assets, net | 2,878 | 3,156 | |||||||||
| Other non-current assets | 2,581 | 2,258 | |||||||||
| Total assets | $ | 65,015 | $ | 61,247 | |||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Drafts and accounts payable | $ | 38,975 | $ | 37,195 | |||||||
| Current portion of long-term debt | 742 | 1,052 | |||||||||
| Current portion of operating lease liabilities | 390 | 354 | |||||||||
| Liabilities held for sale | 9 | 683 | |||||||||
| Other accrued liabilities | 3,987 | 3,340 | |||||||||
| Total current liabilities | 44,103 | 42,624 | |||||||||
| Long-term debt | 6,406 | 6,335 | |||||||||
| Long-term deferred tax liabilities | 1,411 | 2,255 | |||||||||
| Long-term operating lease liabilities | 1,867 | 1,660 | |||||||||
| Long-term litigation liabilities | 8,067 | — | |||||||||
| Other non-current liabilities | 1,715 | 1,662 | |||||||||
| Commitments and contingent liabilities (Note 19) | |||||||||||
| Redeemable noncontrolling interests | 1,271 | 1,402 | |||||||||
| McKesson Corporation stockholders’ equity (deficit) | |||||||||||
| Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding | — | — | |||||||||
| Common stock, $0.01 par value, 800 shares authorized, 273 and 272 shares issued at March 31, 2021 and 2020, respectively | 2 | 2 | |||||||||
| Additional paid-in capital | 6,925 | 6,663 | |||||||||
| Retained earnings | 8,202 | 13,022 | |||||||||
| Accumulated other comprehensive loss | (1,480) | (1,703) | |||||||||
| Treasury shares, at cost, 115 and 110 shares at March 31, 2021 and 2020, respectively | (13,670) | (12,892) | |||||||||
| Total McKesson Corporation stockholders’ equity (deficit) | (21) | 5,092 | |||||||||
| Noncontrolling interests | 196 | 217 | |||||||||
| Total equity | 175 | 5,309 | |||||||||
| Total liabilities, redeemable noncontrolling interests, and equity | $ | 65,015 | $ | 61,247 |
See Financial Notes
72
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
| McKesson Corporation Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Other Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Common Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Opening retained earnings adjustments: adoption of new accounting standard | — | — | — | — | (13) | — | — | — | — | (13) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, April 1, 2020 | 272 | 2 | 6,663 | — | 13,009 | (1,703) | (110) | (12,892) | 217 | 5,296 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under employee plans | 1 | — | 92 | — | — | — | — | (28) | — | 64 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 151 | — | — | — | — | — | — | 151 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payments to noncontrolling interests | — | — | — | — | — | — | — | — | (177) | (177) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 223 | — | — | — | 223 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | (4,539) | — | — | — | 156 | (4,383) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of put right by noncontrolling shareholders of McKesson Europe | — | — | 3 | — | — | — | — | — | — | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | (5) | (750) | — | (750) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared, $1.67 per common share | — | — | — | — | (270) | — | — | — | — | (270) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | 16 | — | 2 | — | — | — | — | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2021 | 273 | $ | 2 | $ | 6,925 | $ | — | $ | 8,202 | $ | (1,480) | (115) | $ | (13,670) | $ | 196 | $ | 175 |
See Financial Notes
73
McKESSON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Years Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||
| Net income (loss) | $ | (4,340) | $ | 1,120 | $ | 255 | |||||||||||
| Adjustments to reconcile to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 321 | 321 | 317 | ||||||||||||||
| Amortization | 566 | 601 | 632 | ||||||||||||||
| Goodwill and other asset impairment charges | 242 | 139 | 2,079 | ||||||||||||||
| Equity earnings and charges from investment in Change Healthcare Joint Venture | — | 1,084 | 194 | ||||||||||||||
| Deferred taxes | (908) | (342) | 189 | ||||||||||||||
| Credits associated with last-in, first-out inventory method | (38) | (252) | (210) | ||||||||||||||
| Non-cash operating lease expense | 334 | 366 | — | ||||||||||||||
| (Gain) loss from sales of businesses and investments | (9) | 33 | (86) | ||||||||||||||
| Other non-cash items | 188 | 615 | 52 | ||||||||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||||||||
| Receivables | 1,145 | (2,494) | (967) | ||||||||||||||
| Inventories | (2,276) | (376) | (368) | ||||||||||||||
| Drafts and accounts payable | 1,267 | 3,952 | 1,976 | ||||||||||||||
| Operating lease liabilities | (362) | (377) | — | ||||||||||||||
| Taxes | (166) | (8) | (95) | ||||||||||||||
| Litigation liabilities | 8,067 | — | — | ||||||||||||||
| Other | 511 | (8) | 68 | ||||||||||||||
| Net cash provided by operating activities | 4,542 | 4,374 | 4,036 | ||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||
| Payments for property, plant, and equipment | (451) | (362) | (426) | ||||||||||||||
| Capitalized software expenditures | (190) | (144) | (131) | ||||||||||||||
| Acquisitions, net of cash, cash equivalents, and restricted cash acquired | (35) | (133) | (905) | ||||||||||||||
| Proceeds from sales of businesses and investments, net | 400 | 37 | 101 | ||||||||||||||
| Other | (139) | 23 | (20) | ||||||||||||||
| Net cash used in investing activities | (415) | (579) | (1,381) | ||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||
| Proceeds from short-term borrowings | 6,323 | 21,437 | 37,265 | ||||||||||||||
| Repayments of short-term borrowings | (6,323) | (21,437) | (37,268) | ||||||||||||||
| Proceeds from issuances of long-term debt | 500 | — | 1,099 | ||||||||||||||
| Repayments of long-term debt | (1,040) | (298) | (1,112) | ||||||||||||||
| Common stock transactions: | |||||||||||||||||
| Issuances | 92 | 113 | 75 | ||||||||||||||
| Share repurchases, including shares surrendered for tax withholding | (770) | (1,954) | (1,639) | ||||||||||||||
| Dividends paid | (276) | (294) | (292) | ||||||||||||||
| Other | (199) | (301) | (355) | ||||||||||||||
| Net cash used in financing activities | (1,693) | (2,734) | (2,227) | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (61) | (19) | (119) | ||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | 2,373 | 1,042 | 309 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | 4,023 | 2,981 | 2,672 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of year | 6,396 | 4,023 | 2,981 | ||||||||||||||
| Less: Restricted cash at end of year included in Prepaid expenses and other | (118) | (8) | — | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 6,278 | $ | 4,015 | $ | 2,981 | |||||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||||||||
| Cash paid for: | |||||||||||||||||
| Interest, net | $ | 220 | $ | 235 | $ | 383 | |||||||||||
| Income taxes, net of refunds | 379 | 368 | 262 |
See Financial Notes
74
McKESSON CORPORATION
FINANCIAL NOTES
1. Significant Accounting Policies
Nature of Operations: McKesson Corporation (“McKesson,” or the “Company,”) is a global provider of healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. McKesson partners with pharmaceutical manufacturers, providers, pharmacies, governments, and other organizations in healthcare to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively. Commencing with the second quarter of 2021, the Company reports its financial results in four reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and Prescription Technology Solutions (“RxTS”). All prior segment information has been recast to reflect the Company’s new segment structure and current period presentation. The Company’s equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson in the fourth quarter of 2020, has been included in Other for retrospective periods presented. Refer to Financial Note 22, “Segments of Business,” for more information.
Basis of Presentation: The consolidated financial statements and accompanying notes are prepared in accordance with United States (“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.
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 coronavirus diseases 2019 (“COVID-19”) pandemic, are uncertain, rapidly changing, and difficult to predict. Therefore, the Company’s accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S., and includes several provisions related to employment and income taxes, including provisions for the deferral of the employer portion of social security taxes through December 31, 2020. On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021, which enhances and expands certain provisions of the CARES Act. These legislative acts are not expected to have a material impact on the Company’s consolidated financial results.
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 the Company’s 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 non-current assets” in the Consolidated Balance Sheets. As of March 31, 2021, restricted cash primarily consists of funds temporarily held on behalf of unaffiliated medical practice groups related to their COVID-19 business continuity borrowings. The amounts have been designated as restricted cash due to contractual provisions requiring their segregation from all other funds until utilized by the medical practices for a limited list of qualified activities. Corresponding deposit liabilities associated with these funds have been recorded by the Company within “Other accrued liabilities” on the Company’s Consolidated Balance Sheet as of March 31, 2021.
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, 2021 and 2020, 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.
Receivables, Net and Allowances for Doubtful Accounts: The Company’s receivables are presented net of an allowance for doubtful accounts and primarily consist of trade accounts receivables from customers that result from the sale of goods and services. Receivables, net also includes other receivables, which primarily represent amounts due from suppliers.
We are exposed to credit losses on accounts receivable balances. The Company estimates credit losses by considering historical credit losses, the current economic environment, customer credit ratings or bankruptcies, as well as reasonable and supportable forecasts. Management reviews these factors quarterly to determine if any adjustments are needed to the allowance. Trade accounts receivable represent the majority of the Company's financial assets, for which an allowance for credit losses of $198 million and $224 million were included in “Receivables, net” on the Consolidated Balance Sheet as of March 31, 2021 and 2020, respectively. Changes in the allowance were not material for the year ended March 31, 2021.
The following table presents the components of the Company’s receivables as of March 31, 2021 and 2020:
| March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Customer accounts | $ | 17,106 | $ | 17,201 | |||||||
| Other | 2,325 | 3,014 | |||||||||
| Total receivables | 19,431 | 20,215 | |||||||||
| Allowances | (250) | (265) | |||||||||
| Receivables, net | $ | 19,181 | $ | 19,950 |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 segment. During 2021, sales to the Company’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 51% of its total consolidated revenues and approximately 32% of total trade accounts receivable at March 31, 2021. Sales to the Company’s largest customer, CVS Health Corporation (“CVS”), accounted for approximately 21% of its total consolidated revenues in 2021 and comprised approximately 19% of total trade accounts receivable at March 31, 2021. 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.
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. As of March 31, 2021 and 2020, financing receivables were not material to the Company’s consolidated financial statements. Financing receivables and the related allowances are included in “Receivables, net” and “Other non-current 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.
The LIFO method was used to value approximately 58% and 60% of the Company’s inventories at March 31, 2021 and 2020, respectively. If the Company had used the moving average method of inventory valuation, inventories would have been approximately $406 million and $444 million higher than the amounts reported at March 31, 2021 and 2020, respectively. 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 $38 million, $252 million, and $210 million in 2021, 2020, and 2019, respectively, in “Cost of sales” in its Consolidated Statements of Operations. The lower LIFO credits in 2021 compared to 2020 is primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. 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. Excluding LIFO reserves, inventory reserves as of March 31, 2021 and 2020 were $263 million and $96 million, respectively. The increase was primarily due to charges in 2021 totaling $136 million on certain personal protective equipment and other related products due to inventory impairments and excess inventory within our Medical-Surgical Solutions segment. These charges are recorded in "Cost of sales" in the Consolidated Statements of Operations.
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, 2021 and 2020, 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, general, and administrative expenses. Shipping and handling costs of $1.0 billion, $1.0 billion, and $951 million were recognized in 2021, 2020, and 2019, respectively.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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, Net: Property, plant, and equipment, net is stated at historical cost and depreciated under the straight-line method over the estimated useful life of each asset, which ranges from 15 to 30 years for building and improvements and 3 to 15 years for machinery, equipment, and other. Leasehold improvements and property, plant, and equipment, net under finance leases are amortized over their respective useful lives or over the term of the lease, whichever is shorter. Depreciation and amortization begins when an asset is placed in service and ready for its intended use. Repairs and maintenance costs are expensed as incurred. When certain events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable, an impairment assessment may be performed on the recoverability of the carrying amounts.
The following table presents the components of the Company’s property, plant, and equipment, net as of March 31, 2021 and 2020:
| March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Land | $ | 156 | $ | 151 | |||||||
| Building and improvements | 1,745 | 1,604 | |||||||||
| Machinery, equipment, and other | 2,512 | 2,308 | |||||||||
| Construction in progress | 382 | 131 | |||||||||
| Total property, plant, and equipment | 4,795 | 4,194 | |||||||||
| Accumulated depreciation and amortization | (2,214) | (1,829) | |||||||||
| Property, plant, and equipment, net | $ | 2,581 | $ | 2,365 |
Total depreciation expense for property, plant, and equipment, net and amortization of finance leases was $344 million, $335 million, and $317 million for the years ended March 31, 2021, 2020, and 2019, respectively.
Goodwill: Goodwill is tested for impairment on an annual basis in the third quarter and 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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 using the straight-line method over their estimated useful lives, not to exceed 10 years. As of March 31, 2021 and 2020, capitalized software held for internal use was $513 million and $400 million, respectively, net of accumulated amortization of $1.4 billion and $1.3 billion, respectively, and is included in “Other non-current assets” in the Consolidated Balance Sheets. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Amortization expense for capitalized software held for internal use was $117 million, $129 million, and $137 million for the years ended March 31, 2021, 2020, and 2019, respectively.
Insurance Programs: The Company maintains insurance programs through its wholly-owned captive insurance subsidiaries (“Captives”), from which it obtains coverage for catastrophic exposures, including certain exposures arising from the opioid-related claims of governmental entities against the Company, as discussed in more detail in Financial Note 19, “Commitments and Contingent Liabilities,” 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, including those related to workers’ compensation and comprehensive general, product, and vehicle liability. Provisions for losses expected under insurance 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. The Captives receive direct premiums, which are eliminated on consolidation against the Company’s premium costs within Operating Expenses in the Consolidated Statements of Operations.
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, 2021 and 2020, respectively.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 each of 2021 and 2020 and $2.9 billion in 2019. Assets for the right to recover products from customers and the associated refund liabilities for return allowances were not material as of March 31, 2021. 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 in its Consolidated Balance Sheets as of March 31, 2021 and 2020. 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.
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 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 (loss), net of tax” in the Consolidated Statements of Comprehensive Income (Loss), 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 “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations and were not material to the Company’s consolidated results of operations in 2021, 2020, or 2019. 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 (loss), net of tax” in the Consolidated Statements of Comprehensive Income (Loss), 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 (Loss): Comprehensive income (loss) consists of two components: net income (loss) 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, and unrealized gains and losses on retirement-related benefit plans.
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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. Refer to Financial Note 19, “Commitments and Contingent Liabilities,” for additional information related to ongoing controlled substances claims to which the Company is a party.
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.
Recently Adopted Accounting Pronouncements
In the first quarter of 2021, the Company prospectively adopted Accounting Standard Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which 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. As a result, the Company began capitalizing eligible implementation costs for such contracts and recognizing the expense over the service period. The adoption of this amended guidance did not have a material impact on the Company’s consolidated financial statements or disclosures.
In the first quarter of 2021, the Company retrospectively adopted ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans, which 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 adoption of this amended guidance resulted in changes in disclosures but did not have an impact on the Company’s Consolidated Statements of Operations, Comprehensive Income (Loss), Balance Sheets, or Cash Flows.
In the first quarter of 2021, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, to remove, modify, and add disclosure requirements on fair value measurements. Certain requirements were applied prospectively while other changes were applied retrospectively on the effective date. 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 and requirements to disclose the range, and weighted-average used to develop significant unobservable inputs for Level 3 fair value measurements. The adoption of this amended guidance resulted in changes in disclosures but did not have an impact on the Company’s Consolidated Statements of Operations, Comprehensive Income (Loss), Balance Sheets, or Cash Flows.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In the first quarter of 2021, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets from one based on current losses to a forward-looking model based on expected losses. The forward-looking model requires 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. The amended guidance requires financial assets that are measured at amortized cost be presented at the net amount expected to be collected. An allowance for credit losses is established as a valuation account that is deducted from the amortized cost basis of financial assets. The guidance also requires enhanced disclosures. This guidance was adopted on a modified retrospective basis and did not have a material impact on the Company’s consolidated financial statements or disclosures. Upon adoption of the amended guidance in the first quarter of 2021, the Company recorded a cumulative-effect adjustment of $13 million to the opening balance of retained earnings, primarily as a result of adjustments to allowances for trade accounts receivable.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, 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 adoption of this amended guidance is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
2. Investment in Change Healthcare Joint Venture
In the fourth quarter of 2017, the Company contributed the majority of its McKesson Technology Solutions businesses to form a joint venture, the 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. The Change Healthcare JV was jointly governed by McKesson and shareholders of Change.
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 of $609 million from its offering of common stock 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 of $279 million from the concurrent offering of other securities were used by Change to acquire certain securities of the Change Healthcare JV that substantially mirrored the terms of other securities included in the offering by Change. 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 dilution loss of $246 million, 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 an other-than-temporary impairment (“OTTI”) charge of $1.2 billion 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 Statements of Operations for the year ended March 31, 2020.
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 Sheets. Refer to Financial Note 20, “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 a net 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 for the year ended March 31, 2020. The net 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) | ||||
| Net gain on split-off of the Change Healthcare JV | $ | 414 |
Equity Method Investment in the Change Healthcare Joint Venture
The Company’s investment in the joint venture was 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 consolidated financial statements. Effective April 1, 2019, the Change Healthcare JV adopted the amended revenue recognition guidance and, 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 and $194 million in 2020 and 2019, respectively. 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. 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.
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 and 2019. Fees incurred or earned from the TSA were not material in 2021 and were $22 million in 2020 and $60 million in 2019. The Advisory Agreement was terminated in 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In 2019, the Company renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million non-current 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 non-current liability and recognized a credit of $90 million in “Selling, distribution, general, and administrative expenses” in its Consolidated Statement of Operations in 2019. At March 31, 2021 and 2020, the Company had no outstanding payable balance to the shareholders of Change under the TRA.
Under the agreement executed in 2019 between the Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, McKesson had the ability to adjust the manner in which certain depreciation or amortization deductions are allocated among Change and McKesson. McKesson exercised its right under the agreement and allocated certain depreciation and amortization deductions to Change for the tax years ended March 31, 2020 and 2019.
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, 2021 or 2020.
In conjunction with the separation transaction in the fourth quarter of 2020, the Company recorded a reversal of the deferred tax liability related to its investment. Under the agreement with the Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, there may be changes in future periods to the amount reversed as the relevant periods are audited by tax authorities. Any such change is not expected to have a material impact on the Company’s consolidated financial statements.
3**.** Held for Sale
Assets and liabilities that have met the classification as held for sale were $12 million and $9 million, respectively, as of March 31, 2021 and $906 million and $683 million, respectively, as of March 31, 2020. The amounts at March 31, 2020 primarily consisted of the majority of the Company’s German pharmaceutical wholesale business as described below. This disposal group had been recorded as assets and liabilities held for sale since the third quarter of 2020 through its contribution to a joint venture in the third quarter of 2021. Based on its analysis, the Company determined that the disposal groups classified as held for sale do not meet the criteria for classification as discontinued operations and are not considered to be significant disposals based on its quantitative and qualitative evaluation.
German Wholesale Joint Venture
On November 1, 2020, the Company completed its previously announced transaction with Walgreens Boots Alliance (“WBA”) whereby the majority of its German pharmaceutical wholesale business was contributed to a newly formed joint venture in which McKesson has a 30% noncontrolling interest.
Consideration received included a receivable amount of $41 million, primarily related to working capital and net debt adjustments from WBA, and the 30% interest in the newly formed joint venture. At the transaction date, the carrying value of the equity investment in the joint venture was recorded at its fair value, which was measured using inputs that fell within Level 3 of the fair value hierarchy. The carrying value of the investment in the joint venture was nil as of March 31, 2021. The Company accounts for its interest in the joint venture as an equity method investment within the International segment. The joint venture also assumed a note payable to the Company in the amount of approximately $291 million as of the transaction date, which was paid to the Company in the third quarter of 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In conjunction with the contribution, the Company recorded losses of $58 million and $275 million (pre-tax and after-tax), respectively, in the years ended March 31, 2021 and 2020, which includes adjustments to remeasure the assets and liabilities held for sale to fair value less costs to sell. These charges were included within “Operating expenses” in the Consolidated Statements of Operations. The Company’s measurement of the fair value of the disposal group was based on estimates of total consideration to be received by the Company as outlined in the contribution agreement between the Company and WBA. As a result of finalization of working capital amounts contributed and other adjustments, the Company may record additional gains or losses in future periods; however, these adjustments are not expected to have a material impact on the Company’s consolidated financial statements.
Following the completion of the transaction on November 1, 2020, there were no assets or liabilities of the German pharmaceutical wholesale joint venture classified as held for sale on the Company’s Consolidated Balance Sheet. The total assets and liabilities of the German pharmaceutical wholesale joint venture that were classified as held for sale on the Company’s Consolidated Balance Sheet as of March 31, 2020, were 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 favorable cumulative foreign currency translation adjustment.
4. Restructuring, Impairment, and Related Charges
The Company recorded restructuring, impairment, and related charges of $334 million, $268 million and $597 million in 2021, 2020, and 2019, respectively. These charges are included in “Restructuring, impairment, and related charges, net” in the Consolidated Statements of Operations. In addition, charges related to restructuring initiatives are included in “Cost of sales” in the Consolidated Statements of Operations and were not material for the years ended 2021, 2020, and 2019.
Restructuring Initiatives
During the first quarter of 2022, the Company approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily includes the rationalization of its office space in North America. Where the Company determines to cease using office space, it plans to exit the portion of the facility no longer used. It also may retain and repurpose certain other office locations. The Company expects to incur total charges of approximately $180 million to $280 million for this initiative, consisting primarily of exit related costs, accelerated depreciation and amortization of long-lived assets, and asset impairments. This initiative is expected to be completed in 2022.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
During the first quarter of 2021, the Company committed to an initiative within the United Kingdom (“U.K.”), which is included in the Company’s International segment, to further drive transformational changes in technologies and business processes, operational efficiencies, and cost savings. The initiative includes reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. Under this initiative, the Company expects to incur total charges of approximately $85 million to $90 million. The Company recorded charges of $57 million in 2021, primarily related to asset impairments and accelerated depreciation expense as well as employee severance and other employee-related costs. The initiative is expected to be substantially complete in 2022 and estimated remaining charges primarily consist of accelerated amortization of long-lived assets, facility and other exit costs, and employee-related costs.
During the fourth quarter of 2019, the Company committed to certain 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 recorded charges of $62 million, $72 million, and $163 million in 2021, 2020, and 2019, respectively, consisting primarily of employee severance, accelerated depreciation expense, and project consulting fees. This initiative was substantially complete in 2021 and remaining costs the Company expects to record under this initiative are not material.
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. As a result, the Company recorded charges of $28 million, $44 million, and $33 million in 2021, 2020, and 2019, respectively, consisting primarily of employee retention expenses, severance, long-lived asset impairments, and accelerated depreciation. The relocation was substantially complete in January 2021 and remaining costs the Company expects to record under this initiative, primarily relating to lease costs, are not material.
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., included in its International segment, and a reduction in workforce. In 2019, the Company recorded charges of $18 million, consisting primarily of employee severance and lease exit costs, with $92 million of total charges recorded through the end of 2019. The plan was substantially completed in 2020 and additional charges were not material.
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 consisted 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 and charges in 2021 were not material. The Company recorded charges of $15 million and $135 million in 2020 and 2019, respectively.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2021
Restructuring, impairment, and related charges, net for the year ended March 31, 2021 consisted of the following:
| Year Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| (In millions) | U.S. Pharmaceutical | International (1) | Medical-Surgical Solutions | Prescription Technology Solutions | Corporate (2) | Total | |||||||||||||||||||||||||||||
| Severance and employee-related costs, net | $ | 10 | $ | 22 | $ | (1) | $ | 4 | $ | 69 | $ | 104 | |||||||||||||||||||||||
| Exit and other-related costs (3) | 11 | 17 | 4 | — | 27 | 59 | |||||||||||||||||||||||||||||
| Asset impairments and accelerated depreciation | — | 46 | 1 | — | 9 | 56 | |||||||||||||||||||||||||||||
| Total | $ | 21 | $ | 85 | $ | 4 | $ | 4 | $ | 105 | $ | 219 |
(1)Primarily represents costs associated with the operating model and cost optimization efforts described above.
(2)Represents costs associated with the operating model cost optimization efforts and the relocation of the Company’s headquarters described above in addition to various other initiatives.
(3)Exit and other-related costs primarily include project consulting fees.
Fiscal 2020
Restructuring, impairment, and related charges, net for the year ended March 31, 2020 consisted of the following:
| Year Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
| (In millions) | U.S. Pharmaceutical (1) | International (2) | Medical-Surgical Solutions (3) | Prescription Technology Solutions | Corporate (4) | Total | |||||||||||||||||||||||||||||
| Severance and employee-related costs, net | $ | 12 | $ | 2 | $ | 4 | $ | (1) | $ | 30 | $ | 47 | |||||||||||||||||||||||
| Exit and other-related costs (5) | 1 | 13 | 19 | — | 46 | 79 | |||||||||||||||||||||||||||||
| Asset impairments and accelerated depreciation | 10 | 6 | 1 | — | 13 | 30 | |||||||||||||||||||||||||||||
| Total | $ | 23 | $ | 21 | $ | 24 | $ | (1) | $ | 89 | $ | 156 |
(1)Represents costs associated with dispositions and costs related to the relocation of the Company’s corporate headquarters described above.
(2)Primarily represents costs associated with the operating model and cost optimization efforts described above.
(3)Primarily represents costs associated with the growth initiative described above.
(4)Represents costs associated with the growth initiative, operating model cost optimization efforts, and with the relocation of the Company’s corporate headquarters described above.
(5)Exit and other-related costs primarily include project consulting fees.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fiscal 2019
Restructuring, impairment, and related charges, net for the year ended March 31, 2019 consisted of the following:
| Year Ended March 31, 2019 | |||||||||||||||||||||||||||||||||||
| (In millions) | U.S. Pharmaceutical (1) | International (2) | Medical-Surgical Solutions (3) | Prescription Technology Solutions | Corporate (4) | Total | |||||||||||||||||||||||||||||
| Severance and employee-related costs, net | $ | 46 | $ | 51 | $ | 18 | $ | 3 | $ | 36 | $ | 154 | |||||||||||||||||||||||
| Exit and other-related costs (5) | 9 | 83 | 20 | — | 52 | 164 | |||||||||||||||||||||||||||||
| Asset impairments and accelerated depreciation | 6 | 24 | 3 | — | 1 | 34 | |||||||||||||||||||||||||||||
| Total | $ | 61 | $ | 158 | $ | 41 | $ | 3 | $ | 89 | $ | 352 |
(1)Represents costs associated with the operating model cost optimization efforts and growth initiative described above.
(2)Primarily represents costs associated with the operating model cost optimization efforts and U.K. restructuring initiative focusing on underperforming retail pharmacy stores described above.
(3)Primarily represents costs associated with the growth initiative described above.
(4)Represents costs associated with operating model cost optimization efforts and with the relocation of the Company’s corporate headquarters described above.
(5)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.
The following table summarizes the activity related to the restructuring liabilities associated with the Company’s restructuring initiatives for the years ended March 31, 2021 and 2020:
| (In millions) | U.S. Pharmaceutical | International | Medical-Surgical Solutions | Prescription Technology Solutions | Corporate | Total | |||||||||||||||||||||||||||||
| Balance, March 31, 2019 | $ | 35 | $ | 129 | $ | 26 | $ | 3 | $ | 44 | $ | 237 | |||||||||||||||||||||||
| Restructuring, impairment, and related charges | 23 | 21 | 24 | (1) | 89 | 156 | |||||||||||||||||||||||||||||
| Non-cash charges | (10) | (6) | (1) | — | (13) | (30) | |||||||||||||||||||||||||||||
| Cash payments | (15) | (45) | (26) | (1) | (61) | (148) | |||||||||||||||||||||||||||||
| Other | (4) | (33) | (1) | — | (20) | (58) | |||||||||||||||||||||||||||||
| Balance, March 31, 2020 (1) | 29 | 66 | 22 | 1 | 39 | 157 | |||||||||||||||||||||||||||||
| Restructuring, impairment, and related charges | 21 | 85 | 4 | 4 | 105 | 219 | |||||||||||||||||||||||||||||
| Non-cash charges | — | (46) | (1) | — | (9) | (56) | |||||||||||||||||||||||||||||
| Cash payments | (31) | (31) | (21) | (1) | (75) | (159) | |||||||||||||||||||||||||||||
| Other | — | (8) | (1) | — | (1) | (10) | |||||||||||||||||||||||||||||
| Balance, March 31, 2021 (2) | $ | 19 | $ | 66 | $ | 3 | $ | 4 | $ | 59 | $ | 151 |
(1) As of March 31, 2020, the total reserve balance was $157 million of which $118 million was recorded in Other accrued liabilities and $39 million was recorded in Other non-current liabilities.
(2) As of March 31, 2021, the total reserve balance was $151 million of which $99 million was recorded in Other accrued liabilities and $52 million was recorded in Other non-current liabilities.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Long-Lived Asset Impairments
Fiscal 2021
In 2021, the Company recognized charges of $115 million to impair certain long-lived assets within the Company’s International segment. These charges primarily related to long-lived assets associated with the Company’s retail pharmacy businesses in Canada and Europe and were due to declines in estimated future cash flows partially driven by a revised outlook regarding the impacts of COVID-19. The Company used both an income approach (a DCF method) and a market approach to estimate the fair value of the long-lived assets.
Fiscal 2020
In 2020, the Company recognized charges of $82 million to impair certain long-lived and intangible assets for its retail pharmacy business in Europe within the Company’s International 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.
In 2020, the Company performed an interim impairment test of long-lived and intangible assets for its Rexall Health retail business, within the Company's International segment, 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 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.
Fiscal 2019
In 2019, the Company recognized charges of $210 million to impair certain long-lived assets (primarily pharmacy licenses) for its U.K. retail business, within the Company’s International segment, primarily driven by government reimbursement reductions and competitive pressures in the U.K. 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.
In 2019, the Company recorded charges of $35 million to impair certain intangible assets (primarily customer relationships) for its Rexall Health retail business within the Company’s International segment. 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 a lower projected overall growth rate from the ongoing impact of government regulations in 2019. The Company utilized an income approach (a DCF method) for estimating the fair value of long-lived assets.
The fair value of the long-lived and intangible assets described above is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company-specific information. Refer to Financial Note 17, “Fair Value Measurements,” for more information on nonrecurring fair value measurements.
5. Business Acquisitions and Divestitures
During 2021 and 2020, the Company did not complete any material acquisitions. During 2021, 2020, and 2019, the Company did not complete any material divestitures other than the contribution of the majority of its German wholesale business to a newly formed joint venture, as described in Financial Note 3, “Held for Sale,” in 2021 and the separation of the Change Healthcare JV, as described in Financial Note 2, “Investment in Change Healthcare Joint Venture,” in 2020.
Acquisitions
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
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, including immaterial adjustments made during the measurement period:
| (In millions) | Amounts Recognized as of the Acquisition Date (1) | ||||||||||||||||||||||
| Receivables | $ | 112 | |||||||||||||||||||||
| Other current assets, net of cash and cash equivalents acquired | 71 | ||||||||||||||||||||||
| Goodwill | 388 | ||||||||||||||||||||||
| Intangible assets | 326 | ||||||||||||||||||||||
| Other long-term assets | 56 | ||||||||||||||||||||||
| Current liabilities | (72) | ||||||||||||||||||||||
| Other long-term liabilities | (97) | ||||||||||||||||||||||
| Net assets acquired, net of cash and cash equivalents | $ | 784 |
(1)Final amounts as of May 31, 2019.
Other Acquisitions
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. Pursuant to the agreement, McKesson’s purchase consideration was subject to an additional $160 million of contingent consideration based on CMM’s financial performance for 2018 and 2019. Pursuant to the agreement, the Company paid additional contingent consideration of $69 million and $68 million in May 2019 and May 2018, respectively. As of March 31, 2020, the related liability was nil.
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.
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 in the same manner as cash compensation paid to the Company’s employees.
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
| Years Ended March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Restricted stock unit awards (1) | $ | 137 | $ | 104 | $ | 75 | |||||||||||
| Stock options | 4 | 7 | 12 | ||||||||||||||
| Employee stock purchase plan | 10 | 8 | 8 | ||||||||||||||
| Share-based compensation expense | 151 | 119 | 95 | ||||||||||||||
| Tax benefit for share-based compensation expense (2) | (23) | (18) | (12) | ||||||||||||||
| Share-based compensation expense, net of tax | $ | 128 | $ | 101 | $ | 83 |
(1)Includes compensation expense recognized for RSUs, PeRSUs, and PSUs.
(2)Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of compensation expense is not tax-deductible. Income tax expense for 2021, 2020, and 2019 included discrete income tax expense of $2 million, $2 million, and $4 million, respectively.
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, 2021, 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, 2021, approximately 82,000 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. All outstanding PeRSU awards have completed the performance period and are now classified and accounted for as RSUs. The Company did not grant any PeRSUs during the years ended March 31, 2021 and 2020.
The weighted-average assumptions used in the Monte Carlo valuations are as follows:
| Years Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Expected stock price volatility | 36 | % | 30 | % | 31 | % | |||||||||||
| Expected dividend yield | 1.1 | % | 1.3 | % | 0.9 | % | |||||||||||
| Risk-free interest rate | 0.2 | % | 2.2 | % | 2.6 | % | |||||||||||
| Expected life (in years) | 3 | 3 | 3 |
The following table summarizes activity for restricted stock unit awards (RSUs, PSUs, and PeRSUs) during 2021:
| (In millions, except per share data) | Shares | Weighted- Average Grant Date Fair Value Per Share | |||||||||
| Nonvested, March 31, 2020 | 3 | $ | 135.57 | ||||||||
| Granted | 1 | 155.47 | |||||||||
| Cancelled | — | 133.70 | |||||||||
| Vested | (1) | 147.63 | |||||||||
| Nonvested, March 31, 2021 | 3 | $ | 142.13 |
The following table provides data related to restricted stock unit award activity:
| Years Ended March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Total fair value of shares vested | $ | 79 | $ | 67 | $ | 59 | |||||||||||
| Total compensation cost, net of estimated forfeitures, related to nonvested restricted stock unit awards not yet recognized, pre-tax | $ | 147 | $ | 155 | $ | 119 | |||||||||||
| Weighted-average period in years over which restricted stock unit award cost is expected to be recognized | 2 | 3 | 2 |
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Weighted-average assumptions used to estimate the fair value of employee stock options were as follows: (1)
| Year Ended March 31, 2019 | ||||||||||||||
| Expected stock price volatility (2) | 26 | % | ||||||||||||
| Expected dividend yield (3) | 0.9 | % | ||||||||||||
| Risk-free interest rate (4) | 2.8 | % | ||||||||||||
| Expected life (in years) (5) | 4.6 |
(1)The Company did not grant any stock options during the years ended March 31, 2021 and 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, 2021:
| 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 | – | $183.20 | 1 | 3 | $ | 166.18 | 1 | $ | 171.38 | ||||||||||||||||||||||||||||
| 183.20 | – | 237.86 | 1 | 1 | 216.23 | 1 | 216.23 | |||||||||||||||||||||||||||||||
| 2 | 2 |
The following table summarizes stock option activity during 2021:
| (In millions, except per share data) | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (2) | |||||||||||||||||||
| Outstanding, March 31, 2020 | 2 | $ | 180.48 | 3 | $ | 1 | |||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Cancelled | — | 187.12 | |||||||||||||||||||||
| Exercised | — | 153.51 | |||||||||||||||||||||
| Outstanding, March 31, 2021 | 2 | $ | 183.29 | 2 | $ | 36 | |||||||||||||||||
| Vested and expected to vest (1) | 2 | $ | 183.38 | 2 | $ | 35 | |||||||||||||||||
| Vested and exercisable, March 31, 2021 | 2 | 189.20 | 2 | 24 |
(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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The following table provides data related to stock option activity:
| Years Ended March 31, | |||||||||||||||||
| (In millions, except per share data) | 2021 | 2020 | 2019 | ||||||||||||||
| Weighted-average grant date fair value per stock option | $ | — | $ | — | $ | 34.98 | |||||||||||
| Aggregate intrinsic value on exercise | $ | 5 | $ | 17 | $ | 16 | |||||||||||
| Cash received upon exercise | $ | 38 | $ | 66 | $ | 29 | |||||||||||
| Tax benefits realized related to exercise | $ | 4 | $ | 4 | $ | 4 | |||||||||||
| Total fair value of stock options vested | $ | 10 | $ | 16 | $ | 16 | |||||||||||
| Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 2 | $ | 6 | $ | 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 2021, 2020, and 2019. At March 31, 2021, 2 million shares remain available for issuance.
7. Other Income, Net
Other income, net consists of the following:
| Years Ended March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Interest income | $ | 12 | $ | 49 | $ | 39 | |||||||||||
| Equity in earnings, net (1) | 48 | 36 | 43 | ||||||||||||||
| Net gains on investments in equity securities (2) | 133 | 17 | 23 | ||||||||||||||
| Actuarial losses from pension plans (3) | — | (127) | — | ||||||||||||||
| Gain from sale of equity method investment (4) | — | — | 56 | ||||||||||||||
| Other, net | 30 | 37 | 21 | ||||||||||||||
| Total | $ | 223 | $ | 12 | $ | 182 |
(1)Primarily recorded within the Company’s International segment.
(2)Represents net realized and unrealized gains on the Company’s investments in equity securities of certain U.S. growth stage companies in the healthcare industry. These gains primarily relate to mark-to-market adjustments for investments which are measured at fair value based on changes in the observable price of the securities and realized gains on disposal of certain of these investments and were included within Corporate expenses, net. Refer to Financial Note 17, “Fair Value Measurements,” and to Financial Note 22, “Segments of Business.”
(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 retired executive. Refer to Financial Note 15, “Pension Benefits.”
(4)Represents a gain from the sale of an equity investment to a third party included in RxTS during 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
8. Income Taxes
| Years Ended March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Income (loss) from continuing operations before income taxes | |||||||||||||||||
| U.S. | $ | (6,019) | $ | 216 | $ | 1,512 | |||||||||||
| Foreign | 985 | 928 | (902) | ||||||||||||||
| Income (loss) from continuing operations before income taxes | $ | (5,034) | $ | 1,144 | $ | 610 |
Income tax expense (benefit) related to continuing operations consists of the following:
| Years Ended March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | (15) | $ | 170 | $ | (20) | |||||||||||
| State | 47 | 48 | 35 | ||||||||||||||
| Foreign | 181 | 142 | 152 | ||||||||||||||
| Total current | 213 | 360 | 167 | ||||||||||||||
| Deferred | |||||||||||||||||
| Federal | (562) | (204) | 223 | ||||||||||||||
| State | (204) | (105) | 44 | ||||||||||||||
| Foreign | (142) | (33) | (78) | ||||||||||||||
| Total deferred | (908) | (342) | 189 | ||||||||||||||
| Income tax expense (benefit) | $ | (695) | $ | 18 | $ | 356 |
The Company reported an income tax benefit rate of 13.8% in 2021. Income tax expense rates were 1.6% and 58.4% in 2020 and 2019, respectively. Fluctuations in the Company’s reported income tax rates are primarily due to the impact of opioid-related claims of $8.1 billion ($6.8 billion after-tax) in 2021, the impact of the Change Healthcare joint venture divestiture in 2020, the impact of nondeductible impairment charges in 2019, 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% to income before income taxes is as follows:
| Years Ended March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Income tax expense (benefit) at federal statutory rate | $ | (1,057) | $ | 240 | $ | 128 | |||||||||||
| State income taxes, net of federal tax benefit | (206) | (41) | 70 | ||||||||||||||
| Tax effect of foreign operations | (77) | (81) | (86) | ||||||||||||||
| Unrecognized tax benefits and settlements | 41 | (7) | 20 | ||||||||||||||
| Non-deductible goodwill | 14 | 7 | 357 | ||||||||||||||
| Opioid-related litigation and claims | 715 | — | — | ||||||||||||||
| Net tax benefit on intellectual property transfer | (105) | — | (42) | ||||||||||||||
| Tax-free gain on investment exit (1) | — | (87) | — | ||||||||||||||
| Impact of change in U.S. tax rate on temporary differences | — | — | (81) | ||||||||||||||
| Capital loss carryback | — | (19) | — | ||||||||||||||
| Other, net (2) | (20) | 6 | (10) | ||||||||||||||
| Income tax expense (benefit) | $ | (695) | $ | 18 | $ | 356 |
(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 $5 million in 2021 and $7 million in each of 2020 and 2019.
The Company’s reported income tax rate for 2021 was impacted by the charge for pending and future opioid-related claims of $8.1 billion ($6.8 billion after-tax), as described further in Financial Note 19, “Commitments and Contingent Liabilities.” The Company recorded a deferred tax benefit of $1.3 billion, which is net of certain non-deductible expenses and an unrecognized tax benefit of $455 million.
During 2021 and 2019, the Company sold intellectual property between wholly-owned legal entities within McKesson that are based in different tax jurisdictions. In both instances, the transferor entity recognized a gain on the sale of assets which was not subject to income tax in its local jurisdiction; such gains were eliminated upon consolidation. The acquiring entities of the intellectual property were entitled to amortize the purchase price of the assets for tax purposes. In accordance with ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” discrete tax benefits of $105 million and $42 million were recognized for 2021 and 2019, respectively, with a corresponding increase to a deferred tax assets for the temporary difference arising from the buyer’s excess tax basis.
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 a net gain for financial reporting purposes of $414 million related to the separation transaction.
The Company’s reported income tax expense rate for 2020 was unfavorably impacted by non-cash charges of $275 million to remeasure the carrying value of assets and liabilities held for sale related to the formation of a new German wholesale joint venture within the Company’s International segment. Refer to Financial Note 3, “Held for Sale,” for more information on this transaction which closed in the third quarter of 2021.
The Company’s reported income tax expense rate for 2019 was unfavorably impacted by non-cash charges of $1.8 billion to impair the carrying value of goodwill for its International segment, given that these charges are generally not deductible for tax purposes. Refer to Financial Note 12, “Goodwill and Intangible Assets, Net,” for more information.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Deferred tax balances consisted of the following:
| March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Assets | |||||||||||
| Receivable allowances | $ | 69 | $ | 72 | |||||||
| Opioid-related litigation and claims | 724 | — | |||||||||
| Compensation and benefit related accruals | 305 | 331 | |||||||||
| Net operating loss and credit carryforwards | 974 | 828 | |||||||||
| Lease obligations | 539 | 482 | |||||||||
| Other | 115 | 109 | |||||||||
| Subtotal | 2,726 | 1,822 | |||||||||
| Less: valuation allowance | (864) | (833) | |||||||||
| Total assets | 1,862 | 989 | |||||||||
| Liabilities | |||||||||||
| Inventory valuation and other assets | (1,939) | (1,947) | |||||||||
| Fixed assets and systems development costs | (196) | (202) | |||||||||
| Intangibles | (411) | (531) | |||||||||
| Lease right-of-use assets | (505) | (449) | |||||||||
| Other | (37) | (56) | |||||||||
| Total liabilities | (3,088) | (3,185) | |||||||||
| Net deferred tax liability | $ | (1,226) | $ | (2,196) | |||||||
| Long-term deferred tax asset | $ | 185 | $ | 59 | |||||||
| Long-term deferred tax liability | (1,411) | (2,255) | |||||||||
| Net deferred tax liability | $ | (1,226) | $ | (2,196) |
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 $864 million and $833 million in 2021 and 2020, respectively, and primarily relate to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. The increase in the valuation allowance of $31 million in the current year relates primarily to net operating losses incurred and deferred tax movements in certain tax jurisdictions for which no tax benefit was recognized.
The Company has federal, state, and foreign net operating loss carryforwards of $2.4 billion, $3.9 billion, and $2.2 billion at March 31, 2021. Federal and state net operating losses will expire at various dates from 2022 through 2041. Substantially all its foreign net operating losses have indefinite lives. In addition, the Company has foreign capital loss carryforwards of $783 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) | 2021 | 2020 | 2019 | ||||||||||||||
| Unrecognized tax benefits at beginning of period | $ | 958 | $ | 1,052 | $ | 1,183 | |||||||||||
| Additions based on tax positions related to prior years | 53 | 20 | 78 | ||||||||||||||
| Reductions based on tax positions related to prior years | (5) | (168) | (234) | ||||||||||||||
| Additions based on tax positions related to current year | 755 | 82 | 68 | ||||||||||||||
| Reductions based on settlements | (8) | (8) | (13) | ||||||||||||||
| Reductions based on the lapse of the applicable statutes of limitations | (12) | (13) | (25) | ||||||||||||||
| Exchange rate fluctuations | 13 | (7) | (5) | ||||||||||||||
| Unrecognized tax benefits at end of period | $ | 1,754 | $ | 958 | $ | 1,052 |
As of March 31, 2021, the Company had $1.8 billion of unrecognized tax benefits, of which $1.3 billion would reduce income tax expense and the effective tax rate, if recognized. The increase in unrecognized tax benefits in 2021 compared to 2020 is primarily attributable to uncertainty in connection with the deductibility of Opioid-related litigation and claims. Because many uncertainties associated with any potential settlement arrangements or other resolutions of opioid claims including provisions related to deductibility have not been finalized, the actual amount of the tax benefit related to uncertain tax positions may differ from these estimates. Refer to Financial Note 19, “Commitments and Contingent Liabilities,” for more information. 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.
During the next twelve months, it is reasonably possible that the Company’s unrecognized tax benefit may decrease by as much as $93 million due to settlements of tax examinations and statute of limitations expirations in the U.S. federal and state jurisdictions and in foreign jurisdictions. However, this amount may change as the Company 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 $9 million, $23 million, and $33 million in 2021, 2020, and 2019, respectively, representing interest and penalties, in its Consolidated Statements of Operations. As of March 31, 2021 and 2020, it accrued $101 million and $91 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. The Internal Revenue Service (“IRS”) is currently examining the Company’s U.S. corporation income tax returns for 2018 and 2019. 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 $6.0 billion were considered indefinitely reinvested. Following enactment of the 2017 Tax Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the U.S. could be subject to applicable foreign withholding taxes and state income taxes. The Company may remit foreign earnings to the U.S. 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 2021, 2020, and 2019, the Company recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $43 million, $42 million, and $45 million, respectively. 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 2021, the Company paid $49 million to purchase 1.8 million shares of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders. This decreased the carrying value of the noncontrolling interests by $49 million, and the associated effect of the increase in the Company’s ownership interest on its equity of $3 million was recorded as a net increase to McKesson’s stockholders paid-in capital. During 2020 and 2019, there were no material exercises of the Put Right. The balance of the associated liability for 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. The Redeemable noncontrolling interest is also adjusted each period for the proportion of other comprehensive income, primarily due to changes in foreign currency exchange rates, attributable to the noncontrolling shareholders. At March 31, 2021 and 2020, the carrying value of redeemable noncontrolling interests of $1.3 billion and $1.4 billion, respectively, exceeded the maximum redemption value of $1.2 billion and $1.2 billion, respectively. At March 31, 2021 and 2020, the Company owned approximately 78% and 77%, respectively, of McKesson Europe’s outstanding common shares.
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 was 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 remained unadjusted. Noncontrolling shareholders of McKesson Europe appealed this decision. McKesson Europe Holdings GmbH & Co. KGaA also appealed the decision. On April 12, 2021, the Company received notice that the Stuttgart Court of Appeals ruled that the Put Amount shall remain €22.99, thereby rejecting the lower court’s increase, and the recurring compensation shall remain €0.83 per share.
Noncontrolling Interests
Noncontrolling interests represent third-party equity interests in the Company’s consolidated entities primarily related to ClarusONE and Vantage, which were $196 million and $217 million at March 31, 2021 and 2020, respectively, in the Company’s Consolidated Balance Sheets. During 2021, 2020, and 2019, respectively, the Company allocated a total of $156 million, $178 million, and $176 million of net income to noncontrolling interests.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Changes in redeemable noncontrolling interests and noncontrolling interests for the years ended March 31, 2021, 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 | ||||||||||||
| Net income attributable to noncontrolling interests | 156 | 43 | ||||||||||||
| Other comprehensive loss | — | (79) | ||||||||||||
| Reclassification of recurring compensation to other accrued liabilities | — | (43) | ||||||||||||
| Payments to noncontrolling interests | (177) | — | ||||||||||||
| Exercises of put right | — | (49) | ||||||||||||
| Other | — | (3) | ||||||||||||
| Balance, March 31, 2021 | $ | 196 | $ | 1,271 |
10. Earnings per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. The computation of diluted earnings (loss) per common share is similar to that of basic earnings (loss) 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.
Diluted loss per common share for the year ended March 31, 2021 was calculated by excluding potentially dilutive securities from the denominator of the share computation due to their anti-dilutive effects. Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately 2 million and 3 million of potentially dilutive securities for 2020 and 2019, respectively, were excluded from the computations of diluted net earnings per common share, as they were anti-dilutive.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The computations for basic and diluted earnings or loss per common share are as follows:
| Years Ended March 31, | |||||||||||||||||
| (In millions, except per share amounts) | 2021 | 2020 | 2019 | ||||||||||||||
| Income (loss) from continuing operations | $ | (4,339) | $ | 1,126 | $ | 254 | |||||||||||
| Net income attributable to noncontrolling interests | (199) | (220) | (221) | ||||||||||||||
| Income (loss) from continuing operations attributable to McKesson | (4,538) | 906 | 33 | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | (1) | (6) | 1 | ||||||||||||||
| Net income (loss) attributable to McKesson | $ | (4,539) | $ | 900 | $ | 34 | |||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||
| Basic | 160.6 | 180.6 | 196.3 | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| Restricted stock units | — | 1.0 | 1.0 | ||||||||||||||
| Diluted | 160.6 | 181.6 | 197.3 | ||||||||||||||
| Earnings (loss) per common share attributable to McKesson: (1) | |||||||||||||||||
| Diluted | |||||||||||||||||
| Continuing operations | $ | (28.26) | $ | 4.99 | $ | 0.17 | |||||||||||
| Discontinued operations | — | (0.04) | — | ||||||||||||||
| Total | $ | (28.26) | $ | 4.95 | $ | 0.17 | |||||||||||
| Basic | |||||||||||||||||
| Continuing operations | $ | (28.26) | $ | 5.01 | $ | 0.17 | |||||||||||
| Discontinued operations | — | (0.03) | — | ||||||||||||||
| Total | $ | (28.26) | $ | 4.98 | $ | 0.17 |
(1)Certain computations may reflect rounding adjustments.
11. Leases
In the first quarter of 2020, the Company adopted amended guidance for leases using the modified retrospective method. 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 as of April 1, 2019. 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 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 Company also elected to adopt the transition package of practical expedients provided within the amended guidance which eliminated the requirements to reassess lease identification, lease classification, and initial direct costs for leases which commenced before April 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated statements of operations and cash flows.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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. As a practical expedient, the Company does not separate lease components from non-lease components such as common area maintenance, utilities, and repairs and maintenance. Remaining terms for facility leases generally range from one to 15 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.
Operating right-of-use (“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 in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” and the corresponding lease assets are recorded in “Operating lease right-of-use assets” in the Company’s Consolidated Balance Sheets. Finance lease assets are included in “Property, plant, and equipment, net” and finance lease liabilities are included in “Current portion of long-term debt” and “Long-term debt” in the Company’s Consolidated Balance Sheets. As a practical expedient, short-term leases with an initial term of 12 months or less are excluded from the Consolidated Balance Sheets and charges from these leases are expensed as incurred.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplemental balance sheet information related to leases was as follows:
| March 31, | ||||||||||||||
| (In millions, except lease term and discount rate) | 2021 | 2020 | ||||||||||||
| Operating leases | ||||||||||||||
| Operating lease right-of-use assets | $ | 2,100 | $ | 1,886 | ||||||||||
| Current portion of operating lease liabilities | $ | 390 | $ | 354 | ||||||||||
| Long-term operating lease liabilities | 1,867 | 1,660 | ||||||||||||
| Total operating lease liabilities | $ | 2,257 | $ | 2,014 | ||||||||||
| Finance leases | ||||||||||||||
| Property, plant and equipment, net | $ | 237 | $ | 180 | ||||||||||
| Current portion of long-term debt | $ | 22 | $ | 15 | ||||||||||
| Long-term debt | 206 | 151 | ||||||||||||
| Total finance lease liabilities | $ | 228 | $ | 166 | ||||||||||
| Weighted-average remaining lease term (Years) | ||||||||||||||
| Operating leases | 7.8 | 7.7 | ||||||||||||
| Finance leases | 10.1 | 12.1 | ||||||||||||
| Weighted-average discount rate | ||||||||||||||
| Operating leases | 2.53 | % | 3.03 | % | ||||||||||
| Finance leases | 2.71 | % | 2.86 | % |
The components of lease cost were as follows:
| Years Ended March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Short-term lease cost | $ | 32 | $ | 29 | |||||||
| Operating lease cost | 465 | 459 | |||||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | 23 | 14 | |||||||||
| Interest on lease liabilities | 6 | 5 | |||||||||
| Total finance lease cost | 29 | 19 | |||||||||
| Variable lease cost (1) | 125 | 125 | |||||||||
| Sublease income | (36) | (33) | |||||||||
| Total lease cost (2) | $ | 615 | $ | 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 “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations.
Rent expense under operating leases was $576 million in 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Supplemental cash flow information related to leases was as follows:
| Years Ended March 31, | ||||||||||||||
| (In millions) | 2021 | 2020 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | (362) | $ | (377) | ||||||||||
| Operating cash flows from finance leases | (4) | (3) | ||||||||||||
| Financing cash flows from finance leases | (31) | (18) | ||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||
| Operating leases (1) | $ | 321 | $ | 2,378 | ||||||||||
| Finance leases | 75 | 166 | ||||||||||||
(1) The amount for the year ended March 31, 2020 includes the transition adjustment of $2.1 billion for operating lease right-of-use assets recorded as of April 1, 2019 upon adoption of the amended leasing guidance included in ASU 2016-02, Leases.
Maturities of lease liabilities as of March 31, 2021 were as follows:
| (In millions) | Operating Leases | Finance Leases | Total | ||||||||||||||
| 2022 | $ | 433 | $ | 28 | $ | 461 | |||||||||||
| 2023 | 401 | 28 | 429 | ||||||||||||||
| 2024 | 332 | 27 | 359 | ||||||||||||||
| 2025 | 283 | 25 | 308 | ||||||||||||||
| 2026 | 233 | 24 | 257 | ||||||||||||||
| Thereafter | 823 | 130 | 953 | ||||||||||||||
| Total lease payments (1) | 2,505 | 262 | 2,767 | ||||||||||||||
| Less imputed interest | (248) | (34) | (282) | ||||||||||||||
| Present value of lease liabilities | $ | 2,257 | $ | 228 | $ | 2,485 |
(1)Total lease payments are not reduced by minimum sublease income of $202 million which are due under future noncancellable subleases.
As of March 31, 2021, the Company entered into additional leases primarily for facilities that have not yet commenced with future lease payments of $217 million that are not reflected in the table above. These operating leases will commence between 2022 and 2024 with noncancellable lease terms of five to 15 years.
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, 2021 and 2020, the total lease receivable was $298 million and $272 million, respectively, with a weighted-average remaining lease term of approximately seven years. Interest income from these leases was not material for the years ended March 31, 2021 and 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
12. Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
| (In millions) | U.S. Pharmaceutical | International | Medical-Surgical Solutions | Prescription Technology Solutions | Total | ||||||||||||||||||||||||
| Balance, March 31, 2019 | $ | 3,935 | $ | 1,446 | $ | 2,451 | $ | 1,526 | $ | 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) | (67) | — | — | (78) | ||||||||||||||||||||||||
| Balance, March 31, 2020 | 3,924 | 1,443 | 2,453 | 1,540 | 9,360 | ||||||||||||||||||||||||
| Goodwill acquired | — | 5 | — | — | 5 | ||||||||||||||||||||||||
| Acquisition accounting, transfers and other adjustments | — | — | — | 2 | 2 | ||||||||||||||||||||||||
| Other changes/disposals | (1) | — | — | — | (1) | ||||||||||||||||||||||||
| Impairment charges | — | (69) | — | — | (69) | ||||||||||||||||||||||||
| Foreign currency translation adjustments, net | 40 | 156 | — | — | 196 | ||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | 3,963 | $ | 1,535 | $ | 2,453 | $ | 1,542 | $ | 9,493 |
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.
The fair value of the reporting units 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 the 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Goodwill charges listed below were recorded in “Goodwill impairment charges” in the Consolidated Statements of Operations. Most of the goodwill impairment for these reporting units were generally not deductible for income tax purposes.
Fiscal 2021
In the second quarter of 2021, the Company implemented a new segment reporting structure which resulted in four reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and RxTS. These reportable segments encompass all operating segments of the Company. This segment change prompted changes in multiple reporting units across the Company. As a result, goodwill included in impacted reporting units was reallocated using a relative fair value approach and assessed for impairment both before and after the reallocation.
The Company recorded a goodwill impairment charge of $69 million in 2021 as the estimated fair value of the Europe Retail Pharmacy reporting unit was lower than its reassigned carrying value based on changes in the composition of the Europe Retail Pharmacy reporting unit within the International segment. At March 31, 2021, the balance of goodwill for the reporting units in Europe was approximately nil and the remaining balance of goodwill in the International segment primarily relates to one of its reporting units in Canada.
The annual impairment testing performed for 2021 did not indicate any impairment of goodwill.
Fiscal 2020
The impairment testing performed in 2020 did not indicate any material impairment of goodwill.
Fiscal 2019
The impairment testing performed in 2019 resulted in the following impairment charges:
| (In millions, except rates) | |||||||||||||||||||||||||||||||||||
| Quarter Ended | Reporting Unit | Segment (1) | Discount Rate | Terminal Growth Rate | Goodwill Impairment (2) | ||||||||||||||||||||||||||||||
| June 2018 | Pharmaceutical Distribution | International | 8.0 | % | 1.25 | % | $ | 238 | (3) | ||||||||||||||||||||||||||
| June 2018 | Retail Pharmacy | International | 8.5 | % | 1.25 | % | 251 | (4) | |||||||||||||||||||||||||||
| June 2018 | Pharmaceutical Distribution | International | 8.0 | % | 1.25 | % | 81 | (4) | |||||||||||||||||||||||||||
| March 2019 | Retail Pharmacy | International | 10.0 | % | 1.25 | % | 465 | (5) | |||||||||||||||||||||||||||
| March 2019 | Pharmaceutical Distribution | International | 9.0 | % | 1.25 | % | 741 | (5) | |||||||||||||||||||||||||||
| Total | $ | 1,776 |
(1)As described above, the Company implemented its new segment reporting structure in the second quarter of 2021 and its European Pharmaceutical Solutions segment and its Rexall Health business in Canada became part of the International segment. Amounts included herein were previously included within the former European Pharmaceutical Solutions segment.
(2)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 included $21 million related to the Company’s Rexall Health business, within the International segment, recorded in the third quarter of 2019.
(3)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.
(4)Both RP and PD projected a decline in the estimated future cash flows primarily triggered by 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(5)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.
Refer to Financial Note 17, “Fair Value Measurements,” for more information on these nonrecurring fair value measurements. As of March 31, 2021 and 2020, accumulated goodwill impairment losses in the Company’s International segment were $3.6 billion and $3.5 billion, respectively.
Intangible Assets
Information regarding intangible assets is as follows:
| March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| (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 | 12 | $ | 3,739 | $ | (2,269) | $ | 1,470 | $ | 3,650 | $ | (1,950) | $ | 1,700 | ||||||||||||||||||||||||||||
| Service agreements | 10 | 1,081 | (513) | 568 | 994 | (480) | 514 | ||||||||||||||||||||||||||||||||||
| Pharmacy licenses | 23 | 497 | (244) | 253 | 492 | (232) | 260 | ||||||||||||||||||||||||||||||||||
| Trademarks and trade names | 12 | 925 | (394) | 531 | 808 | (242) | 566 | ||||||||||||||||||||||||||||||||||
| Technology | 4 | 150 | (122) | 28 | 175 | (111) | 64 | ||||||||||||||||||||||||||||||||||
| Other | 6 | 254 | (226) | 28 | 273 | (221) | 52 | ||||||||||||||||||||||||||||||||||
| Total | $ | 6,646 | $ | (3,768) | $ | 2,878 | $ | 6,392 | $ | (3,236) | $ | 3,156 |
Amortization expense of intangible assets was $422 million, $462 million, and $485 million for 2021, 2020, and 2019, respectively. Estimated annual amortization expense of intangible assets is as follows: $370 million, $270 million, $259 million, $253 million, and $220 million for 2022 through 2026, and $1.5 billion thereafter. All intangible assets were subject to amortization as of March 31, 2021 and 2020.
Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges,” for more information on intangible asset impairment charges recorded in 2021, 2020, and 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
13. Debt and Financing Activities
Long-term debt consisted of the following:
| March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| U.S. Dollar notes (1) (2) | |||||||||||
| 3.65% Notes due November 30, 2020 | $ | — | $ | 700 | |||||||
| 4.75% Notes due March 1, 2021 | — | 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 | |||||||||
| 0.90% Notes due December 3, 2025 | 500 | — | |||||||||
| 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) | |||||||||||
| 0.63% Euro Notes due August 17, 2021 | 704 | 662 | |||||||||
| 1.50% Euro Notes due November 17, 2025 | 700 | 659 | |||||||||
| 1.63% Euro Notes due October 30, 2026 | 587 | 552 | |||||||||
| 3.13% Sterling Notes due February 17, 2029 | 627 | 557 | |||||||||
| Lease and other obligations | 270 | 174 | |||||||||
| Total debt | 7,148 | 7,387 | |||||||||
| Less: Current portion | 742 | 1,052 | |||||||||
| Total long-term debt | $ | 6,406 | $ | 6,335 |
(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.
Long-Term Debt
The Company’s long-term debt includes both U.S. dollar and foreign currency-denominated borrowings. At March 31, 2021 and 2020, $7.1 billion and $7.4 billion, respectively, of total debt was outstanding, of which $742 million and $1.1 billion, respectively, was included in “Current portion of long-term debt” in the Company’s Consolidated Balance Sheets.
On December 3, 2020, the Company completed a public offering of 0.90% Notes due December 3, 2025 (the “2025 Notes”) in a principal amount of $500 million. Interest on the 2025 Notes is payable semi-annually on June 3rd and December 3rd of each year, commencing on June 3, 2021. Proceeds received from this note issuance, net of discounts and offering expenses, were $496 million.
During the year ended March 31, 2021, the Company retired its 3.65% $700 million total principal of notes due on November 30, 2020 upon maturity. On December 1, 2020, the Company redeemed its 4.75% $323 million total principal of notes due on March 1, 2021 prior to maturity. These notes were redeemed using cash on hand and the proceeds of the notes offering discussed above. 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 $742 million in 2022, $838 million in 2023, $1.1 billion in 2024, $34 million in 2025, $1.2 billion in 2026, and $3.2 billion thereafter.
Revolving Credit Facilities
In the second quarter of 2020, the Company entered into a Credit Agreement, dated as of September 25, 2019 (the “2020 Credit Facility”), that provides a syndicated $4.0 billion five-year senior unsecured credit facility with a $3.6 billion aggregate sublimit of availability in Canadian dollars, British pound sterling, and Euro. 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 matures in September 2024 and had no borrowings during 2021 and 2020 and no amounts outstanding as of March 31, 2021 and 2020.
On March 31, 2021, the Company entered into Amendment No. 2 to the 2020 Credit Facility, which superseded Amendment No. 1, dated as of February 1, 2021. The 2020 Credit Facility, as amended, contains various customary investment grade covenants, including a financial covenant which obligates the Company to maintain a maximum Total Debt to Consolidated EBITDA ratio, as defined in the amended credit agreement. 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, 2021, the Company was in compliance with all covenants. 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.
The Company also maintains bilateral credit facilities primarily denominated in Euros with a committed amount of $8 million and an uncommitted amount of $152 million as of March 31, 2021. Borrowings and repayments were not material in 2021 and 2020 and amounts outstanding under these credit lines were not material as of March 31, 2021 and 2020.
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 2021 and 2020, it borrowed $6.3 billion and $21.4 billion, respectively, and repaid $6.3 billion and $21.4 billion, respectively, under the program. At March 31, 2021 and 2020, there were no commercial paper notes outstanding.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
14. 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 $662 million and $74 million, respectively, at March 31, 2021 and $695 million and $82 million, respectively, at March 31, 2020.
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 $1.5 billion at March 31, 2021 and $1.4 billion at March 31, 2020, 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 18, “Financial Guarantees and Warranties.” The Company believes there is no material loss exposure on these assets or from these relationships.
15. Pension Benefits
The Company maintains a number of qualified and nonqualified defined benefit pension plans and defined contribution plans for eligible employees.
Defined Benefit Pension Plans
The Company has an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives, as well as benefit pension plans for eligible employees outside the U.S.
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 settlement charge of $17 million 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 and a pre-tax settlement charge of $105 million was recorded during the second quarter of 2020. Settlement charges were included within “Other income, net,” in the Consolidated Statements of Operations for the year ended March 31, 2020. As of March 31, 2020, this defined benefit pension plan had an accumulated comprehensive loss of approximately nil.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 settlement charge of approximately $11 million was recorded in “Other income, net”, in the 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, respectively.
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.
During the third quarter of 2021, the Company derecognized $187 million of pension liabilities included in liabilities held for sale and $33 million of accumulated other comprehensive loss related to its German pharmaceutical wholesale business contributed to a joint venture, as discussed in more detail in Financial Note 3, “Held for Sale.”
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) | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Service cost - benefits earned during the year | $ | — | $ | — | $ | — | $ | 15 | $ | 16 | $ | 15 | |||||||||||||||||||||||
| Interest cost on projected benefit obligation | — | 6 | 14 | 19 | 19 | 21 | |||||||||||||||||||||||||||||
| Expected return on assets | — | (4) | (16) | (20) | (22) | (23) | |||||||||||||||||||||||||||||
| Amortization of unrecognized actuarial loss and prior service costs | — | 2 | 5 | 5 | 6 | 4 | |||||||||||||||||||||||||||||
| Curtailment/settlement loss | — | 127 | 4 | — | — | 1 | |||||||||||||||||||||||||||||
| Net periodic pension expense | $ | — | $ | 131 | $ | 7 | $ | 19 | $ | 19 | $ | 18 |
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Change in benefit obligations | |||||||||||||||||||||||
| Benefit obligation at beginning of period (1) | $ | 10 | $ | 439 | $ | 896 | $ | 990 | |||||||||||||||
| Service cost | — | — | 15 | 16 | |||||||||||||||||||
| Interest cost | — | 6 | 19 | 19 | |||||||||||||||||||
| Actuarial loss (gain) | — | 20 | 89 | (36) | |||||||||||||||||||
| Benefits paid | (1) | (179) | (34) | (43) | |||||||||||||||||||
| Annuity Premium Transfer | — | (276) | — | — | |||||||||||||||||||
| Divestiture (2) | — | — | (187) | — | |||||||||||||||||||
| Acquisitions | — | — | — | 2 | |||||||||||||||||||
| Foreign exchange impact and other | — | — | 77 | (52) | |||||||||||||||||||
| Benefit obligation at end of period (1) | $ | 9 | $ | 10 | $ | 875 | $ | 896 | |||||||||||||||
| Change in plan assets | |||||||||||||||||||||||
| Fair value of plan assets at beginning of period | $ | — | $ | 322 | $ | 594 | $ | 642 | |||||||||||||||
| Actual return on plan assets | — | 27 | 87 | 3 | |||||||||||||||||||
| Employer and participant contributions | 1 | 116 | 27 | 28 | |||||||||||||||||||
| Benefits paid | (1) | (179) | (34) | (43) | |||||||||||||||||||
| Annuity Premium Transfer | — | (276) | — | — | |||||||||||||||||||
| Foreign exchange impact and other | — | (10) | 61 | (36) | |||||||||||||||||||
| Fair value of plan assets at end of period | $ | — | $ | — | $ | 735 | $ | 594 | |||||||||||||||
| Funded status at end of period | $ | (9) | $ | (10) | $ | (140) | $ | (302) | |||||||||||||||
| Amounts recognized on the balance sheet | |||||||||||||||||||||||
| Assets | $ | — | $ | — | $ | 54 | $ | 49 | |||||||||||||||
| Current liabilities (2) | (1) | (1) | (9) | (162) | |||||||||||||||||||
| Long-term liabilities | (8) | (9) | (185) | (189) | |||||||||||||||||||
| Total | $ | (9) | $ | (10) | $ | (140) | $ | (302) |
(1)The benefit obligation is the projected benefit obligation.
(2)The divestiture relates to the contribution of the Company’s German pharmaceutical wholesale business to a joint venture in 2021 as discussed in more detail in Financial Note 3, “Held for Sale.” These amounts were included within current liabilities and totaled $151 million at March 31, 2020.
The actuarial loss of $89 million in 2021 was primarily attributable to:
-
Discount rates ($32 million loss): The weighted average discount rate for Non-U.S. plans decreased from 2.03% as of March 31, 2020 to 1.89% as of March 31, 2021.
-
Demographic and assumption changes ($57 million loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as inflation assumption, compensation changes, mortality, and other changes including losses related to the divestiture in 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The actuarial gain of $36 million in 2020 was primarily attributable to:
- Discount rates ($6 million loss): The weighted average discount rate for Non-U.S. plans decreased from 2.13% as of March 31, 2019 to 2.03% as of March 31, 2020.
*•*Demographic and assumption changes ($42 million gain): This represents the difference between actual and estimated participant data and demographic factors, including items such as inflation assumption, compensation changes mortality, and other changes. The difference between actual inflation and assumed inflation in our U.K. pension plans resulted in a gain of $23 million.
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) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Projected benefit obligation | $ | 9 | $ | 10 | $ | 875 | $ | 896 | |||||||||||||||
| Accumulated benefit obligation | 9 | 10 | 847 | 856 | |||||||||||||||||||
| Fair value of plan assets | — | — | 735 | 594 |
Amounts recognized in accumulated other comprehensive income consist of:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net actuarial loss | $ | 1 | $ | 1 | $ | 120 | $ | 149 | |||||||||||||||
| Prior service credit | — | — | (2) | (3) | |||||||||||||||||||
| Total | $ | 1 | $ | 1 | $ | 118 | $ | 146 |
Other changes in accumulated other comprehensive income were as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| Years Ended March 31, | Years Ended March 31, | ||||||||||||||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Net actuarial loss (gain) | $ | — | $ | (3) | $ | 8 | $ | (9) | $ | (24) | $ | 42 | |||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Net actuarial loss | — | (129) | (9) | (35) | (6) | (5) | |||||||||||||||||||||||||||||
| Prior service credit (cost) | — | — | — | 1 | — | — | |||||||||||||||||||||||||||||
| Foreign exchange impact and other | — | — | — | 15 | (6) | (12) | |||||||||||||||||||||||||||||
| Total recognized in other comprehensive loss (income) | $ | — | $ | (132) | $ | (1) | $ | (28) | $ | (36) | $ | 25 |
The Company recognized $33 million in actuarial losses for pension plans to stockholders’ equity in 2021 as a result of the contribution of the Company’s German pharmaceutical wholesale business to a joint venture as discussed in more detail in Financial Note 3, “Held for Sale.” 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 retired executive.
Projected benefit obligations related to the Company’s unfunded U.S. plans were $9 million and $10 million at March 31, 2021 and 2020, respectively. 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 $162 million and $298 million at March 31, 2021 and 2020, respectively. Funding obligations for its non-U.S. plans vary based on the laws of each non-U.S. jurisdiction.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Expected benefit payments for the Company’s pension plans are as follows: $43 million, $36 million, $37 million, $36 million and $38 million for 2022 to 2026 and $202 million for 2027 through 2031. 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 $24 million for 2022.
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, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Net periodic pension expense | |||||||||||||||||||||||||||||||||||
| Discount rates | 3.08% | 3.66% | 3.83% | 1.89% | 2.03% | 2.35% | |||||||||||||||||||||||||||||
| Rate of increase in compensation | N/A (1) | N/A (1) | N/A (1) | 3.20 | 2.93 | 3.13 | |||||||||||||||||||||||||||||
| Expected long-term rate of return on plan assets | N/A | 4.00 | 5.25 | 2.56 | 3.01 | 3.71 | |||||||||||||||||||||||||||||
| Benefit obligation | |||||||||||||||||||||||||||||||||||
| Discount rates | 2.35% | 3.08% | 3.65% | 1.89% | 2.03% | 2.13% | |||||||||||||||||||||||||||||
| Rate of increase in compensation | N/A (1) | N/A (1) | N/A (1) | 3.20 | 2.93 | 3.18 |
(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, 2021, the Company’s U.S. defined benefit liabilities are valued using a weighted-average discount rate of 2.35%, which represents a decrease of 73 basis points from its 2020 weighted-average discount rate of 3.08%. The Company’s non-U.S. defined benefit pension plan liabilities are valued using a weighted-average discount rate of 1.89%, which represents a decrease of 14 basis points from its 2020 weighted-average discount rate of 2.03%.
Plan Assets
Investment Strategy: 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, 2021 and 2020, using the fair value hierarchy by asset class:
| Non-U.S. Plans | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 5 | $ | — | $ | — | $ | 5 | $ | 13 | $ | — | $ | — | $ | 13 | |||||||||||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity commingled funds | 64 | 117 | — | 181 | 53 | 75 | — | 128 | |||||||||||||||||||||||||||||||||||||||
| Fixed income securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Government securities | 5 | 144 | — | 149 | 6 | 139 | — | 145 | |||||||||||||||||||||||||||||||||||||||
| Corporate bonds | 6 | 30 | — | 36 | 14 | 17 | — | 31 | |||||||||||||||||||||||||||||||||||||||
| Fixed income commingled funds | 51 | 222 | 1 | 274 | 107 | 101 | — | 208 | |||||||||||||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate funds and Other | 31 | 4 | 3 | 38 | 22 | 2 | 3 | 27 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 162 | $ | 517 | $ | 4 | $ | 683 | $ | 215 | $ | 334 | $ | 3 | $ | 552 | |||||||||||||||||||||||||||||||
| Assets held at NAV practical expedient (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity commingled funds | 10 | 8 | |||||||||||||||||||||||||||||||||||||||||||||
| Other | 42 | 34 | |||||||||||||||||||||||||||||||||||||||||||||
| Total plan assets | $ | 735 | $ | 594 |
(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.
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. 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.
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Other - At March 31, 2021 and 2020, this includes $36 million and $29 million, respectively, 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 not material for the years ended March 31, 2021 and 2020.
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, 2021, 2020, and 2019. Contributions to the POA for non-U.S. Plans exceeding 5% of total plan contributions were $22 million, $17 million, and $27 million in 2021, 2020, and 2019, respectively. Based on actuarial calculations, the Company estimates the funded status for its non-U.S. Plans to be approximately 78% as of March 31, 2021. 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, $102 million, and $92 million for the years ended March 31, 2021, 2020, and 2019, respectively.
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, 2021, 2020, and 2019. The benefit obligation at March 31, 2021 and 2020 was $64 million and $65 million, respectively.
16. 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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, 2021 and 2020, the Company had €1.7 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 Statements 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 pound sterling-denominated notes prospectively from net investment hedges as the hedging relationship ceased to be effective.
Gains or losses from net investment hedges recorded within Other comprehensive income were losses of $118 million in 2021 and gains of $39 million and $259 million in 2020 and 2019, respectively. 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, net” in the Consolidated Statements of Operations. There was no ineffectiveness in the Company’s net investment hedges for the years ended March 31, 2021 and 2019.
Derivatives Designated as Hedges
At March 31, 2021 and 2020, the Company had cross-currency swaps designated as net investment hedges with a total gross notional amount of $500 million and $1.5 billion Canadian dollars, respectively. 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 Statements 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, 2021, 2020, and 2019. In 2021, cross-currency swaps with an aggregate gross notional amount of $999 million Canadian dollars matured and the remaining cross-currency swaps will mature in November 2024.
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 the 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, net” in the Consolidated Statements of Operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Gains or losses from the Company’s cross-currency swaps designated as net investment hedges recorded in Other comprehensive income were losses of $119 million in 2021 and gains of $76 million and $53 million in 2020 and 2019, respectively. There was no ineffectiveness in the Company’s hedges for the years ended March 31, 2021 and 2019.
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 largely offset by the losses recorded in earnings related to these notes. The swaps will mature in February 2023.
From time to time, the Company also enters into cross-currency swaps to hedge intercompany loans denominated in non-functional currencies. For cross-currency swap transactions, 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 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, 2021 and 2020, the Company had cross-currency swaps with total gross notional amounts of approximately $2.6 billion and $2.9 billion, respectively, which are designated as cash flow hedges. These swaps will mature between May 2021 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 loss 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.
On April 27, 2020, the Company entered into forward starting interest rate swaps designated as cash flow hedges, with combined notional amounts of $500 million and €600 million, to hedge the variability of future benchmark interest rates on planned bond issuances. Under the terms of the forward interest rate swap contracts, the Company agreed with third parties to pay fixed interest payments for the $500 million swaps for floating interest payments in U.S. dollars based on three-month LIBOR and to pay fixed interest payments for floating interest payments in Euros based on six-month Euro Interbank Offered Rate (“EURIBOR”) for the €600 million swaps. The $500 million swaps were terminated upon the issuance of the 2025 Notes in November 2020. The settlement loss on the swaps was not material and will be amortized on a straight-line basis as interest expense over the five-year life of the 2025 Notes. Refer to Financial Note 13, “Debt and Financing Activities,” for more information.
Gains or losses from cash flow hedges recorded in Other comprehensive income were losses of $42 million in 2021 and gains of $98 million and $28 million in 2020 and 2019, respectively. Gains or losses reclassified from Accumulated other comprehensive income and recorded in “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations were not material in 2021, 2020, and 2019. There was no ineffectiveness in the Company’s cash flow hedges for the years ended March 31, 2021, 2020, and 2019.
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, 2021 and 2020, the total gross notional amounts of these contracts were $39 million and $29 million, respectively. These contracts will predominately mature between April 2021 and December 2021 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 “Selling, distribution, general, and administrative expenses” in the Consolidated Statements of Operations. Changes in the fair values were not material in 2021, 2020, and 2019. 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 the non-derivative 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, net” in the Consolidated Statements of Operations, which offset 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, 2021 | March 31, 2020 | ||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||
| Cross-currency swaps (current) | Prepaid expenses and other/Other accrued liabilities | $ | 4 | $ | 47 | $ | 826 | $ | 112 | $ | 19 | $ | 1,279 | |||||||||||||
| Cross-currency swaps (non-current) | Other non-current assets/liabilities | 72 | 92 | 2,663 | 182 | — | 3,313 | |||||||||||||||||||
| Forward starting interest rate swaps (current) | Other accrued liabilities | — | 7 | 704 | — | — | — | |||||||||||||||||||
| Total | $ | 76 | $ | 146 | $ | 294 | $ | 19 | ||||||||||||||||||
| Derivatives not designated for hedge accounting | ||||||||||||||||||||||||||
| Foreign exchange contracts (current) | Prepaid expenses and other | $ | — | $ | — | $ | 29 | $ | 2 | $ | — | $ | 24 | |||||||||||||
| Foreign exchange contracts (current) | Other accrued liabilities | — | 1 | 10 | — | — | 5 | |||||||||||||||||||
| Total | $ | — | $ | 1 | $ | 2 | $ | — |
Refer to Financial Note 17, “Fair Value Measurements,” for more information on these recurring fair value measurements.
17. Fair Value Measurements
The Company measures certain assets and liabilities at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value as follows:
Level 1 - quoted prices in active markets for identical assets or liabilities.
Level 2 - significant other observable market-based inputs.
Level 3 - significant unobservable inputs for which little or no market data exists and requires considerable assumptions that are significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Cash and cash equivalents at March 31, 2021 and 2020 included investments in money market funds of $1.6 billion and $2.0 billion, respectively, 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, 2021 and 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Fair values of the Company’s interest rate swaps and foreign currency forward contracts were determined using observable inputs from available market information, including quoted interest rates, 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 16, “Hedging Activities,” for fair value and other information on the Company’s derivatives including interest rate swaps, forward foreign currency contracts and cross-currency swaps.
The Company holds investments in equity securities of U.S. growth stage companies that address both current and emerging business challenges in the healthcare industry and which had carrying values of $269 million and $170 million at March 31, 2021 and 2020, respectively. These investments primarily consist of equity securities without readily determinable fair values and are included in “Other non-current assets” in the Consolidated Balance Sheets. During 2021, several of the Company’s investments in equity securities without readily determinable fair values experienced transactions which resulted in changes in the observable price of those securities, while others were converted into shares of public common stock through initial public offerings and an acquisition. The Company exited most of its investments in publicly traded shares in the fourth quarter of 2021. Net gains related to the Company’s investments in these equity securities were approximately $133 million for the year ended March 31, 2021. These gains were recorded in “Other income, net” in the Consolidated Statements of Operations. There were no other material changes in the carrying value of these investments during the year ended March 31, 2021. The carrying value of publicly traded investments was determined using quoted prices for identical investments in active markets and are considered to be Level 1 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company’s assets and liabilities are also subject to nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.
At March 31, 2021, assets measured at fair value on a nonrecurring basis included long-lived assets of the Company’s International segment and goodwill of the Company’s Europe Retail Pharmacy reporting unit within the International segment.
At March 31, 2020, assets measured at fair value on a nonrecurring basis included long-lived assets of the Company’s International segment. Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges” and Financial Note 12, “Goodwill and Intangible Assets, Net,” for more information.
The aforementioned investments in equity securities of U.S. growth stage companies include the carrying value of investments without readily determinable fair values, which were determined using a measurement alternative and are recorded at cost less impairment, plus or minus any changes in observable price from orderly transactions of the same or similar security of the same issuer. 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.
There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2021 and 2020.
Other Fair Value Disclosures
At March 31, 2021 and 2020, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings, and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.
The Company determines the fair value of commercial paper using quoted prices in active markets for identical instruments, which are considered Level 1 inputs under the fair value measurements and disclosure guidance.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The Company’s long-term debt is also recorded at cost. The carrying value and fair value of the Company’s long-term debt was as follows:
| March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||||||||
| (In millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
| Long-term debt, including current maturities | $ | 7,148 | $ | 7,785 | $ | 7,387 | $ | 7,792 |
The estimated fair value of the Company’s 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.
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 using a DCF model to determine the fair value of the reporting unit.
Refer to Financial Note 12, “Goodwill and Intangible Assets, Net,” for more information regarding goodwill impairment charges recorded for certain reporting units during 2021 and 2019.
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. Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges” under the heading “Long-Lived Assets Impairments” for more information*.*
18. Financial Guarantees and Warranties
Financial Guarantees
The Company has agreements with certain of its customers’ financial institutions, primarily in its International segment, 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 ten 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, 2021, the maximum amounts of inventory repurchase guarantees and customers’ debt guarantees were $329 million and $143 million, respectively, of which the Company has not accrued any material amounts. The expirations of these financial guarantees are as follows: $268 million, $26 million, $33 million, $11 million, and $15 million from 2022 through 2026 and $119 million thereafter.
At March 31, 2021, the Company’s banks and insurance companies have issued $146 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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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.
19. Commitments and Contingent Liabilities
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.
Unless otherwise stated, the Company is unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, the Company is unable to determine that a loss is probable, or to reasonably estimate the amount of loss or a range of loss, for a claim 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 remain unresolved over many years. The Company reviews loss contingencies at least quarterly to determine whether the likelihood of loss has changed and whether it can make a reasonable estimate of the loss or range of loss. When the Company determines that a loss from a claim is probable and reasonably estimable, it records a liability for an estimated amount. 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, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. These actions have been filed in state and federal courts throughout the U.S., 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, and 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 2,900 cases under the jurisdiction of the MDL court.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Three cases involving McKesson that were previously part of the federal MDL have been remanded to other federal courts for discovery and trial. On January 14, 2020, the Judicial Panel on Multidistrict Litigation finalized its Conditional Remand Order, ordering that the cases 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. Trial in that case began on May 3, 2021. These two West Virginia plaintiffs are not expected to participate in any broader multistate resolution of opioid-related claims. 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; trial has been set for December 6, 2021. Also on February 5, 2020, the case brought by the Cherokee Nation was remanded by the MDL court to the U.S. District Court for the Eastern District of Oklahoma. The Cherokee Nation is not expected to participate in any broader multistate resolution of opioid-related claims.
The Company is also named in approximately 300 similar state court cases pending in 38 states plus Puerto Rico, along with 3 cases in Canada. These include actions filed by 26 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 court cases. For example, trial 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, is scheduled to begin in June 2021, the cases brought by the Ohio and Washington attorneys general are scheduled to go to trial in September 2021, and the case brought by the Alabama attorney general is scheduled to go to trial in November 2021.
The Company continues to be involved in discussions with the objective of achieving broad resolution of opioid-related claims of states, their political subdivisions and other government entities (“governmental entities”). The Company is in ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework under which, in order to resolve claims of governmental entities, the three largest U.S. pharmaceutical distributors would pay up to approximately $21.0 billion over a period of 18 years, with up to approximately $8.0 billion to be paid by the Company, of which more than 90% is anticipated to be used to remediate the opioids crisis. Most of the remaining amount relates to plaintiffs’ attorneys’ fees and costs, and would be payable over a shorter time period. In addition, the proposed framework would require the three distributors, including the Company, to adopt changes to anti-diversion programs.
Under the framework, before the distributors determine whether to enter into any final settlement, they would assess the sufficiency of the scope of settlement, based in part on the number and identities of the governmental entities that would participate in any such settlement. The framework contemplates that if certain governmental entities do not agree to a settlement under the framework, but the distributors nonetheless concluded that there was sufficient participation to warrant the settlement, there would be a corresponding reduction in the amount due from the Company to account for the unresolved claims of the governmental entities that do not participate. Those non-participating governmental entities would be entitled to pursue their claims against the Company and other defendants.
The Company disclosed in its financial statements for the quarter ended December 31, 2020 its determination that discussions under that framework reached a stage at which a broad settlement of opioid claims by governmental entities was probable, and for which the loss could be reasonably estimated.
As a result of that conclusion, and its assessment of certain other opioid-related claims, the Company recorded a charge of $8.1 billion ($6.8 billion after-tax) within “Claims and litigation charges, net” in the Consolidated Statements of Operations related to its share of the settlement framework described above, as well as those certain other opioid-related claims. There was no change to the estimated liability as of March 31, 2021.
In light of the uncertainties, as described below, of the timing of amounts that would be paid with respect to these charges, they were recorded in “Long-term litigation liabilities” in the Company’s Consolidated Balance Sheet as of March 31, 2021. In addition, for the same reasons, the amount of loss that the Company ultimately might incur may differ materially from the amounts accrued.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Discussions with attorneys general and other parties continue. If the negotiating parties agree on terms under the framework for a broad resolution of claims of governmental entities, then those potential terms would need to be agreed to by numerous other state and local governments before an agreement could be accepted by the Company and finalized. In some cases, discovery has been paused during the parties’ discussions. While the Company continues to be involved in discussions regarding a potential broad settlement framework, the Company also continues to prepare for trial in these pending matters. The Company believes that it has valid defenses to the claims pending against it, and it intends to vigorously defend against all such claims if acceptable settlement terms are not achieved.
Although the vast majority of opioid claims have been brought by governmental entities in the U.S., the Company is also a defendant in cases brought in the U.S. by private plaintiffs, such as hospitals, health and welfare funds, third-party payors, and individuals, as well as 3 cases brought by governmental entities in Canada. These claims, and those of private entities generally, are not included in the settlement framework for governmental entities, or in the charges recorded by the Company, described above. The Company believes it has valid legal defenses in these matters and intends to mount a vigorous defense. The Company has not concluded a loss is probable in any of these matters; nor is the amount of any loss reasonably estimable.
Because of the many uncertainties associated with any potential settlement arrangement or other resolution of all of these opioid-related litigation matters, including the uncertain scope of participation by governmental entities in any potential settlement under the framework described above, the Company is not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. 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.
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. On February 16, 2021, the court in the federal action dismissed the second amended complaint with prejudice, and the relators appealed the dismissal to the U.S. Court of Appeals for the Ninth Circuit.
Insurance Coverage Litigation
Two cases pending in the Northern District of California were filed against McKesson by its liability umbrella insurers about policies they issued to the Company for the period 1999-2017, AIU Insurance Company and National Union Fire Insurance Company of Pittsburgh, Pa. (together "AIG") and ACE Property and Casualty Insurance Company ("ACE"). AIU Insurance Company et al. v. McKesson Corporation, No. 3:20-cv-07469 (N.D. Cal.) was initiated by AIG in the Northern District of California on October 23, 2020. Ace Property and Casualty Insurance Company v. McKesson Corporation et al., No. 3:20-cv-09356 (N.D. Cal.) was brought by ACE in California state court on November 2, 2020, and was removed by McKesson to federal court, transferred to the Northern District of California, and designated as related to the AIU action. AIG and ACE are seeking declarations that they have no duty to defend or indemnify McKesson in the thousands of lawsuits pending in federal and state courts related to opioids. In both actions, McKesson has asserted claims under the AIG and ACE policies seeking declarations and damages for past and future defense and indemnity costs.
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. On December 24, 2020, the court declined to decertify the class but modified the class definition to distinguish between physical faxes (kept in the class) versus online or e-fax recipients (removed from the class). On March 19, 2021, the court denied summary judgment for plaintiffs on the issue of liability but found that McKesson’s affirmative defense of prior consent fails as a matter of law and precluded McKesson from presenting individualized evidence of consent at trial. On McKesson’s motion for summary judgment, the court demurred and will let the issue of treble damages go to the jury. Trial has been scheduled for October 18, 2021.
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. Plaintiffs filed a complaint against denial of leave to appeal with the Federal Court of Justice (Bundesgerichtshof), which was rejected on November 17, 2020, making the dismissal final and binding. With no further right to appeal, Plaintiffs filed an objection against the decision of the Federal Court of Justice on November 27, 2020, claiming their right to be heard had been violated. On March 16, 2021, the Federal Court of Justice (Bundesgerichtshof) issued an order granting the Polygon plaintiffs leave to appeal. 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 16, 2021, the Federal Court of Justice (Bundesgerichtshof) issued an order granting the Davidson plaintiffs leave to appeal.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 sought treble damages, civil penalties, and further relief. The United States and the states named in the complaint 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. On August 17, 2020, the Seventh Circuit reversed the district court’s decision on the United States’ motion to dismiss and remanded the case with instructions that the district court enter judgment for the defendants on the relator’s claims under the False Claims Act. The relator sought a re-hearing en banc at the Seventh Circuit, which was denied. The relator’s False Claims Act case was dismissed, with judgment entered in favor of the defendants on September 30, 2020. On February 10, 2021, the relator filed a Petition for Writ of Certiorari at the United States Supreme Court seeking review of the Seventh Circuit’s ruling.
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.
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). Previously, the U.S. 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. Following the relator’s appeal, the United States Court of Appeals for the Second Circuit vacated the district court’s order and remanded the suit to the district court, directing it to consider the question of whether the suit should be dismissed for lack of jurisdiction. The district court granted the relator leave to amend the complaint for a seventh time. The relator filed the seventh amended complaint on November 30, 2020.
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.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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. Plaintiffs filed an amended complaint on August 21, 2020. Defendants filed a motion to dismiss the amended complaint, which the district court granted on March 15, 2021. Plaintiffs appealed the order to the United States Court of Appeals for the Seventh Circuit on March 23, 2021.
On December 30, 2019, a group of independent pharmacies and a hospital filed a class action 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; MDL No. 16-MD-2724. The complaint seeks relief including treble damages, disgorgement, attorney fees, and costs in unspecified amounts.
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. The complaint seeks relief including damages, attorney fees, and costs in unspecified amounts. 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. On April 8, 2021, the court granted plaintiff’s motion for class certification.
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 in 2017 against the Company in this bankruptcy case seeks to recover 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 NDCHealth Corporation dba RelayHealth (“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. Subject to final court approval, plaintiffs and RelayHealth reached an agreement in June 2020 to resolve the class action lawsuits and RelayHealth paid into escrow an amount not material in the context of the Company’s overall financial results. The settlement does not include any admission of liability, and RelayHealth expressly denies wrongdoing.
In July 2020, the Company was served with a first amended qui tam complaint filed in the United States District Court for the Southern District of New York by a relator on behalf of the U.S., 27 states and the District of Columbia against McKesson Corporation, McKesson Specialty Distribution LLC, and McKesson Specialty Care Distribution Corporation, alleging that defendants violated the Anti-Kickback Statute, federal False Claims Act, and various state false claims statutes by providing certain business analytical tools to oncology practice customers, United States ex rel. Hart v. McKesson Corporation, et al., 15-cv-00903-RA. The U.S. and the named states have declined to intervene in the case. The complaint seeks relief including damages, treble damages, civil penalties, attorney fees, and costs of suit, all in unspecified amounts.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
III. Government Subpoenas and Investigations
From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. 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. The following are examples of the type of subpoenas or requests the Company receives from time to time.
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 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.
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.
On November 21, 2016, the Belgian Competition Authority carried out inspections at the premises of several Belgian wholesalers, including Belmedis SA, which was subsequently acquired by the Company. Pharma Belgium NV is also part of the investigation. On April 23, 2021, McKesson received correspondence from the Belgian Competition Authority seeking civil penalties.
IV. State Opioid Statutes
Legislative, regulatory or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that it may not be able to predict. For example, in April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the creation of an aggregate $100 million annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids in New York. The initial surcharge payment would have been due on January 1, 2019 for opioids sold or distributed during calendar year 2017. On July 6, 2018, the Healthcare Distribution Alliance filed a lawsuit challenging the constitutionality of the law and seeking an injunction against its enforcement. On December 19, 2018, the U.S. District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing the State of New York from enforcing the law. The State appealed that decision. On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision on procedural grounds. The Company has accrued a $50 million pre-tax charge ($37 million after-tax) as its estimated share of the OSA surcharge for calendar years 2017 and 2018. This OSA provision was recognized in “Selling, distribution, general, and administrative expenses” in the Consolidated Statement of Operations for the year ended March 31, 2021 and in “Other accrued liabilities” in the Consolidated Balance Sheet as of March 31, 2021. The State of New York adopted an excise tax on sales of opioids in the State, which became effective July 1, 2019. The law adopting the excise tax made clear that the OSA does not apply to sales or distributions occurring after December 31, 2018. The Healthcare Distribution Alliance filed a petition for panel rehearing, or, in the alternative, for rehearing en banc with the U.S. Court of Appeals for the Second Circuit; that petition was denied on December 18, 2020. On February 12, 2021, the Court of Appeals for the Second Circuit granted a motion by the Healthcare Distribution Alliance to stay its mandate pending the filing and disposition of a petition for writ of certiorari before the U.S. Supreme Court. The due date for filing such a petition is May 17, 2021.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
V. 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 2021 and March 2051. 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 $1.4 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 $28 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.
VI. Value Added Tax Assessments
The Company operates in various countries outside the U.S. which collect value added taxes (“VAT”). The determination of the manner in which a VAT applies to the Company’s 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.
VII. Antitrust Settlements
Numerous lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. These lawsuits are typically brought as class actions. The Company has not been named a plaintiff in any of these class action lawsuits, but has been a member of the class of those who purchased directly from the pharmaceutical manufacturers. Some of these class action lawsuits have settled in the past with the Company receiving proceeds, including $181 million, $22 million, and $202 million in 2021, 2020, and 2019, respectively, which were included in “Cost of sales” in the Consolidated Statements of Operations.
VIII. 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.
20. Stockholders' Equity
Each share of the Company’s outstanding common stock is permitted one vote on proposals presented to stockholders and is entitled to share equally in any dividends declared by the Company’s Board of Directors (the “Board”).
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In July 2020, the quarterly dividend was raised from $0.41 to $0.42 per common share for dividends declared on or after such date by the Board. Dividends were $1.67 per share in 2021, $1.62 per share in 2020, and $1.51 per share in 2019. 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 combinations of such methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. 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) | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | |||||||||||||||||
| Balance, March 31, 2018 | $ | 1,096 | ||||||||||||||||||
| Shares repurchase plans authorized in May 2018 | 4,000 | |||||||||||||||||||
| Shares repurchased - Open market | 10.4 | $ | 132.14 | (1,377) | ||||||||||||||||
| Shares repurchased - ASR | 2.1 | $ | 117.98 | (250) | ||||||||||||||||
| Balance, March 31, 2019 | 3,469 | |||||||||||||||||||
| Shares repurchased - Open market | 9.2 | $ | 144.68 | (1,334) | ||||||||||||||||
| Shares repurchased - ASR | 4.7 | $ | 127.68 | (600) | ||||||||||||||||
| Balance, March 31, 2020 | 1,535 | |||||||||||||||||||
| Shares repurchase plans authorized in January 2021 | 2,000 | |||||||||||||||||||
| Shares repurchased - Open market (3) | 4.7 | $ | 160.33 | (750) | ||||||||||||||||
| Balance, March 31, 2021 | $ | 2,785 |
(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations. It also excludes shares related to the Company’s Split-off of the Change Healthcare JV as described below.
(2)The number of shares purchased reflects rounding adjustments.
(3)$8 million was accrued within “Other accrued liabilities” on the Company’s Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April.
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.
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, any excess of share repurchase price over par value is allocated 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, respectively, during 2019.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 Sheets. Following consummation of the exchange offer, on March 10, 2020, SpinCo merged with and into Change with 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. See Note 2, “Investment in Change Healthcare Joint Venture,” for more information.
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) | 2021 | 2020 | 2019 | ||||||||||||||
| Foreign currency translation adjustments: (1) | |||||||||||||||||
| Foreign currency translation adjustments arising during period, net of income tax expense of nil, nil, and nil (2) | $ | 312 | $ | (151) | $ | (431) | |||||||||||
| Reclassified to income statement, net of income tax expense of nil, nil, and nil (3) | 47 | — | — | ||||||||||||||
| 359 | (151) | (431) | |||||||||||||||
| 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 $62, $(30), and $(71) | (175) | 85 | 241 | ||||||||||||||
| Reclassified to income statement, net of income tax expense of nil, nil, and nil | — | — | — | ||||||||||||||
| (175) | 85 | 241 | |||||||||||||||
| Unrealized gains (losses) on cash flow hedges: | |||||||||||||||||
| Unrealized gains (losses) on cash flow hedges arising during period, net of income tax (expense) benefit of $6, $(12), and $(4) | (36) | 86 | 24 | ||||||||||||||
| Reclassified to income statement, net of income tax expense of nil, nil, and nil | — | — | — | ||||||||||||||
| (36) | 86 | 24 | |||||||||||||||
| 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 $2, $(8), and $5 (5) | 9 | 27 | (51) | ||||||||||||||
| Amortization of actuarial loss, prior service cost and transition obligation, net of income tax benefit of $1, $1, and nil (6) | — | 2 | 9 | ||||||||||||||
| Foreign currency translation adjustments and other, net of income tax expense of nil, nil, and nil | (11) | 6 | 10 | ||||||||||||||
| Reclassified to income statement, net of income tax expense of $9, $33, and nil (3) (7) | 24 | 94 | — | ||||||||||||||
| 22 | 129 | (32) | |||||||||||||||
| Other comprehensive income (loss), net of tax | $ | 170 | $ | 149 | $ | (198) |
(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, and its operations in Canada into the Company’s reporting currency, U.S. dollars.
(2)2021, 2020, and 2019 include net foreign currency translation adjustments of $(60) million, $1 million, and $(61) million, respectively, attributable to noncontrolling and redeemable noncontrolling interests.
(3)2021 primarily includes adjustments for amounts related to the contribution of the Company’s German pharmaceutical wholesale business to a joint venture, as discussed in more detail in Financial Note 3, “Held for Sale.” These amounts were included in the current and prior periods calculation of charges to remeasure the assets and liabilities held for sale to fair value less costs to sell recorded within Operating expenses in the Consolidated Statements of Operations.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(4)2021, 2020, and 2019 include foreign currency adjustments of $(118) million, $39 million, and $259 million, respectively, on the net investment hedges from the Euro and British pound sterling-denominated notes. 2021, 2020, and 2019 also include foreign currency adjustments of $(119) million, $76 million, and $53 million, respectively, on the net investment hedges from the cross-currency swaps.
(5)The 2021 and 2020 net actuarial gains of $8 million and $2 million, respectively, and 2019 net actuarial loss of $5 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 benefit (expense)” in the Consolidated Statements of Operations.
(7)2020 primarily reflects a reclassification of losses in 2020 upon the termination of the Plan from “Accumulated other comprehensive loss” to “Other income, net” in the Company’s Consolidated Statement of Operations.
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 Loss | ||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 312 | (175) | (36) | (2) | 99 | ||||||||||||||||||||||||
| Amounts reclassified to earnings and other | 47 | — | — | 24 | 71 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | 359 | (175) | (36) | 22 | 170 | ||||||||||||||||||||||||
| Less: amounts attributable to noncontrolling and redeemable noncontrolling interests | (60) | (1) | — | 8 | (53) | ||||||||||||||||||||||||
| Other comprehensive income (loss) attributable to McKesson | 419 | (174) | (36) | 14 | 223 | ||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | (1,361) | $ | (36) | $ | 13 | $ | (96) | $ | (1,480) |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
21. 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. During 2019, the Company paid cash of $100 million to the Foundation to settle an outstanding pledge it made in 2018. During the fourth quarter of 2020, the Company also 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 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 $178 million, $141 million, and $137 million, are included in the Consolidated Statements of Operations for the years ended March 31, 2021, 2020, and 2019, respectively, and receivables related to these transactions included in the Consolidated Balance Sheets were not material as of March 31, 2021 and 2020.
In 2021, 2020, and 2019, the Company’s pharmaceutical sales to one of its equity method investees in the U.S. Pharmaceutical segment totaled $111 million, $60 million, and $34 million, respectively. Trade receivables related to these transactions from this investee were not material as of March 31, 2021 and 2020.
Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for information regarding related party balances and transactions with Change and the Change Healthcare JV.
22. Segments of Business
Commencing with the second quarter of 2021, the Company implemented a new segment reporting structure which resulted in four reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and RxTS. Other, for retrospective periods presented, consists of the Company’s equity method investment in the Change Healthcare JV, which was split-off from McKesson in the fourth quarter of 2020. All prior segment information has been recast to reflect the Company’s new segment structure and current period presentation. The organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. 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 U.S. Pharmaceutical segment distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
The International segment includes the Company’s operations in Europe and Canada, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. The Company’s operations in Europe provide distribution and services to wholesale, institutional, and retail customers in 13 European countries where it owns, partners, or franchises with retail pharmacies and operates through two businesses: Pharmaceutical Distribution and Retail Pharmacy. The Company’s Canada operations deliver vital medicines, supplies, and information technology solutions throughout Canada and includes Rexall retail pharmacies. McKesson Europe was previously reflected as the European Pharmaceutical Solutions reportable segment and McKesson Canada was previously included in Other.
The Medical-Surgical Solutions segment provides medical-surgical supply distribution, logistics, and other services to healthcare providers, including physician offices, surgery centers, nursing homes, hospital reference labs, and home health care agencies. This segment offers more than 275,000 national brand medical-surgical products as well as McKesson’s own line of high-quality products through a network of distribution centers within the United States.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The RxTS segment brings together existing businesses, including CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation, including Multi-Client Central Fill as a Service, to serve the Company’s biopharma and life sciences partners and patients. RxTS works across the healthcare delivery system to connect pharmacies, providers, payers, and biopharma for next-generation patient access and adherence solutions. RxCrossroads was previously included in the former U.S. Pharmaceutical and Specialty Solutions reportable segment and CoverMyMeds, RelayHealth, and McKesson Prescription Automation were previously included in Other.
Other, for retrospective periods presented consists of the Company’s investment in the Change Healthcare JV, which was split-off from the Company in the fourth quarter of 2020.
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) | 2021 | 2020 | 2019 | ||||||||||||||
| Segment revenues (1) | |||||||||||||||||
| U.S. Pharmaceutical | $ | 189,274 | $ | 181,700 | $ | 166,189 | |||||||||||
| International | 35,965 | 38,341 | 38,023 | ||||||||||||||
| Medical-Surgical Solutions | 10,099 | 8,305 | 7,618 | ||||||||||||||
| Prescription Technology Solutions | 2,890 | 2,705 | 2,489 | ||||||||||||||
| Total revenues | $ | 238,228 | $ | 231,051 | $ | 214,319 | |||||||||||
| Segment operating profit (loss) (2) | |||||||||||||||||
| U.S. Pharmaceutical (3) | $ | 2,763 | $ | 2,745 | $ | 2,710 | |||||||||||
| International (4) | (37) | (161) | (1,903) | ||||||||||||||
| Medical-Surgical Solutions (5) | 707 | 499 | 455 | ||||||||||||||
| Prescription Technology Solutions (6) | 395 | 396 | 355 | ||||||||||||||
| Other (7) | — | (1,113) | (104) | ||||||||||||||
| Subtotal | 3,828 | 2,366 | 1,513 | ||||||||||||||
| Corporate expenses, net (8) | (8,645) | (973) | (639) | ||||||||||||||
| Interest expense | (217) | (249) | (264) | ||||||||||||||
| Income (loss) from continuing operations before income taxes | $ | (5,034) | $ | 1,144 | $ | 610 | |||||||||||
| Segment depreciation and amortization (9) | |||||||||||||||||
| U.S. Pharmaceutical | $ | 211 | $ | 208 | $ | 227 | |||||||||||
| International | 334 | 357 | 392 | ||||||||||||||
| Medical-Surgical Solutions | 130 | 136 | 118 | ||||||||||||||
| Prescription Technology Solutions | 87 | 85 | 90 | ||||||||||||||
| Corporate | 125 | 136 | 122 | ||||||||||||||
| Total depreciation and amortization | $ | 887 | $ | 922 | $ | 949 | |||||||||||
| Segment expenditures for long-lived assets (10) | |||||||||||||||||
| U.S. Pharmaceutical | $ | 246 | $ | 109 | $ | 103 | |||||||||||
| International | 212 | 218 | 199 | ||||||||||||||
| Medical-Surgical Solutions | 57 | 36 | 116 | ||||||||||||||
| Prescription Technology Solutions | 22 | 23 | 14 | ||||||||||||||
| Corporate | 104 | 120 | 125 | ||||||||||||||
| Total expenditures for long-lived assets | $ | 641 | $ | 506 | $ | 557 |
(1)Revenues from services on a disaggregated basis represent less than 1% of the U.S. Pharmaceutical segment’s total revenues, less than 7% of the International segment’s total revenues, less than 2% of the Medical-Surgical Solutions segment’s total revenues, and approximately 39% of the RxTS segment’s total revenues. The International segment reflects foreign revenues. Revenues for the remaining three reportable segments are domestic.
(2)Segment operating profit (loss) includes gross profit, net of operating expenses, as well as other income (expense), net, for the Company’s reportable segments. For retrospective periods presented, Operating loss for Other reflects equity earnings and charges from the Company’s equity method investment in the Change Healthcare JV, which was split-off from McKesson in the fourth quarter of 2020.
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(3)The Company’s U.S. Pharmaceutical segment’s operating profit for 2021, 2020, and 2019 includes credits of $38 million, $252 million, and $210 million, respectively, related to the LIFO method of accounting for inventories. Operating profit for 2021, 2020, and 2019 also includes $181 million, $22 million, and $202 million, respectively, of cash receipts for the Company’s share of antitrust legal settlements. In addition, operating profit for 2021 includes a charge of $50 million recorded in connection with the Company’s estimated liability under the State of New York’s OSA, as further discussed in Note 19, “Commitments and Contingent Liabilities,” and operating profit for 2019 includes a charge of $61 million related to a customer bankruptcy.
(4)The Company’s International segment’s operating loss for 2021 and 2020 includes charges of $58 million and $275 million (both pre-tax and after-tax), respectively, to remeasure to fair value the assets and liabilities of the Company’s German pharmaceutical wholesale business which was contributed to a joint venture, as further discussed in Financial Note 3, “Held for Sale.” Operating loss for 2021, 2020, and 2019 includes long-lived asset impairment charges of $115 million, $112 million, and $245 million, respectively, primarily related to retail pharmacy businesses in Canada and Europe, as discussed in more detail in Financial Note 4, “Restructuring, Impairment, and Related Charges.” Operating loss for 2021 and 2019 includes goodwill impairment charges of $69 million and $1.8 billion (both pre-tax and after-tax), respectively, as discussed in more detail in Financial Note 12, “Goodwill and Intangible Assets, Net.” In addition, operating loss for 2019 includes 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.
(5)The Company’s Medical-Surgical Solutions segment’s operating profit for 2021 includes charges totaling $136 million on certain personal protective equipment and other related products due to inventory impairments and excess inventory.
(6)The Company’s RxTS segment’s operating profit for 2019 includes a gain of $56 million recognized from the sale of an equity investment.
(7)Operating loss for Other for 2020 includes an impairment charge of $1.2 billion and a dilution loss of $246 million associated with the Company’s investment in the Change Healthcare JV, partially offset by a net gain of $414 million (pre-tax and after-tax) related to the separation of its interest in the Change Healthcare JV completed during the fourth quarter of 2020. Operating loss for 2019 includes a credit of $90 million for the derecognition of the TRA liability payable to the shareholders of Change. Operating loss for 2020 and 2019 also includes the Company’s proportionate share of loss from the Change Healthcare JV of $119 million and $194 million, respectively.
(8)Corporate expenses, net, for 2021 includes a charge of $8.1 billion related to the estimated liability for opioid-related claims, as discussed in more detail in Financial Note 19, “Commitments and Contingent Liabilities." Corporate expenses, net, for 2021 also includes net gains of $133 million associated with certain of the Company’s equity investments and a net gain of $131 million recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to the Company’s controlled substances monitoring program. Corporate expenses, net, for 2020 includes settlement charges of $122 million for the termination of the Company’s defined benefit pension plan and a settlement charge of $82 million related to opioid claims.
(9)Amounts primarily consist of amortization of acquired intangible assets purchased in connection with business acquisitions and capitalized software for internal use as well as depreciation and amortization of property, plant, and equipment, net.
(10)Long-lived assets consist of property, plant, and equipment, net and capitalized software.
Segment assets and long-lived assets by geographic areas were as follows:
| March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Segment assets | |||||||||||
| U.S. Pharmaceutical | $ | 35,236 | $ | 33,541 | |||||||
| International | 14,987 | 14,994 | |||||||||
| Medical-Surgical Solutions | 5,986 | 5,395 | |||||||||
| Prescription Technology Solutions | 3,446 | 3,786 | |||||||||
| Corporate | 5,360 | 3,531 | |||||||||
| Total assets | $ | 65,015 | $ | 61,247 | |||||||
| Long-lived assets (1) | |||||||||||
| United States | $ | 2,110 | $ | 1,873 | |||||||
| Foreign | 984 | 892 | |||||||||
| Total long-lived assets | $ | 3,094 | $ | 2,765 |
(1)Long-lived assets consist of property, plant, and equipment, net and capitalized software.
McKESSON CORPORATION
FINANCIAL NOTES (Concluded)
23. 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 2021 | |||||||||||||||||||||||
| Revenues | $ | 55,679 | $ | 60,808 | $ | 62,599 | $ | 59,142 | |||||||||||||||
| Gross profit | 2,700 | 3,000 | 3,151 | 3,297 | |||||||||||||||||||
| Income (loss) after income taxes: | |||||||||||||||||||||||
| Continuing operations | $ | 495 | $ | 627 | $ | (6,174) | $ | 713 | |||||||||||||||
| Discontinued operations | (1) | — | — | — | |||||||||||||||||||
| Net income (loss) | $ | 494 | $ | 627 | $ | (6,174) | $ | 713 | |||||||||||||||
| Net income (loss) attributable to McKesson Corporation | $ | 444 | $ | 577 | $ | (6,226) | $ | 666 | |||||||||||||||
| Earnings (loss) per common share attributable to McKesson Corporation (1) | |||||||||||||||||||||||
| Diluted (2) | |||||||||||||||||||||||
| Continuing operations | $ | 2.72 | $ | 3.54 | $ | (39.03) | $ | 4.15 | |||||||||||||||
| Discontinued operations | — | — | — | — | |||||||||||||||||||
| Total | $ | 2.72 | $ | 3.54 | $ | (39.03) | $ | 4.15 | |||||||||||||||
| Basic | |||||||||||||||||||||||
| Continuing operations | $ | 2.74 | $ | 3.56 | $ | (39.03) | $ | 4.19 | |||||||||||||||
| Discontinued operations | — | — | — | — | |||||||||||||||||||
| Total | $ | 2.74 | $ | 3.56 | $ | (39.03) | $ | 4.19 | |||||||||||||||
| Fiscal 2020 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||
| Revenues | $ | 55,728 | $ | 57,616 | $ | 59,172 | $ | 58,535 | |||||||||||||||
| Gross profit | 2,787 | 2,867 | 3,033 | 3,336 | |||||||||||||||||||
| Income (loss) after income taxes: | |||||||||||||||||||||||
| Continuing operations | $ | 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 (1) | |||||||||||||||||||||||
| Diluted (2) | |||||||||||||||||||||||
| 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)Certain computations may reflect rounding adjustments.
(2)As a result of the Company’s reported net loss for the third quarter of 2021 and the second quarter of 2020, potentially dilutive securities were excluded from the per share computations for those quarters due to their antidilutive effect.
McKESSON CORPORATION
Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.