10-K 1 mck_10kx3312014.htm 10-K MCK_10K_3.31.2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2014
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 1-13252
McKESSON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
94-3207296
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Post Street, San Francisco, California
 
94104
(Address of principal executive offices)
 
(Zip Code)
(415) 983-8300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
 
(Name of each exchange on which registered)
Common stock, $0.01 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 
Yes  ¨    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 30, 2013, was approximately $29.4 billion.
Number of shares of common stock outstanding on April 30, 2014: 230,576,753
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



McKESSON CORPORATION

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McKESSON CORPORATION

PART I
Item 1.
Business.
General
McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns), is a Fortune 14 corporation that delivers pharmaceuticals, medical supplies and healthcare information technology that make healthcare safer while reducing costs.
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act,”) are available free of charge on our website (www.mckesson.com under the “Investors — Financial Information — SEC Filings” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC” or the “Commission”). The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.
The public may also read or copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The address of the website is www.sec.gov.
Business Segments
We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs and equipment and health and beauty care products throughout North America and internationally. This segment includes our International pharmaceutical distribution and services business which reflects the results of operations from our acquisition of Celesio AG (“Celesio”) in February 2014. This segment provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, and practice management, technology, clinical support and business solutions to oncology and other specialty practices operating in the community setting. This segment also provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers through a network of distribution centers within the U.S. In addition, this segment sells financial, operational and clinical solutions for pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing and other services. In September 2013, we sold our 49% interest in Nadro, S.A. de C.V. (“Nadro”), a pharmaceutical distributor in Mexico. Prior to the sale, financial results for Nadro were included in this segment.
The McKesson Technology Solutions segment includes McKesson Health Solutions, which includes our InterQual® clinical criteria solution, claims payment solutions and network performance tools. This segment also delivers enterprise-wide clinical, patient care, financial, supply chain, strategic management software solutions, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations. This segment’s customers include hospitals, physicians, homecare providers, retail pharmacies and payers primarily from North America.
Net revenues for our segments for the last three years were as follows:
 
 
Years Ended March 31,
(Dollars in billions)
 
2014
 
2013
 
2012
Distribution Solutions
 
$
134.4

98
%
 
$
119.1

98
%
 
$
119.4

98
%
Technology Solutions
 
3.2

2
%
 
3.0

2
%
 
2.9

2
%
Total
 
$
137.6

100
%
 
$
122.1

100
%
 
$
122.3

100
%


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McKESSON CORPORATION

Distribution Solutions Segment
McKesson Distribution Solutions consists of the following businesses: North America pharmaceutical distribution and services, International pharmaceutical distribution and services and Medical Surgical distribution and services.
North America pharmaceutical distribution and services
Our North America pharmaceutical distribution and services business is comprised of the following business units: U.S. Pharmaceutical Distribution, McKesson Specialty Health, McKesson Canada, and McKesson Pharmacy Systems and Automation.
U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and/or other healthcare-related products to customers throughout the United States in three primary customer channels: (1) retail national accounts (including national and regional chains, food/drug combinations, mail order pharmacies and mass merchandisers); (2) independent retail pharmacies; and (3) institutional healthcare providers (including hospitals, health systems, integrated delivery networks, clinics and alternate site providers). This business also provides solutions and services to pharmaceutical manufacturers. This business sources materials and products from a wide-array of different suppliers, including certain generic pharmaceutical drugs produced through a contract-manufacturing program.
Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through a network of 29 distribution centers, as well as a primary redistribution center, a strategic redistribution center and two repackaging facilities, serving all 50 states and Puerto Rico. We invest in technology and other systems at all of our distribution centers to enhance safety and reliability and provide the best product availability for our customers. For example, in most of our distribution centers we use Acumax® Plus, an award-winning technology that integrates and tracks all internal inventory-related functions such as receiving, put-away and order fulfillment. Acumax® Plus uses bar code technology, wrist-mounted computer hardware and radio frequency signals to provide customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% adjusted accuracy. In addition, we offer Mobile ManagerSM, which integrates portable handheld technology with Acumax® Plus to give customers complete ordering and inventory control. We also offer McKesson ConnectSM, an internet-based ordering system that provides item lookup and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure customers have the right products at the right time for their facilities and patients.
To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology — an analytical approach that emphasizes setting high-quality objectives, collecting data and analyzing results to a fine degree in order to improve processes, reduce costs and minimize errors. We continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.
The major offerings of the McKesson U.S. Pharmaceutical Distribution business by customer group can be categorized as retail national accounts, institutional healthcare providers and independent retail pharmacies.
Retail National Accounts — Business solutions that help national account customers increase revenues and profitability. Solutions include:
Central FillSM — Prescription refill service that enables pharmacies to more quickly refill prescriptions remotely, more accurately and at a lower cost, while reducing inventory levels and improving customer service.
Redistribution Centers — Two facilities totaling over 750,000 square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologics. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery.
McKesson SynerGx® — Generic pharmaceutical purchasing program and inventory management that helps pharmacies maximize their cost savings with a broad selection of generic drugs, low pricing and one-stop shopping.
EnterpriseRx® — A Software as a Service (SaaS) pharmacy management system, that allows large retail chain, health system and retail independent pharmacies to meet demand for prescriptions while maximizing profits and optimizing operations.
RxPakSM — Bulk-to-bottle repackaging service that leverages our purchasing scale and supplier relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce working capital investment.
Inventory Management — An integrated solution comprising forecasting software and automated replenishment technologies that reduce inventory-carrying costs.
ExpressRx Track™ — Pharmacy automation solution featuring state-of-the-art robotics, upgraded imaging and expanded vial capabilities, and industry-leading speed and accuracy in a radically small footprint.
Supplylogix® — develops and delivers practical supply chain intelligence solutions for pharmacy and related businesses and services a wide array of healthcare providers nationwide.

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McKESSON CORPORATION

Institutional Healthcare Providers — Electronic ordering/purchasing and supply chain management systems that help customers improve financial performance, increase operational efficiencies and deliver better patient care. Solutions include:

Fulfill-RxSM — Ordering and inventory management system that empowers hospitals to optimize the often complicated and disjointed processes related to unit-based cabinet replenishment and inventory management.
Asset Management — Award-winning inventory optimization and purchasing management program that helps institutional providers lower costs while ensuring product availability.
SKY Packaging — Blister-format packaging containing the most widely prescribed dosages and strengths in generic oral-solid medications. SKY Packaging enables acute care, long-term care and institutional pharmacies to provide cost-effective, uniform packaging.
McKesson Plasma and BioLogics — A full portfolio of plasma-derivatives and biologic products.
McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, low pricing and one-stop shopping.
McKesson 340B Solution Suite and Macro Helix® — Solutions that help providers manage, track and report on medication replenishment associated with the federal 340B Drug Pricing Program.
Independent Retail Pharmacies — Solutions for managed care contracting, branding and advertising, merchandising, purchasing, operational efficiency and automation that help independent pharmacists focus on patient care while improving profitability. Solutions include:
Health Mart® — Health Mart® is a national network of more than 3,000 independently-owned pharmacies and is one of the industry’s most comprehensive pharmacy franchise programs. Health Mart® provides franchisees support for managed care contracting, branding and local marketing solutions, the Health Mart private label line of products, merchandising solutions and programs for enhanced patient support.
AccessHealth® — Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow.
McKesson Reimbursement AdvantageSM (“MRA”) — MRA is one of the industry’s most comprehensive reimbursement optimization packages, comprising financial services (automated claim resubmission), analytic services and customer care.
McKesson OneStop Generics® — described above.
EnterpriseRx® — described above.
Sunmark® — Complete line of more than 700 products that provide retail independent pharmacies with value-priced alternatives to national brands.
FrontEdge™ — Strategic planning, merchandising and price maintenance program that helps independent pharmacies maximize store profitability.
McKesson Sponsored Clinical Services (SCS) Network — Access to patient-support services that allow pharmacists to earn service fees and develop stronger patient relationships.
McKesson Specialty Health: This business provides solutions for oncology and other specialty practices operating in communities across the country, as well as for pharmaceutical and biotech suppliers who manufacture specialty drugs and vaccines, payers and hospitals. Through expertise in specialty drug distribution, commercialization, revenue cycle and practice management and reimbursement support, McKesson Specialty Health seeks to empower the community patient care delivery system and facilitates collaboration among community healthcare providers, drug manufacturers and payers. We provide direct-to-physician specialty distribution services, ensuring supply chain safety and delivery of specialty drugs in manufacturer recommended conditions. Third party logistics, or 3PL, are offered primarily for vaccine distribution, including our exclusive distributor relationship in the Centers for Disease Control and Prevention’s (CDC) Vaccines for Children program. When classifying a pharmaceutical product or service as “specialty,” we consider the following factors: high cost; diseases requiring complex treatment regimens such as cancer and rheumatoid arthritis; special handling, storage and delivery requirements; and, in some cases, exclusive distribution arrangements. This business also provides practice management and other consulting services to healthcare providers, pharmaceutical manufacturers and third party payers supporting the clinical research and distribution of specialty pharmaceutical products and services. Our use of the term “specialty” to define a portion of our distribution business may not be comparable to that used by other industry participants, including our competitors.

5

McKESSON CORPORATION

We also offer our industry leading iKnowMedSM and iKnowMed Generation 2 Electronic Health Record, Lynx® integrated technologies, and clinical and practice management tools, all of which help community practices achieve better business health-improving inventory management and practice workflow and reimbursement processes, as well as delivering business efficiencies and clinical-decision support. McKesson Specialty Health works with manufacturers across all phases of the product development and commercialization lifecycle, including clinical research, to optimize delivery of complex medication to patients. Through custom distribution and safety programs, we help support appropriate product utilization, as well as the development and management of Risk Evaluation Mitigation Strategies reimbursement, healthcare informatics and patient access programs, and we enable manufacturers to deliver cost effective patient access to needed therapies. McKesson Specialty Health supports The US Oncology Network and US Oncology Research. The US Oncology Network is one of the nation’s largest networks of community-based oncology physicians dedicated to advancing high-quality, evidence-based cancer care. US Oncology Research is one of the nation’s largest research networks, specializing in Phase I — Phase IV oncology clinical trials.
McKesson Canada: McKesson Canada is one of the largest pharmaceutical distributors in Canada. McKesson Canada, through its network of 16 distribution centers, provides logistics and distribution to more than 800 manufacturers — delivering their products to retail pharmacies, hospitals, long-term care centers, clinics and institutions throughout Canada. Beyond pharmaceutical distribution, logistics and order fulfillment, McKesson Canada also provides automation solutions to its retail and hospital customers, dispensing millions of doses each year. In partnership with other McKesson businesses, McKesson Canada provides a full range of services to Canadian manufacturers and healthcare providers, contributing to the quality and safety of care for patients. In March 2012, we acquired substantially all of the assets of Drug Trading Company Limited, the independent banner business of the Katz Group Canada Inc. (“Katz Group”), and Medicine Shoppe Canada Inc., the franchise business of the Katz Group. The acquisition of the assets from the Drug Trading Company Limited consisted of a marketing and purchasing arm of independently owned pharmacies in Canada. The acquisition of Medicine Shoppe Canada Inc. consisted of the franchise business of providing services to independent pharmacies in Canada.
McKesson Pharmacy Systems and Automation: This business supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies. Its primary approach is to provide the customer with a pharmacy management system that best suits the particular needs of their business operation. This objective is achieved by offering three pharmacy management products: EnterpriseRx®, an industry-leading, Software as a Service or SaaS-based management system that intelligently integrates all workflow and communication processes within the pharmacy environment; Pharmaserv®, a fully integrated, server-based pharmacy management system that gives the customer complete control of their pharmacy data; and PharmacyRx, a cost-effective, SaaS-based pharmacy management system that can be installed quickly and makes processing prescriptions fast and easy. These offerings allow large retail chain, hospital outpatient pharmacies and small and independent pharmacies to meet the high demand for prescriptions while maximizing profits and optimizing operations. We also own a 39% interest in Parata Systems, LLC (“Parata”), which sells automated pharmacy and supply management systems and services to retail and institutional pharmacies.
International pharmaceutical distribution and services
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired. Upon the acquisition, our ownership of Celesio’s fully diluted common shares was 75.6% and, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world.
Celesio’s pharmaceutical wholesale business supplies pharmaceuticals and other healthcare-related products generally to retail pharmacies and institutional customers. Celesio’s wholesale network consisting of 133 branches delivers to over 65,000 pharmacies daily in ten European countries and Brazil. Celesio functions as a vital link between manufacturers and pharmacies in supplying pharmaceuticals to patients, and generally procures the medicines approved in each country as well as other products sold in pharmacies directly from the manufacturers.  Celesio stores pharmaceutical and other products at regional wholesale branches with the support of its efficient warehousing management system.  With a refined distribution system, Celesio strives to ensure rapid and reliable delivery directly to its pharmacy customers.
Celesio’s retail pharmacy business serves patients and consumers in six European countries directly through 2,175 of its own pharmacies and almost 4,300 participant pharmacies operating under brand partnership arrangements.  Celesio provides non-prescription products and medical services in addition to traditional prescription pharmaceuticals. Celesio operates under the Lloyds Pharmacy brand in the United Kingdom, which accounted for approximately 66% of the total volume of Celesio’s retail pharmacy business for its fiscal year ended December 31, 2013.

6

McKESSON CORPORATION

Medical-Surgical distribution and services
This business provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers including physicians’ offices, surgery centers, extended care facilities, homecare and occupational health sites through a network of distribution centers within the U.S. This business is a leading provider of supplies to the full range of alternate-site healthcare facilities, including physicians’ offices, clinics and surgery centers (primary care), long-term care and homecare sites (extended care). Through a variety of products and services geared towards the supply chain, our Medical-Surgical Distribution business is focused on helping its customers operate more efficiently while providing one of the industry’s most extensive product offerings, including our own private label line. In February 2013, we acquired all of the outstanding shares of PSS World Medical, Inc. (“PSS World Medical”) of Jacksonville, Florida. The unified organization brings extensive distribution capabilities, deep product and technology expertise and a broad portfolio of business services to an expanding industry, helping our customers improve efficiency and productivity, and deliver better care.
Technology Solutions Segment
Our Technology Solutions segment provides a comprehensive portfolio of software and services to help healthcare organizations improve quality and patient safety, reduce the cost and variability of care and better manage their resources and revenue stream. This segment also includes our InterQual® clinical criteria solution, claims payment processing solutions and network performance tools. The Technology Solutions segment markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payers.
The product portfolio for the Technology Solutions segment is designed to address a wide array of healthcare clinical and business performance needs ranging from medication safety and information access to revenue cycle management, resource utilization and physician adoption of electronic health records (“EHR”). Analytics software enables organizations to measure progress as they automate care processes for optimal clinical outcomes, business and operating results and regulatory compliance. To ensure that organizations achieve the maximum value for their information technology investment, we also offer a wide range of services to support the implementation and use of solutions as well as assist with business and clinical redesign, process re-engineering and staffing (both information technology and back-office).
Technology Solutions consists of the following businesses: McKesson Health Solutions, Connected Care and Analytics, Imaging and Workflow Solutions, Business Performance Services and Enterprise Information Solutions. In the first quarter of 2014, we committed to a plan to sell our Hospital Automation and International Technology businesses and as a result, these businesses, which had previously been included in our Technology Solutions segment, are reported as discontinued operations. During the third quarter of 2014, we sold our Hospital Automation business.
McKesson Health Solutions: This suite of services and software products is designed to manage the cost and quality of care for payers, providers, hospitals and government organizations. Solution sets include:
InterQual® Criteria for clinical decision support and utilization management;
Claims payment solutions to facilitate accurate and efficient medical claim payments;
Business intelligence tools for measuring, reporting and improving clinical and financial performance;
Network management tools to enable health plans to transform the performance of their networks; and
RelayHealth® financial solutions to facilitate communication between healthcare providers and patients, and to aggregate data for claims management and trend analysis, and optimize revenue cycle management processes.
Connected Care and Analytics: Through our vendor-neutral RelayHealth® and its intelligent network, the Company provides health information exchange solutions that streamline clinical and administrative communication between patients, providers, payers, pharmacies, manufacturers, government entities and financial institutions. RelayHealth® helps to accelerate the delivery of high-quality care and improve financial performance through online consultation of physicians by patients, electronic prescribing by physicians, and point-of-service resolution of pharmacy claims by payers. We provide disease management programs to improve the health status and health outcomes of patients with chronic conditions, nurse advice services to provide health information and recommend appropriate levels of care, and clinical and analytical software to support utilization, case and disease management workflows and a comprehensive solution for homecare. We also provide performance management solutions designed to enhance an organization’s ability to plan and optimize quality care delivery. Enterprise visibility and performance analytics provide business intelligence that enables providers to manage capacity, outcomes, productivity and patient flow.

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McKESSON CORPORATION

Imaging and Workflow Solutions: We offer medical imaging and information management systems for healthcare enterprises, including a picture archiving communications system, a radiology information system and a comprehensive cardiovascular information system. Our enterprise-wide approach to medical imaging enables organizations to take advantage of specialty-specific workstations while building an integrated image repository that manages all of the images and information captured throughout the care continuum.
Business Performance Services: We help providers focus their resources on delivering healthcare while managing their revenue cycle operations and information technology through a comprehensive suite of managed services. Services include full and partial revenue cycle outsourcing, remote hosting and business office administration. We also provide a complete solution for physician practices of all sizes, whether they are independent or employed, that includes software, revenue cycle outsourcing and connectivity services. Software solutions include practice management and EHR software for physicians of every size and specialty. Our physician practice offering includes outsourced billing, collection, data input, medical coding, billing, contract management, cash collections, accounts receivable management and extensive reporting of metrics related to the physician practice. We also offer a full suite of physician and hospital consulting services, including financial management, coding and compliance services, revenue cycle services and strategic services.
Enterprise Information Solutions:  We provide comprehensive clinical and financial information systems for hospitals and health systems of all sizes. These systems are designed to improve the safety and quality of patient care and improve clinical, financial and operational performance. Clinical functionality includes a data repository, care planning, physician order entry and documentation, nursing documentation with bar-coded medication administration, pharmacy, surgical management, emergency department and ambulatory EHR systems, and a Web-based physician portal. Revenue management solutions are designed to improve financial performance by reducing days in accounts receivable, preventing insurance claim denials, reducing costs and improving productivity. Solutions include online patient billing, contract management, electronic claims processing and coding compliance checking. These solutions streamline patient access and help organizations to forecast financial responsibility for constituents before and during care, allowing providers to collect their reimbursements more quickly and at a lower cost. We also provide professional services to help customers achieve business results from their software or automation investment. A wide array of service options is available, including consulting for business and/or clinical process improvement and re-design as well as implementation, project management, technical and education services relating to all products in the Technology Solutions segment as well as providing the technical infrastructure designed to maximize application accessibility, availability, security and performance. In addition, workflow management solutions assist caregivers with staffing and maintaining labor rule continuity between scheduling, time and attendance and payroll. We also offer a comprehensive supply chain management solution that integrates enterprise resource planning applications, including financials, materials, human resources/payroll, scheduling, point of use, surgical and anesthesia services and enterprise-wide analytics.
Business Combinations, Sale of an Equity Investment and Discontinued Operations
We have undertaken additional strategic initiatives in recent years designed to further focus on our core healthcare businesses and enhance our competitive position. We expect to continue to undertake such strategic initiatives in the future. Our Celesio acquisition and these additional initiatives are detailed in Financial Notes 2, 3 and 5, “Business Combinations,” “Discontinued Operations” and “Impairment and Sale of an Equity Investment,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Competition
In every area of healthcare distribution operations, our Distribution Solutions segment faces a highly competitive global environment with strong competition, both in price and service, from international, national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers of the segment, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by the segment. Price, quality of service, innovation and, in some cases, convenience to the customer are generally the principal competitive elements in this segment.
Our Technology Solutions segment experiences substantial competition from many firms, including other software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care management organizations, hardware vendors and internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered.

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McKESSON CORPORATION

Patents, Trademarks, Copyrights and Licenses
McKesson and its subsidiaries hold patents, copyrights, trademarks and trade secrets related to McKesson products and services. We pursue patent protection for our innovation, and obtain copyrights covering our original works of authorship, when such protection is advantageous. Through these efforts, we have developed a portfolio of patents and copyrights in the U.S. and worldwide. In addition, we have registered or applied to register certain trademarks and service marks in the U.S. and in foreign countries. Generally, our employees are required to execute agreements that prohibit the disclosure of confidential information and establish an obligation to assign to McKesson intellectual property that they create during their employment.
We believe that, in the aggregate, McKesson’s confidential information, patents, copyrights, and trademarks are important to its operations and market position, but we do not consider any of our businesses to be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same. We cannot guarantee that our intellectual property portfolio will be sufficient to deter misappropriation, theft, or misuse of our technology, nor that we can successfully enjoin infringers. We periodically receive notices alleging that our products or services infringe on third party patents and other intellectual property rights. These claims may result in McKesson entering settlement agreements, paying damages, discontinuing use or sale of accused products, or ceasing other activities. While the outcome of any litigation or dispute is inherently uncertain, we do not believe that the resolution of any of these infringement notices would have a material adverse impact on our results of operation.
We hold inbound licenses for certain intellectual property that is used internally, and in some cases, utilized in McKesson’s products or services. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and services, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our operations and products and services are not materially dependent on any single license or other agreement with any third party.
Other Information about the Business
Customers: During 2014, sales to our ten largest customers accounted for approximately 48% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation ("CVS"), accounted for approximately 16% of our total consolidated revenues. At March 31, 2014, trade accounts receivable from our ten largest customers were approximately 32% of total trade accounts receivable. Accounts receivable from CVS were approximately 12% of total trade accounts receivable. We also have agreements with group purchasing organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers. The accounts receivables balances are with individual members of the GPOs. Substantially all of these revenues and accounts receivable are included in our Distribution Solutions segment.
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than approximately 6% of our purchases in 2014. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers, on the whole, are good. The ten largest suppliers in 2014 accounted for approximately 46% of our purchases.
A significant portion of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. In addition, we have certain distribution arrangements with pharmaceutical manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our existing inventory at the new higher prices. For these manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to us, could have a material adverse impact on our gross profit margin.
Research and Development: Research and development costs were $456 million, $433 million and $402 million during 2014, 2013 and 2012. These costs do not include $40 million, $49 million and $47 million of costs capitalized for software held for sale during 2014, 2013 and 2012. Development expenditures are primarily incurred by our Technology Solutions segment. Our Technology Solutions segment’s product development efforts apply computer technology and installation methodologies to specific information processing needs of hospitals and other customers. We believe that a substantial and sustained commitment to such expenditures is important to the long-term success of this business. Additional information regarding our development activities is included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Environmental Regulation: Our operations are subject to regulations under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental laws.

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We are committed to maintaining compliance with all environmental laws applicable to our operations, products and services and to reducing our environmental impact across all aspects of our business. We meet this commitment through an environmental strategy and sustainability program.
We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Financial Note 22, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
The liability for environmental remediation and other environmental costs is accrued when the Company considers it probable and can reasonably estimate the costs. Environmental costs and accruals, including that related to our legacy chemical distribution operations, are presently not material to our operations or financial position. Although there is no assurance that existing or future environmental laws applicable to our operations or products will not have a material adverse impact on our operations or financial condition, we do not currently anticipate material capital expenditures for environmental matters. Other than the expected expenditures that may be required in connection with our legacy chemical distribution operations, we do not anticipate making substantial capital expenditures either for environmental issues, or to comply with environmental laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2014 and is not expected to be material in the next year.
Employees: On March 31, 2014, we employed approximately 42,800 persons and Celesio employed approximately 28,600 persons. We employed approximately 43,500 and 37,700 on March 31, 2013 and 2012.
Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 25, “Significant Accounting Policies” and “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report and the “Risk Factors” in Item 1A of Part I of this report, contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended. Some of these statements can be identified by use of forward-looking words such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans” or “estimates,” or the negative of these words, or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed in Item 1A of Part I of this report under “Risk Factors.” The reader should not consider the list to be a complete statement of all potential risks and uncertainties.
These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

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Item 1A.
Risk Factors.
The risks described below could have a material adverse impact on our financial position, results of operations, liquidity and cash flows. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed below. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider not to be material to our operations. The reader should not consider this list to be a complete statement of all risks and uncertainties.
Changes in the United States healthcare industry and regulatory environment could have a material adverse impact on our results of operations.
Our products and services are primarily intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. In recent years, the healthcare industry in the United States has changed significantly in an effort to reduce costs. These changes have included cuts in Medicare and Medicaid reimbursement levels, consolidation of pharmaceutical and medical-surgical supply distributors and the development of large, sophisticated purchasing groups. We expect the healthcare industry in the United States to continue to change and for healthcare delivery models to evolve in the future.
Changes in the healthcare industry’s or our pharmaceutical suppliers’ pricing, selling, inventory, distribution or supply policies or practices could significantly reduce our revenues and net income. Due to the diverse range of healthcare supply management and healthcare information technology products and services that we offer, such changes could have a material adverse impact on our results of operations, while not affecting some of our competitors who offer a narrower range of products and services.
The majority of our U.S. pharmaceutical distribution business’ agreements with manufacturers are structured to ensure that we are appropriately and predictably compensated for the services we provide; however, failure to successfully renew these contracts in a timely and favorable manner could have a material adverse impact on our results of operations. In addition, branded pharmaceutical price inflation can be the partial economic basis of some of our distribution business agreements with pharmaceutical manufacturers. If the frequency or rate of branded price increases slows, it could have a material adverse impact on our results of operations.
In addition, we distribute generic pharmaceuticals, which can be subject to both price deflation and price inflation. In recent years, our financial results have improved from our generic drug offerings combined with an increase in the number of generic drug formularies available in the marketplace. In fiscal year 2015, we anticipate the number of branded to generics conversions to increase as compared to the prior year. Continued volatility in the availability, pricing trends or reimbursement of these generic drugs, or significant fluctuations in the rate of increase in the number of generic drugs, could have a material adverse impact on our results of operations.
Generic drug manufacturers are increasingly challenging the validity or enforceability of patents on branded pharmaceutical products. During the pendency of these legal challenges, a generics manufacturer may begin manufacturing and selling a generic version of the branded product prior to the final resolution of its legal challenge over the branded product’s patent. To the extent we source, contract manufacture, and distribute such generic products, the brand-name company could assert infringement claims against us. While we generally obtain indemnification against such claims from generic manufacturers as a condition of distributing their products, there can be no assurances that these rights will be adequate or sufficient to protect us.
The healthcare industry is highly regulated, and further regulation of our distribution businesses and computer-related products and services could impose increased costs, negatively impact our profit margins, and the profit margins of our customers, delay the introduction or implementation of our new products, or otherwise negatively impact our business and expose the Company to litigation and regulatory investigations.

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Healthcare Fraud: We are subject to extensive and frequently changing local, state and federal laws and regulations relating to healthcare fraud, waste and abuse, and the government, both state and federal, continues to strengthen its position and scrutiny over practices involving fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare programs. Our relationships with pharmaceutical and medical-surgical product manufacturers and healthcare providers, as well as our provision of products and services to government entities, subject our business to laws and regulations on fraud and abuse, which among other things: (1) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or for inducing the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs; (2) impose a number of restrictions upon referring physicians and providers of designated health services under Medicare and Medicaid programs; and (3) prohibit the knowing submission of a false or fraudulent claim for payment to, and knowing retention of an overpayment by, a federal healthcare program such as Medicare and Medicaid. Many of the regulations applicable to us, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could become liable for damages and suffer civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid and other federal and state healthcare programs.
Reimbursements: Both our profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals, medical treatments and related services, or changing the methodology by which reimbursement levels are determined. For example, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “Affordable Care Act”), signed into law in 2010, revised the federal upper limits for Medicaid reimbursement for multiple source generic drugs available for purchase by retail community pharmacies on a nationwide basis to a limit of not less than 175% of the weighted average (determined on the basis of utilization) of the most recently reported monthly average manufacturer price (“AMP”) using a smoothing process. The Centers for Medicare and Medicaid Services (“CMS”) has proposed new rules for calculating AMP (“Revised AMP”) and is also offering states the option to replace traditional reimbursement metrics for certain drugs with alternatives such as the average acquisition cost (“AAC”) method or the national average drug acquisition cost benchmark (“NADAC”). Under AAC and NADAC, reimbursement is based on the actual acquisition costs from invoiced amounts and from a statistically validated cost of dispensing survey. States will have the option of using any of these metrics to determine appropriate Medicaid reimbursement to pharmacies for generic or brand drugs. We expect that the use of a Revised AMP benchmark or the use of an alternative reimbursement metric, such as AAC or NADAC, would result in a reduction in the Medicaid reimbursement rates to our customers for certain pharmaceuticals, which could indirectly impact the prices that we can charge our customers and cause corresponding declines in our profitability.
The federal government may adopt measures that could reduce Medicare and/or Medicaid spending, or impose additional requirements on healthcare entities. For example, under the terms of the Budget Control Act of 2011, an automatic 2% reduction of Medicare program payments for all healthcare providers became generally effective for services provided on or after April 1, 2013. This automatic reduction is known as “sequestration.” Medicare generally reimburses physicians for Part B drugs at the rate of average sales price (“ASP”) plus 6%. The implementation of sequestration pursuant to the Budget Control Act of 2011 has effectively reduced reimbursement below the ASP plus 6% level for the duration of sequestration (which lasts through fiscal 2024 in the absence of additional legislation). Additionally, concerns held by federal policymakers about the federal deficit and national debt levels could result in enactment of further federal spending reductions, further entitlement reform legislation affecting the Medicare program, or both. We cannot predict what alternative or additional deficit reduction initiatives or Medicare payment reductions, if any, will ultimately be enacted into law, or the timing or effect any such initiatives or reductions will have on us.
There can be no assurance that the preceding changes would not have a material adverse impact on our results of operations.

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Operating, Security and Licensure Standards: We are subject to the operating and security standards of the Drug Enforcement Administration (the “DEA”), the U.S. Food and Drug Administration (“FDA”), various state boards of pharmacy, state health departments, the U.S. Department of Health and Human Services (“HHS”), the CMS and other comparable agencies. Certain of our businesses may be required to register for permits and/or licenses with, and comply with operating and security standards of the DEA, FDA, HHS, CMS, various state boards of pharmacy, state health departments and/or comparable state agencies as well as foreign agencies and certain accrediting bodies, depending upon the type of operations and location of product development, manufacture, distribution, and sale. In addition, and as part of these operating, security and licensure standards, we regularly receive requests for information and occasionally subpoenas from government authorities. Although we believe that we are in compliance in all material respects with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of our operations with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses or any other regulatory approvals or obtain without significant delay future permits, licenses or other approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could have a material adverse impact on our results of operations.
Pedigree Tracking: There have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy and departments of health and the FDA, to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated and/or mislabeled drugs into the pharmaceutical distribution system (“pedigree tracking”). In November 2013, Congress passed and the President signed into law the Drug Quality and Security Act (“DQSA”). The DQSA will establish federal standards requiring supply-chain stakeholders to participate in an electronic, interoperable, lot-level prescription drug track and trace system. The law also preempts state drug pedigree requirements.
In addition, the Food and Drug Administration Amendments Act of 2007, which went into effect on October 1, 2007, requires the FDA to establish standards and identify and validate effective technologies for the purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards may include any track-and-trace or authentication technologies, such as radio frequency identification devices and other similar technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (“SNI”) guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulations in our distribution operations. The DQSA and other pedigree tracking laws and regulations could increase the overall regulatory burden and costs associated with our pharmaceutical distribution business, and could have a material adverse impact on our results of operations.
Privacy: State, federal and foreign laws regulate the confidentiality of sensitive personal information, how that information may be used, and the circumstances under which such information may be released. These regulations govern the disclosure and use of confidential personal and patient medical record information and require the users of such information to implement specified privacy and security measures. Regulations currently in place, including regulations governing electronic health data transmissions, continue to evolve and are often unclear and difficult to apply. Although we modified our policies, procedures and systems to comply with the current requirements of applicable state, federal and foreign laws, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Health Information Technology for Economic and Clinical Health (“HITECH”) Act portion of the American Recovery and Reinvestment Act of 2009, new laws and regulations in this area could restrict our or our customers’ ability to obtain, use or disseminate personal or patient information, or could require us to incur significant additional costs to re-design our products in a timely manner, either of which could have a material adverse impact on our results of operations. In addition, the HITECH Act expanded HIPAA privacy and security requirements and increased financial penalties for violations. It also extended certain provisions of the federal privacy and security standards to us in our capacity as a business associate of our payer and provider customers. These standards may be interpreted by a regulatory authority in a manner that could require us to make a material change to our operations. Furthermore, our failure to maintain confidentiality of sensitive personal information in accordance with applicable regulatory requirements could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation.
Healthcare Reform:    The Affordable Care Act significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both governmental and private payers. While certain provisions of the Affordable Care Act took effect immediately, others have delayed effective dates. We do not currently anticipate that the Affordable Care Act or any resulting federal and state healthcare reforms will have a material impact on our business, financial condition and results of operations. However, given the scope of the changes made and under consideration, as well as the uncertainties associated with implementation of healthcare reforms, we cannot predict their full effect on the Company at this time.

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Interoperability Standards and Meaningful Use Requirement: There is increasing demand among customers, industry groups and government authorities that healthcare software and systems provided by various vendors be compatible with each other. This demand for interoperability is leading to the development of standards by various groups, such as Commonwell Health Alliance, which the Company and other healthcare IT companies announced in 2013. Certain federal and state agencies also are developing standards that could become mandatory for software and systems purchased by these agencies, or used by our customers. For example, the HITECH Act requires meaningful use of “certified” healthcare information technology products by healthcare providers in order to receive stimulus funds from the federal government. Although several of our healthcare information technology products have received certification while others are on track to receive certification, rules regarding meaningful use may be changed or supplemented in the future. As a result, we may incur increased development costs and delays in receiving certification for our products, and changing or supplementing rules also may lengthen our sales and implementation cycle. We also may incur costs in periods prior to the corresponding recognition of revenue. To the extent these rules subsequently are changed or supplemented, or we are delayed in receiving certification for our products, customers may postpone or cancel their decisions to purchase or implement these products.
FDA Regulation of Medical Software:  The FDA has increasingly focused on the regulation of medical software and health information technology products as medical devices under the federal Food, Drug and Cosmetic Act. For example, in 2011 the FDA issued a rule on medical device data systems (MDDS) that now regulates certain software systems that electronically store, transfer or display data originating from medical devices as Class 1 medical devices (i.e., those devices deemed by the FDA to be low risk and subject to the least regulatory controls) themselves. If the FDA chooses to regulate more of our products as medical devices, it can impose extensive requirements upon us. If we fail to comply with the applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant pre-market clearance of products, withdrawing clearances and initiating criminal prosecution. Any additional FDA regulations governing health information technology products, once issued, may increase the cost and time to market of new or existing products or may prevent us from marketing our products.
Standards for Submission of Healthcare Claims: HHS previously adopted two rules that impact healthcare claims submitted for reimbursement. The first rule modifies the standards for electronic healthcare transactions (e.g., eligibility, claims submission and payment and electronic remittance) from Version 4010/4010A to Version 5010. The enforcement deadline for the 5010 rule was extended through June 30, 2012 and many healthcare providers began implementing the 5010 rule. The second rule updated and expanded the standard medical code sets for diagnosis and procedure coding from International Classification of Diseases, Ninth Revision (“ICD-9”) to International Classification of Diseases, Tenth Revision (“ICD-10”). As a consequence of the passage of the Protecting Access to Medicare Act of 2014 in March, the compliance date for ICD-10 conversion has been postponed from October 1, 2014 to October 1, 2015. Updating systems to Version 5010 for electronic healthcare transactions (e.g., eligibility, claims submission and payment and electronic remittance) is required for use of the ICD-10 code set. Generally, claims submitted not using Version 5010 and ICD-10 when required will not be processed, and health plans not accepting transactions using Version 5010 and ICD-10 may experience significant increases in customer service inquiries. We may incur increased development costs and delays in delivering solutions and upgrading our software and systems to be in compliance with these new rules. In addition, these rules may lengthen our sales and implementation cycle and we may incur costs in periods prior to the corresponding recognition of revenue. Delays in providing software and systems that are in compliance with the new rules may result in postponement or cancellation of our customers’ decisions to purchase our software and systems.
Medical Billing and Coding: Medical billing, coding and collection activities are governed by numerous federal and state civil and criminal laws. In connection with these laws, we may be subjected to federal or state government investigations and possible penalties may be imposed upon us, false claims actions may have to be defended, private payers may file claims against us and we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Any such proceeding or investigation could have a material adverse impact on our results of operations.

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Changes in the Canadian healthcare industry and regulatory environment could have a material adverse impact on our results of operations.
The provincial governments in Canada provide partial funding for the purchase of pharmaceuticals and independently regulate the sale and reimbursement of drugs. Similar to the United States, the Canadian healthcare industry has undergone significant changes in recent years in an effort to reduce program costs. For example, the Ontario government significantly revised the drug reimbursement system with the passage of the Transparent Drug System for Patients Act. In recent years, to reduce the cost for taxpayers, various provinces took further steps to reform the rules regarding the sale of generic drugs. These changes include the significant lowering of prices for generic pharmaceuticals and, in some provinces, the elimination or reduction of professional allowances paid to pharmacists by generic manufacturers. These reforms may adversely affect the distribution of drugs as well as the pricing for prescription drugs for the Company’s operations in Canada. Other provinces are considering similar changes, which would also lower pharmaceutical pricing and service fees. Individually or in combination, such changes in the Canadian healthcare environment may significantly reduce our Canadian revenue and operating profit.
Changes in the European regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations.
In Europe, we are subject to the European Union (“EU”) data protection regulations, including the EU Directive on Data Protection, which requires member states to impose minimum restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States. The EU regulations establish several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. In addition to this EU-wide legislation, certain member states have adopted more stringent data protection standards. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit the use and adoption of our products and solutions and could have a material adverse impact on our results of operations.
Our foreign operations subject us to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial condition and results of operations.
We have operations based in, and we source and contract manufacture pharmaceutical and medical-surgical products in, a number of foreign countries. The Company’s acquisition of Celesio significantly increases the importance of our foreign operations to our future operations and growth.
Our foreign operations expose us to a number of risks. Operations outside of the United States may be affected by changes in trade protection laws, policies and measures and other regulatory requirements affecting trade and investment; changes in licensing regimes for pharmacies; unexpected regulatory, social, political, or economic changes in a specific country or region; changes in intellectual property, privacy and data protection; import/export regulations in both the United States and foreign countries and difficulties in staffing and managing foreign operations. Political changes, labor strikes, acts of war or terrorism and natural disasters, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location. We may also be affected by potentially adverse tax consequences and difficulties associated with repatriating cash generated or held abroad. Additionally, foreign operations expose us to foreign currency fluctuations, including uncertainty regarding the Euro, the Canadian dollar, the British pound sterling and the Brazilian real, that could adversely impact our results of operations based on the movements of the applicable foreign currency exchange rates in relation to the U.S. dollar. Since substantially all of Celesio’s revenues are generated outside of the United States, the Company’s acquisition of Celesio significantly increases our exposure to these risks.
Foreign operations are also subject to risks of violations of laws prohibiting improper payments and bribery, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar regulations in foreign jurisdictions. The U.K. Bribery Act, for example, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that fails to prevent bribery committed by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented adequate procedures to prevent bribery. Failure to comply with these laws could subject us to civil and criminal penalties that could have a material adverse impact on our financial condition and results of operations.

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We also may experience difficulties and delays inherent in sourcing products and contract manufacturing from foreign countries, including but not limited to: (1) difficulties in complying with the requirements of applicable federal, state and local governmental authorities in the United States and of foreign regulatory authorities; (2) inability to increase production capacity commensurate with demand or the failure to predict market demand; (3) other manufacturing or distribution problems including changes in types of products produced, limits to manufacturing capacity due to regulatory requirements, physical limitations, or scarce or inadequate resources that could impact continuous supply; and (4) damage to our reputation due to real or perceived quality issues. For example, the FDA has conducted investigations and banned certain generics manufacturers from selling certain raw materials and drug ingredients in the U.S. from overseas plants due to quality issues. Difficulties in manufacturing or access to raw materials could result in production shutdowns, product shortages and other similar delays in product manufacturing that could have a material adverse impact on our financial condition and results of operations.
Our business could be hindered if we are unable to complete and integrate acquisitions successfully.
An element of our strategy is to identify, pursue and consummate acquisitions that either expand or complement our business. Integration of acquisitions involves a number of significant risks, including the diversion of management’s attention to the assimilation of the operations of businesses we have acquired; difficulties in the integration of operations and systems; the realization of potential operating synergies; the assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; challenges in retaining the customers of the combined businesses. Further, acquisitions may have a material adverse impact on our operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related to potential impairment charges, assumed litigation and unknown liabilities. In addition, we may potentially require additional financing in order to fund future acquisitions, which may or may not be attainable and is subject to potential volatility in the credit markets. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our business and our growth strategies could be negatively affected.
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio. Upon the acquisition, our ownership of Celesio’s fully diluted shares was 75.6%. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares. Celesio is an international wholesale and retail company and provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of Celesio expands our global geographic area; the combined company will be one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide.
Achieving the anticipated benefits of our acquisition of Celesio is subject to a number of risks and uncertainties, including foreign exchange fluctuations, challenges of managing new international operations, and whether we can ensure continued performance or market growth of Celesio’s product and services. The integration process is subject to a number of uncertainties and no assurance can be given that the anticipated benefits of the transaction will be realized or, if realized, the timing of their realization. It is possible that the integration process could take longer than anticipated, and could result in the loss of employees, the disruption of each company’s ongoing businesses, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Celesio acquisition and which could have a material adverse impact on our revenues, expenses, operating results and financial condition.
Any significant diversion of management’s attention away from the ongoing businesses, and any difficulties encountered in the acquisition, transition and integration process, could adversely affect our financial results, both prior to and after the acquisition of Celesio. Moreover, the failure to achieve the anticipated benefits of the Celesio acquisition could result in increased costs or decreases in the amount of expected revenues, and could adversely affect our future business, financial condition, operating results and prospects. Events outside of our control, including the market price of Celesio shares that we did not acquire in the acquisition, changes in regulations and laws, as well as economic trends, could also adversely affect our ability to realize the expected benefits from our acquisition of Celesio.

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The process to obtain operational control of Celesio, including Celesio shareholder approval of the domination and profit and loss agreement and registration of the domination and profit and loss agreement in the Celesio corporate register is complex and we do not expect to complete the steps required to exercise operating control of Celesio until late in the first half of our fiscal 2015. Until the domination and profit and loss agreement is registered and effective, Celesio will not be subject to direct management control by us and Celesio’s profits can only be distributed by the declaration of dividends. In the event that a minority shareholder of Celesio files an action to challenge the registration, or the registration is delayed by German courts, it may prevent us from exercising operational control of Celesio on the anticipated timeline, or at all. Our pursuit of the Celesio acquisition and the preparation for the integration of Celesio’s business over an extended period of time may place a significant burden on our management and internal resources, as well as the management and internal resources of Celesio. In the event that our acquisition of Celesio’s remaining then outstanding common shares is significantly delayed, it may prevent the Celesio acquisition from being consummated on the anticipated timeline, which could have a material adverse impact on the market price of our common stock, and could result in our incurring significant expenses related to the Celesio acquisition without realizing the expected benefits.
We are subject to legal proceedings that could have a material adverse impact on our financial position and results of operations.
From time- to-time and in the ordinary course of our business, we and certain of our subsidiaries may become involved in various legal proceedings involving false claims, healthcare fraud and abuse, antitrust, commercial, employment, environmental, intellectual property, regulatory, tort and other various claims. All such legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or injunctive relief that may affect how we operate our business or we may enter into settlements of claims for monetary damages. In some cases, substantial non-economic remedies or punitive damages may be sought. For some complaints filed against the Company, we are currently unable to estimate the amount of possible losses that might be incurred should these legal proceedings be resolved against the Company.
The outcome of litigation and other legal matters is always uncertain and outcomes that are not justified by the evidence or existing law can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or any combination of more than one legal matter could result in a material adverse impact on our financial position or results of operations.
Litigation is costly, time-consuming and disruptive to normal business operations. The defense of these matters could also result in continued diversion of our management’s time and attention away from business operations, which could also harm our business. Even if these matters are not resolved against us, the uncertainty and expense associated with unresolved legal proceedings could harm our business and reputation.
European economic conditions together with austerity measures being taken by certain European governments could have a material adverse impact on our results of operations.
The Company’s acquisition of Celesio significantly increases our assets and operations within Europe and, accordingly, our exposure to economic conditions in Europe. A further slowdown within the European economy could affect our business in Europe by reducing the prices our customers may be able or willing to pay for our products and services or by reducing the demand for our products, either of which could result in a material adverse impact on our results of operations.
In addition, in many European countries, the government provides or subsidizes healthcare to consumers and regulates pharmaceutical prices, patient eligibility, and reimbursement levels to control costs for the government-sponsored healthcare system. In recent years, in response to the recessionary environment and financial crisis in Europe, a number of European governments have announced or implemented austerity measures to reduce healthcare spending and constrain overall government expenditures. For example, in 2011, the French government introduced a new wholesale mark-up system that constrained distribution margins on pharmaceuticals. These measures, which include efforts aimed at reforming healthcare coverage and reducing healthcare costs, continue to exert pressure on the pricing of and reimbursement timelines for pharmaceuticals and may cause our customers to purchase fewer of our products and services and reduce the prices they are willing to pay.
Countries with existing healthcare-related austerity measures may impose additional laws, regulations, or requirements on the healthcare industry. In addition, European governments that have not yet imposed healthcare-related austerity measures may impose them in the future. New austerity measures may be similar to or vary from existing austerity measures and could have a material adverse impact on our results of operations.

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Competition may erode our profit.
In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition, both in price and service, from international, national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers of the segment, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by the segment. Price, quality of service, and in some cases, convenience to the customer are generally the principal competitive elements in this segment.
In recent years, pharmaceutical suppliers have been subject to increasing consolidation. As a result, a small number of very large companies control a significant share of the market. Accordingly, we depend on fewer suppliers for our products and therefore we may be less able to negotiate price terms with suppliers. Many healthcare organizations have also consolidated to create larger healthcare enterprises with greater market power. If this consolidation trend continues, it could reduce the size of our target market and give the resulting enterprises greater bargaining power, which may lead to erosion of the prices for our products and services. In addition, when healthcare organizations combine they often consolidate infrastructure including IT systems, which in turn may erode the diversity of our customer and revenue base.
Our Technology Solutions segment experiences substantial competition from many firms, including other software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care management organizations, hardware vendors and internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered. These competitive pressures could have a material adverse impact on our results of operations.
A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as substantial defaults in payment by a large customer or group purchasing organization, could have a material adverse impact on our financial condition, results of operations and liquidity.
In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2014, sales to our ten largest customers accounted for approximately 48% of our total consolidated revenues. Sales to our largest customer, CVS, accounted for approximately 16% of our total consolidated revenues. At March 31, 2014, trade accounts receivable from our ten largest customers were approximately 32% of total trade accounts receivable. Accounts receivable from CVS were approximately 12% of total trade accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements with group purchasing organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. A material default in payment, change in our customer mix, reduction in purchases, or the loss of a large customer or GPO could have a material adverse impact on our financial condition, results of operations and liquidity.
We generally sell our products and services to customers on credit that is short-term in nature and unsecured. Any adverse change in general economic conditions can adversely reduce sales to our customers, affect consumer buying practices or cause our customers to delay or be unable to pay accounts receivable owed to us, which may in turn materially reduce our revenue growth and cause a material decrease in our profitability and cash flow. Further, interest rate fluctuations and changes in capital market conditions may also affect our customers’ ability to obtain credit to finance their business under acceptable terms, which in turn may materially reduce our revenue growth and cause a decrease in our profitability.
Contracts with the U.S. federal government and other governments and their agencies pose additional risks relating to future funding and compliance.
Contracts with the U.S. federal government and other governments and their agencies are subject to various uncertainties, restrictions and regulations, including oversight audits by various government authorities and profit and cost controls. Government contracts also are exposed to uncertainties associated with funding. Contracts with the U.S. federal government, for example, are subject to the uncertainties of Congressional funding. Governments are typically under no obligation to maintain funding at any specific level, and funds for government programs may even be eliminated. As a result, our government clients may terminate our contracts for convenience or decide not to renew our contracts with little or no prior notice. The loss of such contracts could have a material adverse impact on our results of operations.

18

McKESSON CORPORATION

In addition, because government contracts are subject to specific procurement regulations and a variety of other socio-economic requirements, we must comply with such requirements. For example, for contracts with the U.S. federal government, with certain exceptions, we must comply with the Federal Acquisition Regulation, the Truth in Negotiations Act, and the Cost Accounting Standards. We must also comply with various other government regulations and requirements as well as various statutes related to employment practices, environmental protection, recordkeeping and accounting. These regulations and requirements affect how we transact business with our clients and, in some instances, impose additional costs on our business operations. Government contracts also contain terms that expose us to higher levels of risk and potential liability than non-government contracts.
We also are subject to government audits, investigations, and proceedings. For example, government agencies routinely review and audit government contractors to determine whether allowable costs are in accordance with applicable government regulations. These audits can result in adjustments to the amount of contract costs we believe are reimbursable by the agencies and the amount of our overhead costs allocated to the agencies.
If we violate these rules or regulations, fail to comply with a contractual or other requirement or do not satisfy an audit, a variety of penalties can be imposed by the government including disallowance of costs claimed, monetary damages and criminal and civil penalties. In addition, any or all of our government contracts could be terminated or we could be suspended or debarred from all government contract work. The occurrence of any of these actions could harm our reputation and could have a material adverse impact on our results of operations.
Our future results could be materially affected by a number of public health issues whether occurring in the United States or abroad.
Public health issues, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of suppliers or customers, or have a broader adverse impact on consumer spending and confidence levels that would negatively affect our suppliers and customers. We have developed contingency plans to address infectious disease scenarios and the potential impact on our operations, and we will continue to update these plans as necessary. However, there can be no assurance that these plans will be effective in eliminating the negative impact of any such diseases on the Company’s operating results. We may be required to suspend operations in some or all of our locations, which could have a material adverse impact on our business, financial condition and results of operations.
We are dependent upon sophisticated information systems. The malfunction, failure or breach of these systems to perform as designed could have a material adverse impact on our results of operations.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including protected health information, financial information and other sensitive information relating to our customers, company and workforce. We also rely on sophisticated information systems in our business to obtain, rapidly process, analyze and manage data to: (1) facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers; (2) receive, process and ship orders and handle other product and services on a timely basis; (3) manage the accurate billing and collections for thousands of customers; and (4) process payments to suppliers. In Europe, Celesio outsources its IT infrastructure to an external service provider. If these systems are interrupted, damaged or breached by an unforeseen event or actions of a third party, including a cyber attack, or fail for any extended period of time, it could have a material adverse impact on our results of operations.
Cyber attacks can result from deliberate attacks or unintentional incidents involving unauthorized access to computer systems or data that could result in the misappropriation or loss of assets or the disclosure of sensitive information, the corruption of data, or other disruption of business operations. Similarly, denial-of-service or other Internet-based attacks may range from mere vandalism of electronic systems to systematic theft of sensitive information and intellectual property. Although we actively devote significant resources to protect and maintain the confidentiality of all information in our possession, preventing all cyber incidents is inherently difficult. Therefore, any compromise of our electronic systems, including the unauthorized access, use or disclosure of sensitive information or a significant disruption of our computing assets and networks, would adversely affect our reputation, our ability to fulfill contractual obligations and could have a material adverse impact on our results of operations. Moreover, unauthorized access, use, or disclosure of such sensitive information could result in a civil, criminal or regulatory action, including potential fines and penalties. Any real or perceived compromise of our security or disclosure of sensitive information may also result in lost revenues by deterring customers from using or purchasing our products and services in the future.

19

McKESSON CORPORATION

We could experience losses or liability not covered by insurance.
In order to provide prompt and complete service to our major Distribution Solutions segment’s customers, we maintain significant product inventory at certain of our distribution centers. While we seek to maintain property insurance coverage in amounts sufficient for our business, there can be no assurance that our property insurance will be adequate or available on acceptable terms. One or more large casualty losses caused by fire, earthquake or other natural disaster in excess of our coverage limits could have a material adverse impact on our results of operations.
Our business exposes us to risks that are inherent in the distribution, manufacturing, dispensing and administration of pharmaceuticals and medical-surgical supplies, the provision of ancillary services, the conduct of our payer businesses (which include care management programs and our nurse advice services) and the provision of products that assist clinical decision-making and relate to patient medical histories and treatment plans. If customers or individuals assert liability claims against our products and/or services, any ensuing litigation, regardless of outcome, could result in a substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products. We attempt to limit our liability to customers by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by contract, such as a claim directly by a patient. We also maintain general liability coverage; however, this coverage may not continue to be available on acceptable terms, may not be available in sufficient amounts to cover one or more large claims against us and may include larger self-insured retentions or exclusions for certain products. In addition, the insurer might disclaim coverage as to any future claim. A successful product or professional liability claim not fully covered by our insurance could have a material adverse impact on our results of operations.
The acquisition of Celesio exposes us to additional risks related to providing pharmacy services. Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. Although Celesio maintains liability insurance, the coverage may not be adequate to protect us against future claims. If Celesio’s insurance coverage proves to be inadequate or unavailable or Celesio suffers reputational harm as a result of an error or omission, it could have a material adverse impact on our results of operations.
The failure of our healthcare technology businesses to attract and retain customers due to challenges in software product integration or to keep pace with technological advances may significantly reduce our results of operations.
Our healthcare technology businesses, the bulk of which resides in our Technology Solutions segment, deliver enterprise‑wide and single entity clinical, patient care, financial, supply chain and strategic management software solutions to hospitals, physicians, homecare providers, retail and mail order pharmacies and payers. Challenges integrating software products could impair our ability to attract and retain customers and could have a material adverse impact on our consolidated results of operations and a disproportionate impact on the results of operations of our Technology Solutions segment.
Future advances in the healthcare information systems industry could lead to new technologies, products or services that are competitive with the technology products and services offered by our various businesses. Such technological advances could also lower the cost of such products and services or otherwise result in competitive pricing pressure or render our products obsolete.
The success of our technology businesses will depend, in part, on our ability to be responsive to technological developments, pricing pressures and changing business models. To remain competitive in the evolving healthcare information systems marketplace, our technology businesses must also develop new products on a timely basis. The failure to develop competitive products and to introduce new products on a timely basis could curtail the ability of our technology businesses to attract and retain customers, and thereby could have a material adverse impact on our results of operations.

20

McKESSON CORPORATION

Proprietary protections may not be adequate and products may be found to infringe the rights of third parties.
We rely on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect our proprietary rights in our products and solutions. There can be no assurance that these protections will be adequate or that our competitors will not independently develop products or solutions that are equivalent or superior to ours. In addition, despite protective measures, we may be subject to unauthorized use of our technology due to copying, reverse-engineering or other infringement. Although we believe that our products, solutions and services do not infringe the proprietary rights of third parties, from time to time third parties have asserted infringement claims against us and there can be no assurance that third parties will not assert infringement claims against us in the future. If we were found to be infringing others’ rights, we may be required to pay substantial damage awards and forced to develop non-infringing products or technology, obtain a license or cease selling or using the products that contain the infringing elements. Additionally, we may find it necessary to initiate litigation to protect our trade secrets, to enforce our patent, copyright and trademark rights and to determine the scope and validity of the proprietary rights of others. These types of litigation can be costly and time consuming. These litigation expenses, damage payments or costs of developing replacement products or technology could have a material adverse impact on our results of operations.
System errors or failures of our products to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our results of operations.
The software and technology services (“systems”) that we sell or operate are complex. As with complex systems offered by others, our systems may contain errors, especially when first introduced. For example, our Technology Solutions segment’s business systems are intended to provide information to healthcare professionals in the course of delivering patient care. Therefore, users of our systems have a greater sensitivity to errors than the general market for software products. If our software or systems lead to faulty clinical decisions or injury to patients, we could be subject to claims or litigation by our clients, clinicians or patients. In addition, such failures could damage our reputation and could negatively affect future sales.
Failure of a customer’s system to perform in accordance with our documentation could constitute a breach of warranty and could require us to incur additional expense in order to make the system comply with the documentation. If such failure is not remedied in a timely manner, it could constitute a material breach under a contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid or assert claims for significant damages.
Various risks could interrupt customers’ access to their data residing in our service center, exposing us to significant costs.
We provide remote hosting services that involve operating both our software and the software of third-party vendors for our customers. The ability to access the systems and the data that we host and support on demand is critical to our customers. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (1) power loss and telecommunications failures; (2) fire, flood, hurricane and other natural disasters; (3) software and hardware errors, failures or crashes; and (4) cyber attacks, computer viruses, hacking and other similar disruptive problems. We attempt to mitigate these risks through various means including disaster recovery plans, separate test systems and change controls, information security procedures, and continued development and enhancement of our cyber security, but our precautions may not protect against all risks. If customers’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims, particularly if the access interruption is associated with problems in the timely delivery of medical care. If customers’ access is interrupted from failure or breach of our operational or information security systems, or those of our third party service providers, we could suffer reputational harm or be exposed to liabilities arising from the unauthorized and improper use or disclosure of confidential or proprietary information. We must maintain disaster recovery and business continuity plans that rely upon third-party providers of related services and if those vendors fail us at a time that our center is not operating correctly, we could incur a loss of revenue and liability for failure to fulfill our contractual service commitments. Any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services.

21

McKESSON CORPORATION

The length of our sales and implementation cycles for our Technology Solutions segment could have a material adverse impact on our future results of operations.
Many of the solutions offered by our Technology Solutions segment have long sales and implementation cycles, which could range from a few months to two years or more from initial contact with the customer to completion of implementation. How and when to implement, replace, or expand an information system, or modify or add business processes, are major decisions for healthcare organizations. Many of the solutions we provide typically require significant capital expenditures and time commitments by the customer. Any decision by our customers to delay or cancel implementation could have a material adverse impact on our results of operations. Furthermore, delays or failures to meet milestones established in our agreements may result in a breach of contract, termination of the agreement, damages and/or penalties as well as a reduction in our margins or a delay in our ability to recognize revenue.
We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired.
We are required under U.S. generally accepted accounting principles (“GAAP”) to test our goodwill for impairment, annually or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry, or economic trends or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time. In addition, we periodically review our intangible assets for impairment when events or changes in circumstances, such as a divestiture indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include slower growth rates the loss of a significant customer, or divestiture of a business or asset for below its carrying value. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined. This could have a material adverse impact on our results of operations. There are inherent uncertainties in management’s estimates, judgments and assumptions used in assessing recoverability of goodwill and intangible assets. Any changes in key assumptions, including failure to meet business plans, a further deterioration in the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.
Tax legislation initiatives or challenges to our tax positions could have a material adverse impact on our results of operations.
We are a large multinational corporation with operations in the United States and international jurisdictions. As such, we are subject to the tax laws and regulations of the United States federal, state and local governments and of many international jurisdictions. From time-to-time, legislation may be enacted that could adversely affect our tax positions. There can be no assurance that our effective tax rate and the resulting cash flow will not be adversely affected by these changes in legislation. For example, if legislation is passed to repeal the LIFO (last-in, first-out) method of inventory accounting for income tax purposes, it would adversely impact our cash flow. Additionally, if legislation is passed to change the current U.S. taxation treatment of income from foreign operations, or if legislation is passed at the state level to establish or increase taxation on the basis of our gross revenues, it may adversely impact our tax expense. The tax laws and regulations of the various countries where we have major operations are extremely complex and subject to varying interpretations. Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that these tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Even if we are successful in maintaining our positions, we may incur significant expense in defending challenges to our tax positions by tax authorities that could have a material impact on our financial position and results of operations.

22

McKESSON CORPORATION

Volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit, our cost of credit and the financial soundness of our customers and suppliers.
Volatility and disruption in the global capital and credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by other financial institutions, decreased liquidity and increased costs in the commercial paper market and the reduced market for securitizations, may adversely affect the availability and cost of credit already arranged and the availability, terms and cost of credit in the future, including any arrangements to renew or replace our current credit or financing arrangements. Although we believe that our operating cash flow, financial assets, current access to capital and credit markets, including our existing credit and sales facilities, will give us the ability to meet our financing needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.
Our $1.35 billion accounts receivable sales facility is generally renewed annually and will expire in November 2014. Historically, we have primarily used the accounts receivable sales facility to fund working capital requirements, as needed. We anticipate extending or renewing this facility before its expiration. Although we believe we will be able to renew this facility, there is no assurance that we will be able to do so.
Our business could also be negatively impacted if our customers or suppliers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy. As a result, customers may modify, delay or cancel plans to purchase or implement our products or services and suppliers may increase their prices, reduce their output or change their terms of sale. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of accounts receivable owed to us and suppliers may restrict credit, impose different payment terms or be unable to make payments due to us for fees, returned products or incentives. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms may have a material adverse impact on our results of operations and cash flow.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time-to-time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse impact on our results of operations and financial condition.
We could face significant liability if we withdraw from participation in one or more multiemployer pension plans in which we participate or one or more multiemployer plans in which we participate is reported to have underfunded liabilities.
We participate in various “multiemployer” pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional cash contribution to the plans, payable in installments and/or lump sum. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s funding of vested benefits. Our multiemployer plans could have significant underfunded liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies. The occurrence of any of these events could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 1B.
Unresolved Staff Comments.
None.

23

McKESSON CORPORATION

Item 2.
Properties.
Because of the nature of our principal businesses, our plant, warehousing, retail pharmacies, office and other facilities are operated in widely dispersed locations, primarily throughout North America and Europe. The warehouses and retail pharmacies are typically owned or leased on a long-term basis. We consider our operating properties to be in satisfactory condition and adequate to meet our needs for the next several years without making capital expenditures materially higher than historical levels. Information as to material lease commitments is included in Financial Note 20, “Lease Obligations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Item 3.
Legal Proceedings.
Certain legal proceedings in which we are involved are discussed in Financial Note 22, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Item 4.
Mine Safety Disclosures.
Not applicable.

24

McKESSON CORPORATION

Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of the Company, including their principal occupations during the past five years. The number of years of service with the Company includes service with predecessor companies.
There are no family relationships between any of the executive officers or directors of the Company. The executive officers are elected on an annual basis generally and their term expires at the first meeting of the Board of Directors (“Board”) following the annual meeting of stockholders, or until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner.
Name
 
Age
 
Position with Registrant and Business Experience
 
 
 
 
 
John H. Hammergren
 
55
 
Chairman of the Board since July 2002; President and Chief Executive Officer since April 2001; and a director since July 1999. Service with the Company — 18 years.
 
 
 
 
 
James A. Beer
 
53
 
Executive Vice President and Chief Financial Officer since October 2013; Executive Vice President and Chief Financial Officer, Symantec Corporation from 2006 to October 2013; Senior Vice President and Chief Financial Officer, AMR Corporation and its principal subsidiary, American Airlines, Inc., from 2004 to 2006, Service with the Company — 7 months.
 
 
 
 
 
Patrick J. Blake
 
50
 
Executive Vice President and Group President since June 2009; President of McKesson Specialty Care Solutions (now McKesson Specialty Health) from April 2006 to June 2009. Service with the Company — 18 years.
 
 
 
 
 
Jorge L. Figueredo
 
53
 
Executive Vice President, Human Resources since May 2008; Service with the Company — 6 years.
 
 
 
 
 
Paul C. Julian
 
58
 
Executive Vice President and Group President since April 2004. Service with the Company — 18 years.
 
 
 
 
 
Laureen E. Seeger
 
52
 
Executive Vice President, General Counsel and Chief Compliance Officer since April 2010 (functionally has served as chief compliance officer since March 2006); Executive Vice President and General Counsel from July 2009 to April 2010; Executive Vice President, General Counsel and Secretary from March 2006 to July 2009. Service with the Company — 14 years.
 
 
 
 
 
Randall N. Spratt
 
62
 
Executive Vice President, Chief Technology Officer and Chief Information Officer since April 2009; Service with the Company — 28 years.
 
 
 
 
 
Brian S. Tyler
 
47
 
Executive Vice President, Corporate Strategy and Business Development since August 2012; President, U.S. Pharmaceutical from January 2011 to August 2012; President, McKesson Medical-Surgical from April 2006 to December 2010. Service with the Company — 17 years.


25

McKESSON CORPORATION

PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)
Market Information: The principal market on which the Company’s common stock is traded is the New York Stock Exchange (“NYSE”).
The following table sets forth the high and low sales prices for our common stock as reported on NYSE for each quarterly period of the two most recently completed fiscal years:
 
2014
 
2013
 
High
Low
 
High
Low
First quarter
$
119.32

$
102.68

 
$
94.47

$
85.95

Second quarter
$
133.33

$
113.26

 
$
97.23

$
84.65

Third quarter
$
166.57

$
128.84

 
$
100.00

$
85.57

Fourth quarter
$
188.02

$
159.45

 
$
111.55

$
96.67

(b)
Holders: The number of record holders of the Company’s common stock at March 31, 2014 was approximately 6,900.
(c)
Dividends: In July 2013, the Company’s quarterly dividend was raised from $0.20 to $0.24 per common share for dividends declared after such date, until further action by the Company’s Board of Directors (the “Board”).  The Company declared regular cash dividends of $0.92 and $0.80 per share in the years ended March 31, 2014 and 2013
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.
(d)
Securities Authorized for Issuance under Equity Compensation Plans: Information relating to this item is provided under Part III, Item 12, to this Annual Report on Form 10-K.
(e)
Share Repurchase Plans: Stock repurchases may be made from time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.
In 2014, we made no share repurchases. In 2013, we repurchased 13 million shares for $1,159 million at an average price of $100.82 per share. In 2012, we repurchased 20 million shares for $1,850 million at an average price of $83.47 per share.
The following table provides information on the Company’s share repurchases during the fourth quarter of 2014:
 
Share Repurchases (1)
(In millions, except price per share)
Total
Number of Shares
Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
January 1, 2014 - January 31, 2014

 
$

 

 
$
340

February 1, 2014 - February 28, 2014

 

 

 

March 1, 2014 - March 31, 2014

 

 

 

Total

 
 
 

 
$
340

(1)
This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax-withholding obligations in connection with employee equity awards.

26

McKESSON CORPORATION

(f)
Stock Price Performance Graph*: The following graph compares the cumulative total stockholder return on the Company’s common stock for the periods indicated with the Standard & Poor’s 500 Index and the Value Line Healthcare Sector Index (composed of 154 companies in the health care industry, including the Company).
 
March 31,
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
McKesson Corporation
$
100.00

 
$
189.25

 
$
230.09

 
$
258.00

 
$
320.07

 
$
526.94

S&P 500 Index
$
100.00

 
$
149.77

 
$
173.21

 
$
188.00

 
$
214.25

 
$
261.08

Value Line Healthcare Sector Index
$
100.00

 
$
137.73

 
$
147.44

 
$
167.52

 
$
209.54

 
$
269.61

* Assumes $100 invested in McKesson Common Stock and in each index on March 31, 2009 and that all dividends are reinvested.

27

McKESSON CORPORATION

Item 6.
Selected Financial Data.
FIVE-YEAR HIGHLIGHTS
 
As of and for the Years Ended March 31,
(In millions, except per share data and ratios)
 
2014 (1)
 
2013
 
2012
 
2011
 
2010
Operating Results
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
137,609

 
$
122,069

 
$
122,321

 
$
111,677

 
$
108,295

Percent change
 
12.7
%
 
(0.2
)%
 
9.5
%
 
3.1
%
 
1.9
 %
Gross profit
 
$
8,309

 
$
6,848

 
$
6,402

 
$
5,797

 
$
5,498

Income from continuing operations before income taxes
 
2,096

 
1,928

 
1,893

 
1,579

 
1,806

Income (loss) after income taxes
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
1,354

 
1,347

 
1,379

 
1,083

 
1,205

Discontinued operations
 
(96
)
 
(9
)
 
24

 
119

 
58

Net income
 
1,258

 
1,338

 
1,403

 
1,202

 
1,263

Net loss attributable to noncontrolling interests (2)
 
5

 

 

 

 

Net income attributable to McKesson Corporation
 
1,263

 
1,338

 
1,403

 
1,202

 
1,263

 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
3,072

 
$
1,813

 
$
1,917

 
$
3,631

 
$
4,492

Days sales outstanding for: (3)
 
 
 
 
 
 
 
 
 
 
Customer receivables
 
30

 
26

 
24

 
25

 
25

Inventories
 
34

 
33

 
31

 
31

 
34

Drafts and accounts payable
 
54

 
51

 
49

 
47

 
48

Total assets
 
$
51,759

 
$
34,786

 
$
33,093

 
$
30,886

 
$
28,189

Total debt, including capital lease obligations
 
10,719

 
4,873

 
3,980

 
4,004

 
2,297

Total McKesson stockholders’ equity
 
8,522

 
7,070

 
6,831

 
7,220

 
7,532

Property acquisitions
 
274

 
232

 
221

 
233

 
199

Acquisitions, net of cash and cash equivalents acquired
 
4,634

 
1,873

 
1,051

 
292

 
18

 
 
 
 
 
 
 
 
 
 
 
Common Share Information
 
 
 
 
 
 
 
 
 
 
Common shares outstanding at year-end
 
231

 
227

 
235

 
252

 
271

Shares on which earnings per common share were based
 
 
 
 
 
 
 
 
 
 
Diluted
 
233

 
239

 
251

 
263

 
273

Basic
 
229

 
235

 
246

 
258

 
269

Diluted earnings (loss) per common share attributable to McKesson Corporation (4)
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
5.83

 
$
5.62

 
$
5.49

 
$
4.12

 
$
4.41

Discontinued operations
 
(0.42
)
 
(0.03
)
 
0.10

 
0.45

 
0.21

Total
 
5.41

 
5.59

 
5.59

 
4.57

 
4.62

Cash dividends declared
 
214

 
192

 
202

 
188

 
131

Cash dividends declared per common share
 
0.92

 
0.80

 
0.80

 
0.72

 
0.48

Book value per common share (4) (5)
 
36.89

 
31.15

 
29.07

 
28.65

 
27.79

Market value per common share - year-end
 
176.57

 
107.96

 
87.77

 
79.05

 
65.72

 
 
 
 
 
 
 
 
 
 
 
Supplemental Data
 
 
 
 
 
 
 
 
 
 
Capital employed (6)
 
$
19,241

 
$
11,943

 
$
10,811

 
$
11,224

 
$
9,829

Debt to capital ratio (7)
 
55.7
%
 
40.8
 %
 
36.8
%
 
35.7
%
 
23.4
 %
Net debt to net capital employed (8)
 
43.4
%
 
25.5
 %
 
10.8
%
 
5.1
%
 
(23.5
)%
Average McKesson stockholders’ equity (9)
 
$
7,803

 
$
7,294

 
$
7,108

 
$
7,105

 
$
6,768

Return on McKesson stockholders’ equity (10)
 
16.2
%
 
18.3
 %
 
19.7
%
 
16.9
%
 
18.7
 %
Footnotes to Five-Year Highlights:
(1)
2014 includes financial results from our February 6, 2014 acquisition of Celesio.
(2)
Net loss attributable to noncontrolling interests represents the noncontrolling shareholders’ portion of net loss from Celesio, our majority-owned subsidiary, acquired in the fourth quarter of fiscal year 2014.
(3)
Based on year-end balances and sales or cost of sales for the last 90 days of the year.
(4)
Certain computations may reflect rounding adjustments.
(5)
Represents McKesson stockholders’ equity, excluding noncontrolling interests, divided by year-end common shares outstanding.
(6)
Consists of the sum of total debt and McKesson stockholders’ equity, excluding noncontrolling interests.
(7)
Ratio is computed as total debt divided by capital employed.
(8)
Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt and McKesson stockholders’ equity, excluding noncontrolling interests (“net capital employed”).
(9)
Represents a five-quarter average of McKesson stockholders’ equity, excluding noncontrolling interests.
(10)
Ratio is computed as net income attributable to McKesson Corporation divided by a five-quarter average of McKesson stockholders’ equity, excluding noncontrolling interests.

28

McKESSON CORPORATION
FINANCIAL REVIEW

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
GENERAL
Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K. 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.
Certain statements in this report constitute forward-looking statements. See Item 1 - Business - Forward-Looking Statements in Part I of this Annual Report on Form 10-K for additional factors relating to these statements; also see Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for a list of certain risk factors applicable to our business, financial condition and results of operations.
We conduct our business through two operating segments: McKesson Distribution Solutions and McKesson Technology Solutions. See Financial Note 25, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for a description of these segments.

29

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


RESULTS OF OPERATIONS
Overview:
(Dollars in millions, except per share data)
Years Ended March 31,
 
Change
2014
 
2013
 
2012
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
137,609

 
$
122,069

 
$
122,321

 
13

%
 

%
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
$
8,309

 
$
6,848

 
$
6,402

 
21

%
 
7

%
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
$
5,942

 
$
4,523

 
$
4,278

 
31

 
 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
$
2,096

 
$
1,928

 
$
1,893

 
9

 
 
2

 
Income Tax Expense
(742
)
 
(581
)
 
(514
)
 
28

 
 
13

 
Income from Continuing Operations
1,354

 
1,347

 
1,379

 
1

 
 
(2
)
 
Income (Loss) from Discontinued Operations, Net of Tax
(96
)
 
(9
)
 
24

 
NM

 
 
NM

 
Net Income
1,258

 
1,338

 
1,403

 
(6
)
 
 
(5
)
 
Net Loss Attributable to Noncontrolling Interests
5

 

 

 

 
 

 
Net Income Attributable to McKesson Corporation
$
1,263

 
$
1,338

 
$
1,403

 
(6
)
 
 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
 
 
 
 
 
 
 
 
 
 
 
Continuing Operations
$
5.83

 
$
5.62

 
$
5.49

 
4

%
 
2

%
Discontinued Operations
(0.42
)
 
(0.03
)
 
0.10

 
NM

 
 
NM

 
Total
$
5.41

 
$
5.59

 
$
5.59

 
(3
)
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Diluted Common Shares
233

 
239

 
251

 
(3
)
%
 
(5
)
%
NM - not meaningful
Revenues for 2014 increased from 2013 primarily due to market growth, reflecting growing drug utilization and price increases, our acquisitions of Celesio AG (“Celesio”) and PSS World Medical, Inc. (“PSS World Medical”) which were completed in February 2014 and 2013, and our mix of business. Revenues for 2014 were also impacted by price deflation associated with brand to generics drug conversion. Revenues for 2013 approximated 2012 primarily reflecting market growth, net of price deflation.
Gross profit and gross profit margin increased in 2014 and 2013 primarily due to our business acquisitions, growth in sales of higher margin generic drugs, higher buy margin and our mix of business, partially offset by a decrease in sell margin. Additionally, 2014 gross profit was impacted by LIFO-related inventory charges of $311 million.
Operating expenses increased in 2014 and 2013 primarily due to our business acquisitions, including increases in acquisition-related expenses and higher intangible asset amortization, and higher compensation and benefit costs. Operating expenses in 2013 were favorably impacted by an $81 million non-cash gain on business combination and lower Average Wholesale Price (“AWP”) litigation charges, partially offset by a $40 million charge for a legal dispute and a $36 million charge for goodwill impairment. AWP litigation charges were $68 million, $72 million and $149 million in 2014, 2013 and 2012.
Income from continuing operations before income taxes increased in 2014 and 2013 reflecting higher gross profit, partially offset by higher operating and interest expenses. Increased interest expense in 2014 was primarily attributable to our acquisition of Celesio. Additionally, in 2013 we committed to a plan to sell our 49% equity interest in Nadro, S.A. de C.V (“Nadro”) and recorded a pre-tax non-cash impairment charge of $191 million reducing the investment’s carrying value to its estimated fair value. Nadro was sold in 2014 with no material gain or loss on its disposition.

30

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Our reported income tax rates were 35.4%, 30.1% and 27.2% in 2014, 2013 and 2012. Fluctuations in our reported income tax rates are primarily due to changes within our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates, and discrete items. Income tax expense included $94 million of net discrete tax expense in 2014, and $29 million and $66 million of net discrete tax benefit in 2013 and 2012. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. Included in the 2012 discrete tax benefit is a $31 million credit to income tax expense as a result of the reversal of an unrecognized tax benefit relating to our AWP litigation.
During 2014, we committed to a plan to sell our International Technology business and our Hospital Automation business from our Technology Solutions segment and certain small businesses from our Distribution Solutions segment. In the third quarter of 2014, we recorded a non-cash pre-tax and after-tax impairment charge of $80 million to reduce the carrying value of our International Technology business to its estimated net realizable value (fair value less costs to sell).
Net income attributable to McKesson Corporation was $1,263 million, $1,338 million and $1,403 million in 2014, 2013 and 2012, and diluted earnings per common share attributable to McKesson Corporation were $5.41, $5.59 and $5.59. Diluted earnings per common share attributable to McKesson Corporation were favorably affected by decreases in our weighted average shares outstanding primarily due to the cumulative effect of share repurchases.
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired. Upon the acquisition, our ownership of Celesio’s fully diluted shares was 75.6% and as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares. The acquisition was funded by utilizing a senior bridge loan, our existing accounts receivable facility and cash on hand. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of Celesio expands our global geographic area; the combined company will be one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide.
Revenues:
 
Years Ended March 31,
 
Change
(Dollars in millions)
2014
 
2013
 
2012
 
2014
 
2013
Distribution Solutions
 
 
 
 
 
 
 
 
 
 
 
North America pharmaceutical distribution
& services
$
123,930

 
$
115,443

 
$
116,279

 
7

%
 
(1
)
%
International pharmaceutical distribution & services
4,848

 

 

 

 
 

 
Medical-Surgical distribution & services
5,648

 
3,603

 
3,145

 
57

 
 
15

 
Total Distribution Solutions
134,426

 
119,046

 
119,424

 
13

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Technology Solutions - products and services
3,183

 
3,023

 
2,897

 
5

 
 
4

 
Total Revenues
$
137,609

 
$
122,069

 
$
122,321

 
13

 
 

 
Revenues for 2014 increased 13% to $137.6 billion from 2013 and revenues for 2013 of $122.1 billion approximated 2012. Increases in our revenues were primarily driven by our Distribution Solutions segment, which accounted for approximately 98% of our consolidated revenues.

31

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Distribution Solutions
North America pharmaceutical distribution and services revenues increased in 2014 compared to 2013 primarily due to market growth, reflecting growing drug utilization and price increases, and our mix of business. These increases were partially offset by price deflation associated with brand to generics drug conversion. North America revenues for 2013 approximated 2012 primarily due to market growth and our mix of business, partially offset by price deflation associated with brand to generic drug conversions, the loss of customers and fewer sales days.
International pharmaceutical distribution and services revenues of $4.8 billion in 2014 represents revenues from Celesio, our majority-owned subsidiary, acquired in February 2014.
Medical-Surgical distribution and services revenues increased in 2014 compared to 2013 primarily due to our acquisition of PSS World Medical in February 2013 and market growth. Revenues for 2013 increased compared to 2012 primarily due to market growth, new customers and our acquisition of PSS World Medical. These 2013 increases were partially offset by five less sales days.
Technology Solutions
Technology Solutions revenues increased in 2014 compared to 2013 primarily due to small business acquisitions and a higher volume of claims processing. These increases were partially offset by a decrease in software product revenues. Technology Solutions revenues increased in 2013 compared to 2012 mainly due to acquisitions, higher volume of claims processing revenues and an increase in maintenance revenues from new and existing customers.
Gross Profit:
 
Years Ended March 31,
 
Change
(Dollars in millions)
2014
 
 
2013
 
 
2012
 
 
2014
 
2013
Gross Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distribution Solutions (1)
$
6,767

 
 
$
5,435

 
 
$
5,057

 
 
25

%
 
7

%
Technology Solutions
1,542

 
 
1,413

 
 
1,345

 
 
9

 
 
5

 
Total
$
8,309

 
 
$
6,848

 
 
$
6,402

 
 
21

 
 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit Margin
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distribution Solutions
5.03

%
 
4.57

%
 
4.23

%
 
46

bp
 
34

bp 
Technology Solutions
48.44

 
 
46.74

 
 
46.43

 
 
170

 
 
31

 
Total
6.04

 
 
5.61

 
 
5.23

 
 
43

 
 
38

 
bp - basis points
(1)
Gross profit for our Distribution Solutions segment for 2014, 2013 and 2012 includes LIFO charges of $311 million, $13 million and $11 million.
Gross profit increased 21% to $8.3 billion in 2014 and 7% to $6.8 billion in 2013. As a percentage of revenues, gross profit increased by 43 bp in 2014 and by 38 bp in 2013. Gross profit margin increased in 2014 and 2013 reflecting increases in both of our operating segments.

32

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Distribution Solutions
Distribution Solutions segment’s gross profit margin increased in 2014 compared to 2013 primarily due to our business acquisitions, growth in sales of higher margin generic drugs, and an increase in buy margin. Buy margin primarily reflects volume and timing of compensation we receive from pharmaceutical manufacturers. These increases were partially offset by a decrease in sell margin and charges related to the LIFO method of accounting for inventories, as further described below. Additionally, gross profit was impacted by a $50 million charge for the reversal of a fair value step-up of inventory acquired as part of the Celesio acquisition. Gross profit margin increased in 2013 compared to 2012 primarily due to higher sales of generic drugs, business acquisitions, an increase in buy margin and antitrust settlement receipts, and a lower proportion of revenues within the segment attributed to lower-margin sales to customers’ warehouses. These increases were partially offset by a decrease in sell margin.
Our last-in, first-out (“LIFO”) net inventory expense was $311 million in 2014, $13 million in 2013 and $11 million in 2012. Our Distribution Solutions segment uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The practice in the Distribution Solutions segment’s distribution businesses is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price-related inventory losses. A LIFO expense 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.
From 2005 through 2011, we experienced net price deflation and in 2012 and 2013, we began to experience a modest net inflationary trend in our pharmaceuticals indices, as price increases on branded pharmaceuticals exceeded the impact of price declines and shifts toward generic pharmaceuticals, including the effect of branded pharmaceutical products that have lost market exclusivity. As a result of this cumulative net price deflation, at March 31, 2013, pharmaceutical inventories at LIFO were $60 million more than market and, accordingly, a $60 million lower-of-cost or market (“LCM”) reserve reduced inventories to market.  During 2014, we experienced net inflation in our pharmaceutical inventories.  As a result, in 2014, we recorded LIFO charges of $311 million to cost of sales, net of the LCM reserve release. As of March 31, 2014, pharmaceutical inventories at LIFO did not exceed market. At March 31, 2014 and March 31, 2013, our LIFO reserves, net of LCM adjustments were $431 million and $120 million. Additional information regarding our LIFO accounting is included under the caption “Critical Accounting Policies and Estimates,” included in this Financial Review.
Technology Solutions
Technology Solutions segment’s gross profit margin increased in 2014 compared to 2013 primarily due to growth in higher-margin revenues, partially offset by product alignment charges. Technology Solutions segment’s gross profit margin increased in 2013 compared to 2012 primarily due to a change in product and services mix and a decline in product alignment charges partially offset by a $10 million impairment of capitalized software held for sale.
In 2014, this segment recorded pre-tax charges totaling $57 million.  These charges primarily consisted of $35 million of product alignment charges, $15 million of integration-related expenses and $7 million of reduction-in-workforce severance charges.  Included in the total charge was $35 million for severance for employees primarily in our research and development, customer services and sales functions, and $15 million for asset impairments which primarily represents the write-off of deferred costs for a product that will no longer be developed.  Charges were recorded in our consolidated statement of operations as follows: $34 million in cost of sales and $23 million in operating expenses. 
In 2013, this segment recorded $46 million of non-cash pre-tax impairment charges. These charges were the result of a significant decrease in estimated revenues for a software product. The charge included a $36 million goodwill impairment to reduce the carrying value of goodwill within the applicable reporting unit to its implied fair value. In addition, the goodwill had a nominal tax basis. This impairment charge was recorded in operating expenses within our consolidated statement of operations. The balance of the charge represents a $10 million impairment to reduce the carrying value of the unamortized capitalized software held for sale costs for this product to its net realizable value. We concluded that the estimated future undiscounted revenues, net of estimated related costs, were insufficient to recover its carrying value. This impairment charge was recorded in cost of sales within our consolidated statement of operations.

33

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


In 2012, we approved a plan to align our hospital clinical and revenue cycle healthcare software products within this segment. As part of this alignment strategy, we began converging our core clinical and revenue cycle Horizon and Paragon product lines onto Paragon’s Microsoft®-based platform. We also stopped development of our HzERM software product. As the result of this plan, we recorded product alignment charges of $51 million, of which $31 million was recorded to cost of sales and $20 million was recorded to operating expenses.
Operating Expenses: 
 
Years Ended March 31,
 
Change
(Dollars in millions)
2014
 
2013
 
2012
 
 
2014
 
2013
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Distribution Solutions (1)
$
4,335

 
$
3,068

 
$
2,854

 
 
41

%
 
7

%
Technology Solutions
1,156

 
1,109

 
1,011

 
 
4

 
 
10

 
Corporate (2)
451

 
346

 
413

 
 
30

 
 
(16
)
 
Total
$
5,942

 
$
4,523

 
$
4,278

 
 
31

 
 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses as a Percentage of Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Distribution Solutions
3.22

%
2.58

%
2.39

%
 
64

bp 
 
19

bp 
Technology Solutions
36.32

 
36.69

 
34.90

 
 
(37
)
 
 
179

 
Total
4.32

 
3.71

 
3.50

 
 
61

 
 
21

 
(1)
Operating expenses for 2014, 2013 and 2012 include $68 million, $72 million and $149 million of AWP litigation charges.
(2)
Corporate expenses for 2013 are net of an $81 million pre-tax gain on business combination.
Operating expenses increased 31% to $5.9 billion in 2014 and 6% to $4.5 billion in 2013. Operating expenses increased in 2014 and 2013 primarily due to our business acquisitions, including increases in acquisition-related expenses and higher intangible asset amortization, and higher compensation and benefit costs. Additionally, 2013 operating expenses were impacted by a $40 million charge for a legal dispute in our Canadian business, a $36 million non-cash goodwill impairment charge, an $81 million gain on business combination, and lower AWP charges.
Distribution Solutions
Distribution Solutions segment’s operating expenses and operating expenses as a percentage of revenues increased in 2014 and 2013 primarily due to our business acquisitions and higher employee compensation and benefit costs. Operating expenses in 2013 were also impacted by lower AWP charges and a $40 million charge for a legal dispute in our Canadian business.
The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and whenever events or circumstances indicate changes, including consideration of the pace and progress of discussions relating to potentially resolving other public entity claims. Charges related to AWP litigation, including accrued interest, are recorded in operating expenses within our Distribution Solutions segment. Such pre-tax charges were $68 million, $72 million and $149 million in 2014, 2013 and 2012.
Refer to Financial Note 22, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for further information.
Technology Solutions
Technology Solutions segment’s operating expenses increased in 2014 compared to 2013 primarily due to small business acquisitions, integration-related expenses, reduction-in-workforce severance charges, and continued investment in research and development activities. These increases were partially offset by a $36 million goodwill impairment charge incurred in 2013.
Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenues increased in 2013 compared to 2012 primarily due to our continued investment in research and development activities, a $36 million goodwill impairment charge and acquisitions. These increases were partially offset by product alignment charges incurred in 2012. The goodwill impairment was recorded to reduce the carrying value of goodwill within the applicable reporting unit to its implied fair value.

34

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Corporate
Corporate expenses increased in 2014 compared to 2013 primarily due to higher compensation and benefit costs, acquisition‑related expenses and the 2013 $81 million gain on business combination. Corporate expenses decreased in 2013 compared to 2012 primarily due to the gain on business combination and a charitable contribution in 2012. These decreases were partially offset by an increase in a reserve for an environmental liability, acquisition-related expenses and other corporate initiatives.
In 2013, we purchased the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California for $90 million, which was funded from cash on hand. We previously held a 50% ownership interest and were the primary tenant in this building. This transaction was accounted for as a step acquisition, which requires that we re-measure our previously held 50% ownership interest to fair value and record the difference between the fair value and carrying value as a gain in the consolidated statements of operations. The re-measurement to fair value resulted in a non-cash pre-tax gain of $81 million ($51 million after-tax), which was recorded as a gain on business combination within Corporate in the consolidated statements of operations.
Acquisition Expenses and Related Adjustments
Acquisition expenses and related adjustments, which include transaction and integration expenses that are directly related to acquisitions by the Company and gains and losses related to business combinations were $218 million, $1 million and $26 million in 2014, 2013 and 2012. Expenses for 2014 were primarily related to our acquisition of Celesio and integration of PSS World Medical. Expenses for 2013 primarily pertained to PSS World Medical and a $81 million gain on business combination from our acquisition of the remaining 50% ownership interest in our Corporate headquarters building. Expenses for 2012 were primarily incurred to integrate a 2011 acquisition. Additional acquisition-related expenses are expected to be incurred as we integrate our businesses. 
Acquisition expenses and related adjustments were as follows:
 
Years Ended March 31,
(In millions)
2014
 
2013
 
2012
Cost of Sales
$
3

 
$

 
$

Operating Expenses
 
 
 
 
 
Transaction closing expenses
39

 
16

 
3

Restructuring, severance and relocation
43

 
30

 
3

Other integration related expenses
73

 
25

 
20

Gain on business combination

 
(81
)
 

Total
155

 
(10
)
 
26

Other Income, Net
14

 

 

Interest Expense - bridge loan fees
46

 
11

 

Total Acquisition Expenses and Related Adjustments
$
218

 
$
1

 
$
26


35

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Acquisition expenses and related adjustments by segment were as follows:
 
Years Ended March 31,
(In millions)
2014
 
2013
 
2012
Cost of Sales - Technology Solutions
$
3

 
$

 
$

Operating Expenses
 
 
 
 
 
Distribution Solutions
119

 
47

 
24

Technology Solutions
15

 
7

 
1

Corporate
21

 
(64
)
 
1

Total
155

 
(10
)
 
26

Corporate - Other Income, Net
14

 

 

Corporate - Interest Expense
46

 
11

 

Total Acquisition Expenses and Related Adjustments
$
218

 
$
1

 
$
26

Amortization expenses of acquired intangible assets purchased in connection with acquisitions recorded in operating expenses were $308 million, $196 million and $167 million in 2014, 2013 and 2012. The increases in amortization expense reflect our recent business acquisitions. Additionally, certain intangible assets associated with a 2007 acquisition were fully amortized in 2012.
Other Income, Net: 
 
Years Ended March 31,
 
Change
(Dollars in millions)
2014
 
2013
 
2012
 
2014
 
2013
Distribution Solutions
$
29

 
$
19

 
$
16

 
53

%
 
19

%
Technology Solutions
1

 
4

 
4

 
(75
)
 
 

 
Corporate
2

 
11

 

 
(82
)
 
 
100

 
Total
$
32

 
$
34

 
$
20

 
(6
)
 
 
70

 
Other income, net decreased slightly in 2014 compared to 2013 primarily due to our acquisition of Celesio including acquisition‑related expenses. Other income, net increased in 2013 compared to 2012 primarily due to an impairment of an asset in 2012.
Impairment of an Equity Investment: 
In 2013, we committed to a plan to sell our 49% equity interest in Nadro, S.A. de C.V. (“Nadro”) and in the fourth quarter of 2013 recorded a pre-tax impairment charge of $191 million reducing the investment’s carrying value to its estimated fair value. The charge reflected deterioration in Nadro’s market position, projected lower revenue growth rates and operating margins and continued business challenges in the wholesale pharmaceutical distribution business in Mexico. Cumulative foreign currency translation losses of $69 million were included in the assessment of the investment’s carrying value for purposes of calculating the impairment charge. Cumulative foreign currency translation losses (net of tax), were included in Accumulated Other Comprehensive Income on our consolidated balance sheet at March 31, 2013. The charge was recorded in impairment of an equity investment in the consolidated statements of operations within our Distribution Solutions segment. In September 2013, we completed the sale of our 49% equity interest in Nadro. Under the terms of the agreement, we received $41 million in total cash consideration. There was no material gain or loss on the disposition based on the adjusted net realizable value of the investment at the time of the sale.

36

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Segment Operating Profit, Corporate Expenses, Net and Interest Expense:
 
Years Ended March 31,
 
 
Change
(Dollars in millions)
2014
 
2013
 
2012
 
 
2014
 
2013
Segment Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
Distribution Solutions
$
2,461

 
$
2,195

 
$
2,219

 
 
12

%
 
(1
)
%
Technology Solutions
387

 
308

 
338

 
 
26

  
 
(9
)
 
Subtotal
2,848

 
2,503

 
2,557

 
 
14

  
 
(2
)
 
Corporate Expenses, Net
(449
)
 
(335
)
 
(413
)
 
 
34

  
 
(19
)
 
Interest Expense
(303
)
 
(240
)
 
(251
)
 
 
26

  
 
(4
)
 
Income From Continuing Operations Before Income Taxes
$
2,096

 
$
1,928

 
$
1,893

 
 
9

  
 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Operating Profit Margin
 
 
 
 
 
 
 
 
 
 
 
 
Distribution Solutions
1.83

%
1.84

%
1.86

%
 
(1
)
bp 
 
(2
)
bp 
Technology Solutions
12.16

 
10.19

 
11.67

 
 
197

  
 
(148
)
 
Distribution Solutions: Operating profit margin for our Distribution Solutions segment in 2014 was flat compared to 2013, primarily reflecting an increase in gross profit margin and the $191 million impairment charge on an equity investment incurred in 2013, partially offset by higher operating expenses as a percentage of revenues, which includes the effects of our acquisitions. Operating profit margin for our Distribution Solutions segment decreased in 2013 compared to 2012 primarily due to the $191 million impairment charge on an equity investment and higher operating expenses as a percentage of revenues, which included the effects of our acquisitions. These 2013 increases were partially offset by an increase in gross profit margin.
Technology Solutions: Operating profit margin in our Technology Solutions segment increased in 2014 compared to 2013 primarily due to an increase in gross profit margin and a decrease in operating expenses as a percentage of revenues. Operating profit margin in our Technology Solutions segment decreased in 2013 compared to 2012 primarily due to an increase in operating expenses as a percentage of revenues.
Corporate: Corporate expenses, net of other income increased in 2014 compared to 2013 due to higher operating expenses. Corporate expenses for 2013 also included the $81 million gain on business combination. Corporate expenses, net of other income decreased in 2013 compared to 2012 primarily due to the gain on business combination and an increase in other income.
Interest Expense: Interest expense increased in 2014 compared to 2013 primarily due to our acquisition of Celesio, including $46 million of bridge loan fees, interest on $4.1 billion of new debt issued to fund the acquisition and interest on debt of Celesio. These increases are partially offset by repayment of $500 million of the current portion of our long-term debt in March 2013. Interest expense decreased in 2013 compared to 2012 primarily due to the repayment of $400 million of long-term debt in February 2012, partially offset by $11 million of bridge loan fees paid in connection with our acquisition of PSS World Medical. Interest expense fluctuates based on timing, amounts and interest rates of term debt that is repaid and new term debt issued, as well as amounts incurred for bridge loan fees. Refer to our discussion under the caption “Credit Resources” within this Financial Review for additional information regarding our financing activities.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Income Taxes
Our reported income tax rates were 35.4%, 30.1% and 27.2% in 2014, 2013 and 2012. Fluctuations in our reported income tax rates are primarily due to changes within our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates and discrete items. Income tax expense included $94 million of net discrete tax expense in 2014, and $29 million and $66 million of net discrete tax benefit in 2013 and 2012. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. Included in the 2012 discrete tax benefit is a $31 million credit to income tax expense as a result of the reversal of an unrecognized tax benefit relating to our AWP litigation.
We have received reassessments from the Canada Revenue Agency (“CRA”) for a total of $219 million related to a transfer pricing matter impacting years 2003 through 2009. We previously appealed the reassessment for 2003 to the Tax Court of Canada and have filed a notice of objection for 2004 through 2009. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the reassessment with respect to 2003. On January 10, 2014, we filed a Notice of Appeal to the Federal Court of Appeal in response to the judgment of the Tax Court of Canada. As a result of the unfavorable Tax Court decision relating to 2003, we recognized a discrete tax expense of $122 million in the third quarter of 2014, which includes tax and interest for the years 2003 through 2013. The ultimate resolution of these issues could result in an increase or decrease to income tax expense.
We have received tax assessments of $98 million from the U.S. Internal Revenue Service (“IRS”) relating to 2003 through 2006. We are pursuing administrative relief through the appeals process. We continue to believe in the merits of our tax positions and that we have adequately provided for any potential adverse results relating to these examinations in our financial statements.
Income (Loss) from Discontinued Operations, Net of Tax
Results from discontinued operations, net of tax, were losses of $96 million and $9 million in 2014 and 2013, and income of $24 million in 2012. Results for 2014 include a non-cash pre-tax and after-tax impairment charge of $80 million.
In 2014, we committed to a plan to sell our International Technology business and our Hospital Automation business from our Technology Solutions segment and certain small businesses from our Distribution Solutions segment. During the third quarter of 2014, we recorded the $80 million impairment charges to reduce the carrying value of our International Technology business to its estimated net realizable value (fair value less costs to sell). The charge was primarily the result of the terms of the preliminary purchase offers received for all of the business during the third quarter of 2014. A portion of the impairment charge was attributed to goodwill and other long-lived assets and as a result, there was no tax benefit associated with this portion of the charge. The ultimate selling price of our International Technology business may be higher or lower than our current assessment of fair value.
In 2014, we sold our Hospital Automation business for cash proceeds of $55 million, which approximates the business’ net book value. The results of operations for these businesses are included in income (loss) from discontinued operations for 2014, 2013 and 2012.
Net Loss Attributable to Noncontrolling Interests: Noncontrolling interests primarily represent the portion of Celesio’s net profit or loss that is not allocable to McKesson Corporation. At March 31, 2014, McKesson owned approximately 75.4% of Celesio’s common shares on an outstanding fully diluted basis.
Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was $1,263 million, $1,338 million and $1,403 million in 2014, 2013 and 2012 and diluted earnings per common share were $5.41, $5.59 and $5.59.
Weighted Average Diluted Common Shares Outstanding: Diluted earnings per common share was calculated based on a weighted average number of shares outstanding of 233 million, 239 million and 251 million for 2014, 2013 and 2012. The decreases in the number of weighted average diluted common shares outstanding primarily reflect the cumulative effect of share repurchases, partially offset by the exercise and settlement of share-based awards.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Foreign Operations
Foreign operations accounted for 11.0%, 8.2% and 8.4% of 2014, 2013 and 2012 consolidated revenues. Foreign operations are subject to certain risks, including currency fluctuations. We monitor our operations and adopt strategies responsive to changes in the economic and political environment in each of the countries in which we operate. Additional information regarding our foreign operations is also included in Financial Note 25, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Business Combinations
Fiscal 2014
On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the “Acquisition”). Upon the acquisition, our ownership of Celesio’s fully diluted shares was 75.6% and, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet. The Acquisition was funded by utilizing a senior bridge loan, our existing accounts receivable facility and cash on hand. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of Celesio expands our global geographic area; the combined company will be one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide.
Our acquisition of Celesio was consummated through a series of transactions:
129.3 million of common shares of Celesio were acquired from Franz Haniel & Cie. GmbH (“Haniel”) for cash consideration of €23.50 per common share or $4,128 million.
4,840 of the 7,000 convertible bonds issued by Celesio in the nominal aggregate amount of €350 million due in October 2014 (the “2014 Bonds”), and 2,180 of the 3,500 convertible bonds issued by Celesio in the nominal amount of €350 million due in April 2018 (the “2018 Bonds”) were acquired from Elliot International, L.P., The Liverpool Limited Partnership and Elliot Capital Advisers, L.P. (together, the “Elliot Group”) for cash consideration of $951 million. The 2,180 acquired 2018 Bonds were converted to 11.4 million common shares of Celesio.
303 of the 2014 Bonds and 216 of the 2018 Bonds were acquired in private transactions for cash consideration of $63 million. 139 of the acquired 2018 Bonds were converted to 0.7 million common shares of Celesio.
From February 7, 2014 through March 31, 2014, we converted our remaining 2014 Bonds and 2018 Bonds into 11.9 million of Celesio common shares.  Also during this time period, substantially all of the remaining 2014 Bonds and 2018 Bonds held by third parties were converted to 9 million Celesio common shares valued at $313 million and approximately $30 million in cash. At March 31, 2014, we owned approximately 75.4% of Celesio’s outstanding and fully diluted common shares.
In accordance with a business combination agreement that we entered into with Celesio in January 2014, on February 28, 2014 and April 7, 2014 we launched voluntary public tender offers for the common shares of Celesio that remain outstanding for €23.50 per share. In April 2014, the last of these tender offers expired and we acquired 1 million of additional common shares. We also intend to enter into a domination and profit and loss transfer agreement, with Celesio as the dominated party, pursuant to Sections 291 et seq. of the German Stock Corporation Act (Aktiengesetz - AktG). Such a domination and profit and loss transfer agreement does not require any further regulatory approval.
Fiscal 2013
In addition to our April 2012 acquisition of the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California, on February 22, 2013, we acquired all of the outstanding shares of PSS World Medical for $29.00 per share plus the assumption of PSS World Medical’s debt, or approximately $1.9 billion in aggregate, consisting of cash consideration of $1.3 billion, net of cash acquired, and the assumption of long-term debt with a fair value of $0.6 billion. The cash paid at acquisition was funded from cash on hand and the issuance of long-term debt. PSS World Medical markets and distributes medical products and services throughout the United States. The acquisition of PSS World Medical expands our existing Medical-Surgical business. Financial results for PSS World Medical since the acquisition date are included in the results of operations within our Medical-Surgical distribution and services business, which is part of our Distribution Solutions segment beginning in the fourth quarter of 2013.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Fiscal 2012
On March 25, 2012, we acquired substantially all of the assets of Drug Trading Company Limited, the independent banner business of the Katz Group Canada Inc. (“Katz Group”), and Medicine Shoppe Canada Inc., the franchise business of the Katz Group (collectively, “Katz Assets”) for $925 million, which was funded from cash on hand. The acquisition of the assets from the Drug Trading Company Limited consists of a marketing and purchasing arm of independently owned pharmacies in Canada. The acquisition of Medicine Shoppe Canada Inc. consists of the franchise business of providing services to independent pharmacies in Canada. Financial results for the acquired Katz Assets have been included in the results of operations within our Canadian pharmaceutical distribution and services business, which is part of our Distribution Solutions segment, beginning in the first quarter of 2013.
During the last three years, we also completed a number of other smaller acquisitions within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.
Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. The pro forma results of operations for our business acquisitions and the results of operations for these acquisitions since the acquisition date have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.
Refer to Financial Notes 2 and 14, “Business Combinations” and “Debt and Financing Activities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
2015 Outlook
Information regarding the Company’s 2015 outlook is contained in our Form 8-K dated May 13, 2014. This Form 8-K should be read in conjunction with the sections Item 1 - Business - Forward-Looking Statements and Item 1A - Risk Factors in Part 1 of this Annual Report on Form 10-K.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters that were uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial condition or results from operations. Below are the estimates that we believe are critical to the understanding of our operating results and financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to customers who purchase our products and services. Other customer financing primarily relates to guarantees provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing to certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate the receivables for which we do not expect full collection based on historical collection rates and specific knowledge regarding the current creditworthiness of our customers and record an allowance in our consolidated financial statements for these amounts.
In determining the appropriate allowance for doubtful accounts, which includes portfolio and specific reserves, the Company reviews accounts receivable aging, industry trends, customer financial strength, credit standing, historical write-off trends and payment history to assess the probability of collection. If the frequency and severity of customer defaults due to our customers’ financial condition or general economic conditions change, our allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding receivables and other customer financing and adjust allowances for accounts where collection may be in doubt. During 2014, sales to our ten largest customers accounted for approximately 48% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation ("CVS"), accounted for approximately 16% of our total consolidated revenues. At March 31, 2014, trade accounts receivable from our ten largest customers were approximately 32% of total trade accounts receivable. Accounts receivable from CVS were approximately 12% of total trade accounts receivable. As a result, our sales and credit concentration is significant. A default in payments, a material reduction in purchases from these, or any other large customer or the loss of a large customer could have a material adverse impact on our financial condition, results of operations and liquidity.
Reserve methodologies are assessed annually based on historical losses and economic, business and market trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present. We believe the reserves maintained and expenses recorded in 2014 are appropriate and consistent with historical methodologies employed. At this time, we are not aware of any internal process or customer issues that might lead to a significant increase in the foreseeable future in our allowance for doubtful accounts as a percentage of net revenue.
At March 31, 2014, trade and notes receivables were $12,755 million prior to allowances of $113 million. In 2014, 2013 and 2012 our provision for bad debts was $38 million, $28 million and $30 million. At March 31, 2014 and 2013, the allowance as a percentage of trade and notes receivables was 0.9% and 1.4%. An increase or decrease of a hypothetical 0.1% in the 2014 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $13 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios. Additional information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report on Form 10-K.
Inventories: We report inventories at the lower of cost or market (“LCM”). Inventories for our Distribution Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment, the majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign locations is based on weighted average purchase price using the first-in, first-out method (“FIFO”). Technology Solutions segment inventories consist of computer hardware with cost generally determined by the standard cost method, which approximates average cost. Rebates, cash discounts and other incentives received from vendors relating to the purchase or distribution of inventory are considered as product discounts and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is sold. Total inventories were $13.3 billion and $10.3 billion at March 31, 2014 and 2013.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


The LIFO method was used to value approximately 67% and 80% of our inventories at March 31, 2014 and 2013. If we had used the FIFO method of inventory valuation, which approximates current replacement costs, inventories would have been approximately $431 million and $120 million higher than the amounts reported at March 31, 2014 and 2013. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. In 2014, 2013, and 2012, we recognized net LIFO expense of $311 million, $13 million and $11 million within our consolidated statements of operations. A LIFO expense is recognized when the net effect of price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines and shifts towards generic pharmaceuticals, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines and shifts towards generic pharmaceuticals exceeds the impact of price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Primarily due to historical net deflation in our pharmaceutical inventories, pharmaceutical inventories at LIFO were $60 million higher than market as of March 31, 2013. As a result, we recorded a LCM credit of $60 million and $16 million in 2014 and 2013 within our consolidated statements of operations to adjust our LIFO inventories to market.
In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that could affect the value of our inventories. We write down inventories which are considered excess and obsolete, as a result of these reviews. These factors could make our estimates of inventory valuation differ from actual results.
Business Combinations: We account for acquired businesses using the acquisition method of accounting, which requires that once control is obtained of a business, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses 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, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Refer to Financial Note 2, “Business Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information regarding our acquisitions.
Goodwill and Intangible Assets: As a result of acquiring businesses, we have $9,927 million and $6,405 million of goodwill at March 31, 2014 and 2013 and $5,022 million and $2,270 million of intangible assets, net at March 31, 2014 and 2013. We maintain goodwill assets on our books unless the assets are considered to be impaired. We perform an impairment test on goodwill balances annually in the fourth quarter or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time.
Impairment testing is conducted at the reporting unit level, which is generally defined as a component — one level below our Distribution Solutions and Technology Solutions operating segments, for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit. Components that have essentially similar operations, products, services, customers and operating margin are aggregated as a single reporting unit. Management judgment is involved in determining which components may be combined and changes in these combinations could affect the outcome of the testing.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


The first step in goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. This step may be performed utilizing either a qualitative or quantitative assessment. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is necessary. If the carrying value of the reporting unit is higher than its estimated fair value, the second step must be performed to measure the amount of impairment loss. Under the second step, the implied fair value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any unrecognized intangibles assets, from the fair value of the reporting unit calculated in the first step of the impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess.
To estimate the fair value of our reporting units, we use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the fair values.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approach include the selection of appropriate guideline companies, the determination of market value multiples for both the guideline companies and the reporting unit, the determination of applicable premiums and discounts based on any differences in marketability between the business and the guideline companies and for the income approach, the required rate of return used in the discounted cash flow method, which reflects capital market conditions and the specific risks associated with the business. 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.
Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair value may materially impact our results of operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including failure to meet business plans, a further deterioration in the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge. In 2014 and 2012, we concluded that there were no impairments of goodwill as the fair value of each reporting unit exceeded its carrying value. In 2013, we recorded a goodwill impairment charge of $36 million in our Technology Solutions segment. For our newly-acquired Celesio operations, we determined the preliminary fair value of the assets acquired and liabilities assumed using various methods, including an overall discounted cash flow analysis performed for all of Celesio’s operations. As of March 31, 2014, the fair value assignments were preliminary and could change significantly upon finalization of the fair value assignments.
Currently, all of our intangible assets are subject to amortization and are amortized based on the pattern of their economic consumption or on a straight‑line basis over their estimated useful lives, ranging from one to thirty-eight years.  We review intangible assets for impairment 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 over its fair value.  Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. There were no material impairments of intangibles in 2014, 2013 or 2012.  Our ongoing consideration of all the factors described previously could result in impairment charges in the future, which could adversely affect our net income.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in factual circumstances. As of March 31, 2014 and 2013, supplier reserves were $181 million and $164 million. The ultimate outcome of any outstanding claims may be different from our estimate. All of the supplier reserves at March 31, 2014 and 2013 pertain to our Distribution Solutions segment. An increase or decrease in the supplier reserve as a hypothetical 0.1% of trade payables at March 31, 2014 would result in an increase or decrease in the cost of sales of approximately $22 million in 2014. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax provision and in evaluating income tax uncertainties. We review our tax positions at the end of each quarter and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative net operating losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. We had deferred income tax assets (net of valuation allowances) of $1,332 million and $1,247 million at March 31, 2014 and 2013 and deferred tax liabilities of $4,133 million and $3,114 million. Deferred tax assets primarily consist of timing differences on our compensation and benefit related accruals and net operating loss and credit carryforwards. Deferred tax liabilities primarily consist of basis differences for inventory valuation (including inventory valued at LIFO) and intangible assets. We established valuation allowances of $270 million and $118 million for 2014 and 2013 against certain deferred tax assets, which primarily relate to federal, state and foreign net operating loss carryforwards for which the ultimate realization of future benefits is uncertain. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, including those laws pertaining to LIFO, our cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax regulations across multiple global jurisdictions where we conduct our operations. We recognize liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual settlement with the tax authorities. These estimates may change due to changing facts and circumstances; however, due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that differs from our current estimate of tax liabilities and related interest. If our current estimate of tax and interest liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax expense may be recognized.
If our assumptions and estimates described above were to change, an increase/decrease of 1% in our effective tax rate as applied to income from continuing operations would have increased/decreased tax expense by approximately $21 million, or $0.09 per diluted share, for 2014.
Loss Contingencies: We are subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations, together with our existing sources of liquidity from our accounts receivable sales facilities, revolving credit facilities and commercial paper issuance, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, we may access the long-term debt capital markets from time-to-time.
Net cash flow from operating activities was $3,136 million in 2014 compared to $2,483 million in 2013 and $2,950 million in 2012. Operating activities for 2014 were affected by an increase in drafts and accounts payable reflecting longer payment terms for certain purchases. Operating activities for 2014 also reflect increases in receivables and inventories primarily associated with our revenue growth. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors.
Operating activities for 2013 were primarily affected by $483 million of payments made for AWP litigation settlements. Operating activities for 2012 reflect an increase in drafts and accounts payable primarily associated with longer payment terms for certain purchases, partially offset by an increase in receivables and higher inventories primarily associated with revenue growth. 
Net cash used in investing activities was $5,046 million in 2014 compared to $2,209 million in 2013 and $1,502 million in 2012. Investing activities for 2014 included $4,634 million of net cash payments for acquisitions, including $4,497 million for our acquisition of Celesio. Investing activities in 2014 also included $274 million and $141 million in capital expenditures for property acquisitions and capitalized software. Investing activities for 2014 also reflect $97 million of cash proceeds from sales of our automation business and an equity investment.
Investing activities for 2013 included $1,873 million of net cash payments for acquisitions, including $1,299 million for our acquisition of PSS World Medical. Investing activities in 2013 also included $232 million and $153 million in capital expenditures for property acquisitions and capitalized software.
Investing activities for 2012 included $1,051 million of net cash payments for acquisitions, including $919 million for our acquisition of the Katz Assets. Investing activities in 2012 also included $221 million and $177 million in capital expenditures for property acquisitions and capitalized software.
Financing activities generated cash of $3,619 million in 2014 compared to net cash usage of $956 million in 2013 and $1,905 million in 2012. Financing activities for 2014 include cash receipts of $788 million and cash paid of $765 million from short-term borrowings. In connection with our acquisition of Celesio, we also borrowed $4,957 billion million under a senior bridge loan facility and $400 million under our accounts receivable sales facility in February 2014. These borrowings were fully repaid in March 2014. Financing activities for 2014 also include cash receipts of $4,114 million from the issuance of long-term debt in March 2014 and cash paid of $356 for repayments of long-term debt, primarily consisting of $350 million paid on the maturity of our 6.50% Notes due in February 2014. Additionally, financing activities for 2014 included $130 million of cash paid for stock repurchases and $214 million of dividends paid.

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Financing activities for 2013 included cash receipts of $1,325 million and cash paid of $1,725 million from short-term borrowings. In addition, in connection with our acquisition of PSS World Medical, we borrowed $900 million for bridge financing in February 2013, which was fully repaid in March 2013. Financing activities for 2013 also include cash receipts of $1,798 million for the issuance of long-term debt and cash paid of $1,143 million for repayments of long-term debt. In December 2012, we issued $500 million of 0.95% Notes due 2015 and $400 million of 2.70% Notes due 2022. In March 2013, we issued $500 million of 1.40% Notes due 2018 and $400 million of 2.85% Notes dues 2023. Long-term debt repayments include $500 million paid on the maturity of our 5.25% Notes due in March 2013 and $635 million paid to redeem the debt acquired on the acquisition of PSS World Medical. Additionally, financing activities for 2013 included $1,214 million of cash paid for stock repurchases and $194 million of dividends paid.
Financing activities for 2012 included $1,874 million of cash paid for share repurchases, $400 million of cash paid on the maturity of our 7.75% Notes in February 2012, $195 million of dividends paid, $400 million of cash receipts from secured borrowings and $167 million of cash receipts from employees’ exercises of stock options.
The Company’s Board has authorized the repurchase of McKesson’s common stock from time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.
The Board authorized the repurchase of the Company’s common stock as follows: $1.0 billion in April 2010, $1.0 billion in October 2010, $1.0 billion in April 2011, $650 million in January 2012, $700 million in April 2012 and $500 million in January 2013. Total share repurchases transacted through ASR programs and open market transactions over the last three years were as follows:
 
Years Ended March 31,
(In millions, except per share data)
2014
 
2013
 
2012
Number of shares repurchased (1)

 
13

 
20

Average price paid per share
$

 
$
100.82

 
$
83.47

Total value of shares repurchased (1)
$

 
$
1,159

 
$
1,850

(1)
Excludes shares surrendered for tax withholding.
The total authorization outstanding for repurchases of the Company’s common stock was $340 million at March 31, 2014.
During the fourth quarter of 2013, we retired approximately 2 million shares repurchased for $217 million by the Company.   The retired shares constitute authorized but unissued shares. We elected to allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. As such, $195 million was recorded as a decrease to retained earnings.
We believe that our operating cash flow, financial assets and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.

46

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Selected Measures of Liquidity and Capital Resources:
 
March 31,
(Dollars in millions)
2014
 
2013
 
2012
Cash and cash equivalents
$
4,193

 
 
$
2,456

 
 
$
3,149

 
Working capital
3,072

 
 
1,813

 
 
1,917

 
Debt, net of cash and cash equivalents
6,526

 
 
2,417

 
 
831

 
Debt to capital ratio (1)
55.7

%
 
40.8

%
 
36.8

%
Net debt to net capital employed (2)
43.4

 
 
25.5

 
 
10.8

 
Return on McKesson stockholders’ equity (3)
16.2

 
 
18.3

 
 
19.7

 
(1)
Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity, excluding noncontrolling interests.
(2)
Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt and McKesson stockholders’ equity, excluding noncontrolling interests (“net capital employed”).
(3)
Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity, excluding noncontrolling interests.
Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S. Treasury bonds, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound sterling.
The remaining cash and cash equivalents are deposited with several financial institutions. Deposits at U.S. banks exceed the amount insured by the Federal Deposit Insurance Corporation. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds. Within the Celesio operations, the majority of deposits are placed in Germany with only banks that are part of deposit protection programs.
Our cash and equivalents balance as of March 31, 2014 included approximately $2.4 billion of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash in foreign operations as well as to fund certain research and development activities for an indefinite period of time.  Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to U.S. federal, state and local income tax. 
Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and accounts payable, short-term borrowings, current portion of long-term debt, deferred revenue and other current liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.
Consolidated working capital increased at March 31, 2014 compared to March 31, 2013 primarily due to increases in cash and cash equivalents, and increases in receivables, inventories and current portion of long-term debt associated with our acquisition of Celesio. Consolidated working capital decreased at March 31, 2013 compared to March 31, 2012, primarily due to a decrease in the cash and cash equivalents balance.
Our ratio of net debt to net capital employed increased at March 31, 2014 compared to March 31, 2013 primarily due to the increase in debt associated with our Celesio acquisition. Our ratio of net debt to net capital employed increased at March 31, 2013 compared to March 31, 2012 primarily due to a lower cash and cash equivalents balance.
In July 2013, the quarterly dividend was raised from $0.20 to $0.24 per common share for dividends declared after such date, until further action by the Board. Dividends were $0.92 per share in 2014 and $0.80 per share in 2013 and 2012. 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. In 2014, 2013 and 2012, we paid total cash dividends of $214 million, $194 million and $195 million.

47

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Contractual Obligations:
The table below presents our significant financial obligations and commitments at March 31, 2014:
 
 
 
Years
(In millions)
Total
 
Within 1
 
Over 1 to 3
 
Over 3 to 5
 
After 5
On balance sheet
 
 
 
 
 
 
 
 
 
Long-term debt (1)
$
10,373

 
$
1,424

 
$
2,812

 
$
2,005

 
$
4,132

Other  (2)
638

 
75

 
216

 
132